BCAJ | Bombay Chartered Accountant Journal

Maintenance Under Hindu Law

Introduction

The codified Hindu Law consists of four main Acts which deal with different aspects of family law, such as, succession, adoptions, guardianship, marriage, etc. One such important Act is the Hindu Adoptions and Maintenance Act, 1956 (“the Act”). As the name suggests, this Act deals with two diverse topics – Adoptions by a Hindu and Maintenance of a Hindu. Let us consider some of the facets of the Maintenance part of this Act.

Maintenance of Different Persons

The Act provides for the maintenance of four different categories of persons, namely:

(a) maintenance of a wife by her husband;

(b) maintenance of a widowed daughter-in-law by her father-in-law;

(d) maintenance of dependants by the heirs of a deceased Hindu.

What is Maintenance?

The Act defines the term maintenance in a wide and inclusive manner to include in all cases, provision for food, clothing, residence, education and medical attendance and treatment. Thus, even the right to residence is treated as a part of maintenance – Mangat Mal vs. Smt Punni Devi, (1995) 6 SCC 88.

Further, in the case of an unmarried daughter (included in the category of children), it also includes the reasonable expenses of and incidental to her marriage. What is reasonable would depend upon the facts of each case and the financial status of each family. No hard and fast rule could be laid down in this respect and it would be a qualitative answer which would vary from family to family.

The Act provides that it is the discretion of the Court to determine whether and what maintenance would be awarded. In doing so, it would consider various factors. For instance, in the case of an award to a wife, children or aged parents, it would consider the position / status of parties, reasonable wants of the claimant, value of the claimant’s property, income of the claimant, number of persons entitled to maintenance under the Act. Similarly, while determining the maintenance of dependants, it would consider the net value of the estate of the deceased, degree of relationship between the deceased and dependants, reasonable wants of dependants, past relations, value of property of the dependant and their source of income, number of persons entitled to maintenance under the Act. The Court is granted very wide discretion. In Kulbhushan Kumar vs. Raj Kumari, 1971 SCR (2) 672, income-tax was allowed as a deduction in computing the income of the husband for determining the maintenance payable to his wife.

Maintenance of Wife

A Hindu wife is entitled to be maintained by her Husband during her life-time. Of course, this is subject to the marriage subsisting. Once a marriage is dissolved on account of a divorce, then an order for maintenance / alimony would be u/s.25 of the Hindu Marriage Act, 1925 and not under this Act. In Chand Dhawan vs. Jawaharlal Dhawan, 1993 (3) SCC 406, it was held that the court is not at liberty to grant relief of maintenance simplicitor obtainable under one Act in proceedings under the other. Both the statutes were codified as such and were clear on their subjects and by liberality of interpretation, inter-changeability could not be permitted so as to destroy the distinction on the subject of maintenance.

In Kirtikant D. Vadodaria vs. State of Gujarat, (1996) 4 SCC 479, it was held that there is an obligation on the husband to maintain his wife which does not arise by reason of any contract – expressed or implied – but out of jural relationship of husband and wife consequent to the performance of marriage. The obligation to maintain is personal, legal and absolute in character and arises from the very existence of the relationship between the parties. The Bombay High Court in Bai Appibai vs. Khimji Cooverji, AIR 1936 Bombay 138, held that under the Hindu Law, the right of a wife to maintenance is a matter of personal obligation on the husband. It rests on the relations arising from the marriage and is not dependent on or qualified by a reference to the possession of any property by the husband. The Supreme Court in BP Achala Anand vs. S Aspireddy, AIR 2005 SC 986 held that the right of a wife for maintenance is an incident of the status or estate of matrimony and a Hindu is under a legal obligation to maintain his wife.

A Hindu wife is also entitled to live separately from her husband without forfeiting her claim to maintenance in several circumstances, namely ~ if he is guilty of desertion, i.e., abandoning her without reasonable cause and without her consent; if he has treated her with cruelty; if he is suffering from virulent leprosy; if he has any other wife alive; if he keeps a concubine; if he has converted to a non-Hindu or if there is any other cause justifying her living separately. However, the wife loses her right to separate residence and maintenance if she is unchaste or converts to a non-Hindu.

Maintenance of Daughter-in-law

A Hindu widow is entitled to be maintained by her father-in-law provided the following circumstances exist:

(a) She has not remarried and is unable to maintain herself out of her own earnings or property; or

(b) She has not remarried, has no property of her own and she cannot obtain maintenance from the estate of her husband or her father or mother or from her son or daughter or their estate.

In either case, the obligation on the father-in-law is not enforceable if he does not have the means to maintain her from the joint property in his possession. If he has no coparcenery property, then a claim cannot lie against him. Of course, it is trite, that this provision cannot have force when a Hindu lady’s husband is alive, it is only a widow who can avail of this protection. Further, this right ceases when she remarries.

An interesting question would be whether this right would lie against her mother-in-law?

In Vimalben Ajitbhai Patel vs. Vatslaben Ashokbhai Patel, Appeal (Civil) 2003 / 2008 (SC), it was held that the property in the name of the mother-in-law can neither be a subject matter of attachment nor during the life time of the husband, his personal liability to maintain his wife can be directed to be enforced against such property.

Maintenance of Children and Parents

A Hindu male/female has an obligation to maintain his/her children and aged /infirm parents. Children can claim maintenance till they are minor. However, the Act also provides that the obligation to maintain parents or unmarried daughter extends if the parent/unmarried daughter is unable to maintain himself/herself from own earnings/other property. Hence, a conjoined reading of the different provisions of the Act would indicate that minority is relevant only for maintenance of sons but for daughters, the obligation continues till they are married whatever be her age – CGT vs. Bandi Subbarao, 167 ITR 66 (AP). However, it has been held in CGT vs. Smt. G. Indra Devi, 238 ITR 849 (Ker) that gifts to daughter after her marriage would not fall within the purview of maintenance.

Maintenance of Dependants

The Act has an interesting provision where it states that the heirs of a deceased Hindu (male or female) are bound to maintain the dependants of the deceased out of the estate inherited by them from the deceased. If a dependant has not obtained (under a Will or as intestate succession) any share in the estate of a deceased Hindu, then he is entitled to maintenance from those who take the estate. The liability of each of the persons who take the estate, shall be in proportion to the value of the estate’s share taken by him. The list of dependants is as follows:

(a) father

(b) mother

(d) son/son of predeceased son/son of predeceased grandson, till he is a minor

(e) unmarried daughter/unmarried daughter of pred-eceased son/unmarried daughter of predeceased grandson

(f) widowed daughter

(g) widow of son/widow of son of predeceased son

(h) illegitimate minor son

(i) illegitimate unmarried daughter.

For certain types of dependants, the claim for maintenance is subject to they not being able to obtain maintenance from certain other sources.

Maintenance under 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 (“the 2005 Act”). 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. An aggrieved woman under the 2005 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. 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 2005 Act, Parliament has taken notice of a new social phenomenon which has emerged in India, known as live-in relationships. According to the Court, a relationship in the nature of marriage was akin to a common law marriage.

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. Section 17 of the 2005 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 reliefs 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.

An interesting decision was rendered by the Bombay High Court in the case of Roma Rajesh Tiwari vs. Rajesh Tiwari, WP 10696/2017. This was a case of domestic violence in which the wife had alleged that she was driven out of her husband’s home, but she was willing to go back to that home. She filed a petition before the Family Court for allowing her to stay in her husband’s home. This petition was rejected as it was held that the flat exclusively belonged to her father-in-law and there was nothing to show that her husband had any interest or title in the property, hence, she had no right to claim any relief in respect of the property, which stood in the name of her husband’s father. On appeal, the Bombay High Court set aside the Family Court’s order and analysed the definition of the term shared household under the 2005 Act. It also analysed section 17 which stated that 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. It held that since the couple were living in the father-in-law’s flat, it became a shared household under the 2005 Act. It was irrelevant whether the husband had an interest in the same and title of the husband or that of the family members to the said flat was totally irrelevant. The question of title or proprietary right in the property was not at all of relevance. It held that the moment it was proved that the property was a shared household, as both of them had resided together there up to the date when the disputes arose, it followed that the wife got a right to reside therein and, therefore, to get the order of interim injunction, restraining her husband from dispossessing her, or, in any other manner, disturbing her possession from the said flat.

Contrast this decision of the Bombay High Court with that of the Delhi High Court in the case of Sachin vs. Jhabbu Lal, RSA 136/2016 (analysed in detail in this Feature in the BCAJ of January 2017). In that case, the Delhi High Court held that in respect of a self acquired house of the parents, a son and his wife had no legal right to live in that house and they could live in that house only at the mercy of the parents up to such time as the parents allow. Merely because the parents have allowed them to live in the house so long as his (son’s) relations with the parents were cordial, does not mean that the parents have to bear the son and his family’s burden throughout their life. A conclusion may be drawn that in cases of domestic violence, a wife can claim shelter even in her in-laws’ home, but in a normal case she and her husband cannot claim a right to stay in her in-laws’ home.

Conclusion

Right to claim maintenance has been provided to several persons under the Act. Codification of this important part of Hindu Law has resolved a great deal of ambiguities, but considering the complex nature of this Act dealing with personal law, it does have its fair share of controversies and litigations.

shailesh.kwebmaker

Companies Act: Operation Delyening

Introduction

A bariatric surgeon is one who cuts away
layers of fat from an obese person in order to have a slimmer structure. The
Ministry of Corporate Affairs (“MCA”) has also donned the role of such a
surgeon by trimming away vertical layers of subsidiaries (or step-down
subsidiaries) in order to present a leaner and clearer corporate structure. Its
scalpel for this highly impactful operation was the Companies (Amendment
Act), 2017 to the Companies Act, 2013 (“the Act”) coupled with the
Rules issued under the Act. The Amendment Act has introduced several changes to
the Act but the one which had the most disruptive effect is in fact not a part
of the Amendment Act. Initially, the Amendment Bill had decided against
restricting vertical layers of subsidiaries but subsequently on account of the
action against shell firms and other similar events, the MCA decided to retain
the restriction in the Amendment Act. Thus, the Amendment Act does not amend
the existing position in the Companies Act, 2013 of restricting the number of
layers of vertical subsidiaries.

Amendment

The original definition of section 2(87) of the Act which defined the
term “subsidiary” provided that a subsidiary in relation to a
company, which was the holding company, meant one in which the holding company
controlled the composition of the board of directors or exercised or controlled
more than half the total share capital either on its own or together with its
subsidiaries. The definition as it stood had generated several problems since
even a passive investor, e.g., a private equity investor, who owned more than
50% of the total share capital but not 50% of the total voting power was
treated as the holding company of the investee company. This created unique
problems for several investors and investees alike.

This definition was amended by the Amendment
Act to replace total share capital with total voting power.
Hence, the Amendment restores the old position, i.e., in order to be treated as
a subsidiary, the holding company must control more than 50% of the total
voting power and not merely 50% of the total capital. Accordingly, all shares
not carrying voting rights, e.g., non-voting shares, preference shares, etc.,
would be ignored while determining whether there is a holding-subsidiary
relationship between 2 companies.

The proviso to this definition provides that
such classes of holding companies as may be prescribed by the MCA shall not
have more than the prescribed number of layers of subsidiaries. The Companies
(Amendment) Bill, 2016 sought to delete this proviso and permit holding
companies to have as many layers as they desired. However, when the Bill was
passed by the Lok Sabha this deletion was dropped, i.e., the original position
of restriction in number of layers of subsidiaries, was retained.

Rules

Pursuant to the proviso being retained, the
MCA notified the Companies (Restriction on Number of Layers) Rules,
2017 (“the Rules”) on 20^thSeptember 2017. The Rules
provide that on and from 20^th September 2017, a company cannot have
more than 2 layers of subsidiaries. A layer in relation to a holding company
has been defined to mean one or more subsidiaries. A layer thus, is a vertical
layer of a subsidiary. However, in computing the limit of 2 layers, 1 layer
comprising of one or more wholly owned subsidiaries is excluded. Thus, the
total number of layers which a company can have is 1 + 2 = 3, i.e., 1 layer of
wholly owned subsidiaries + 2 layers of other subsidiaries which may or may not
be wholly owned. For instance, HCo has 5 wholly owned subsidiaries – A to E.
All of these would constitute 1 layer which would be exempted. Each of these
wholly owned subsidiaries can now incorporate 2 vertical layers, e.g., A can
incorporate A1 and A1, in turn, can have A2. A1 and A2 would constitute 2
vertical layers in relation to HCo. However, A2 cannot incorporate A3 since
that would mean that HCo would violate the prescribed limits. It may be noted
that the restriction is on vertical layers and not horizontal subsidiaries.
Thus, in the above example, instead of 5 subsidiaries, A to E, HCo can have
many more direct subsidiaries (whether 100% or less), say, A to Z. However, the
number of step-down subsidiaries would be limited as per the Rules.

Section 2(87) provides that company includes
a body corporate and hence, the definition of subsidiary would even encompass a
foreign body corporate which is a subsidiary of the Indian holding company.
Also, a subsidiary in the form of a Limited Liability Partnership, being a body
corporate, would be covered.

Gateways

The Rules do not apply to the following
types of companies:

(a) a Bank

(b) a Systemically Important
Non-Banking Finance Company, i.e., NBFCs whose asset size is of Rs. 500 cr. or
more as per its last audited balance sheet.

(d) a Government Company

The Rules provide grandfathering to existing
layers of subsidiaries even if they are in excess of the limits prescribed by
the Rules. For availing of this protection, holding companies were required to
file a prescribed return with the Registrar of Companies latest by 17^thFebruary
2018. The protection further provided that after the commencement of the Rules,
such a holding company cannot have any additional layers over and above those
which have been grandfathered. Further, if the existing layers are reduced
after the commencement of the Rules, then it cannot have new layers over and
above the limit prescribed by the Rules. To give an illustration, HCo had 5
layers of subsidiaries prior to the enactment of the Rules. These layers would
be protected by the grandfathering provisions and can continue. However, HCo
cannot incorporate any fresh 6^th layer of subsidiary.If HCo were to
sell the shares of one of the subsidiaries and be left with 4 layers then it
cannot now incorporate any fresh layer of subsidiaries since that would again
violate the provisions of the Rules, but it can continue with the 4 layers
which have been grandfathered.

Another exemption provided by the Rules is
that the limit of 2 layers would not affect a company from acquiring a company
incorporated abroad which already has subsidiaries beyond 2 layers and these
are allowed under the laws of such foreign country. However, this exemption is not provided if such a
foreign company desires to subsequently set up multiple layers of foreign
subsidiaries. Thus, it would not be possible to have multiple foreign layers
even if the foreign laws were to permit them.

Impact Analysis

The Rules would severely impact the creation
of Special Purpose Vehicles (“SPVs”) which are very prevalent especially
in sectors such as, infrastructure, real estate, roads, etc. In these
sectors, it is a common practice to have multiple layers for different
projects. For instance, a real estate company may have 2 subsidiaries, one for
commercial projects and one for residential. Within each of them, there may be
holding companies for different regions, e.g., one for Mumbai, one for Delhi,
one for Chennai, etc. Under each regional holding company, there may be
an SPV for a specific project. The benefit of a layered structure is that it
facilitates value unlocking at multiple levels. A strategic investor/project
partner can invest at the SPV level. A financial investor who is interested
only in residential projects in Mumbai can invest at the Mumbai layer level
since he would then get access to all the projects in Mumbai. Similarly,
investors could invest at the residential level or even at the corporate level.Such
structuring would be constrained by the limit on the layers. Also, in a case
where the 1^st layer is not of wholly owned subsidiaries, the limit
would be of only 2 layers and not 1+2 =3.

Another area which would be affected is that
of outbound investment. It is quite common for Indian companies to have
multiple layers when investing abroad. For instance, an Indian company may have
an Intermediate Holding Company (IHC) in a tax haven, followed by a Regional
Holding Company (RHC) say, one in a European country for housing all European
ventures and another in an African country for all African ventures. Under the
RHC would be the countrywise SPVs. These layers would now also have to toe the line
laid down under the Rules. However, on a related note, the Reserve Bank of
India also does not easily approve of multi-layered structures for outbound
investments involving the use of multiple layers of foreign SPVs. Thus, the
Companies Act restrictions and the RBI’s views under the Foreign Exchange
Management Act are now similar.

Same Difference

A similar restriction already existed in
section186 (similar to section 372/372A of the Companies Act, 1956) of the Act.
According to this section, a company cannot make an investment through more
than two layers of investment companies. Thus, any company, desiring to make an
investment, can do so either directly or through an investment company or
through one investment company followed by a 2^nd layer of investment
company. However, it cannot have a 3^rdlayer of investment company
under the 2^nd layer of the investment company.

It may be noted that the prohibition is on
having more than 2 layers of investment companies and hence, we need to
ascertain what constitutes an investment company? The section
defines an ‘investment company’ to mean a company whose principal
business is acquisition of shares, debentures or securities.

Secondly, it must be a company whose principal
business is acquisition of securities. What is principal business has now
been defined by the Amendment Act. According to these tests, a principal
business is defined if it satisfies the following conditions as per its audited
accounts:

(i) Its assets in the form of
investment in shares, debentures or other securities constitute not less than
50% of its total assets; OR

(ii) Its income from investment
business constitutes not less than 50% of its gross income.

The Act expressly provides that the
restriction on two layers of investment companies even applies to an NBFC whose
principal business is acquisition of securities.

The investor company could be an investment
or an operating company, but it cannot route its investment via more than 2
layers of investment companies. If the investment is routed through an
operating company or one whose principal business is not acquisition of
securities, then the restriction u/s. 186 on 2 layers would not apply.

The prohibition on making investments only
through a maximum of two layers of investment companies will not affect the
following two cases:

(i) a company from acquiring any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country; or

(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

Certain
Government companies have also been exempted from this provision.

The Rules u/s. 2(87) provide that they are
not in derogation to the exemptions contained u/s. 186(1). Thus, the Rules
would apply equally to an investment company as long as they are not in
derogation of the proviso to section 186(1).

One may compare the restrictions contained
in section 186 vs. section 2(87) as follows:

Details

Section 186

Section 2(87)

Restriction on

More than 2 layers of investment companies

More than 2 layers of subsidiaries

Applies to

All companies, including NBFCs but excluding certain
Government companies.

All companies other than banks, NBFCs, insurance companies,
Government companies.

Type of layers prohibited

Only investment companies – not applicable to operating
companies

All types of subsidiaries, whether operating or investment.

Companies or body corporates?

Only companies

All types of subsidiaries, whether companies or body
corporates.

Effective from

1^st April 2014

20th September 2017, the date from which the Rules were notified.

Conclusion

India Inc. is going to find it tough to
grapple with these provisions more so when it is used to having multiple
layers. The objective seems to be to cut through the opacity haze of multiple
layers and provide more transparency to the regulators to find out who is the
real investor. Clearly, thin is in!! _

shailesh.kwebmaker

RERA: An Overview

Introduction

On
1^stMay 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect. This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member.

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1^st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31^stJuly 2017.

Registration
is not required for the following type of projects:

(a) Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b) Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act.

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a) Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b) Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c) 3 years’ Annual
Accounts Reports of the Promoter.

d) Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e) Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f) One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website.

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1) The Promoter must provide all details of
registration with the RERA and update his inventory
position on a quarterly basis.

(2) The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3) The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4) The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5) The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6) The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7) Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8) The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9) If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10) The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11) Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12) The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3^rdparty without prior written consent from 2/3^rd
of the allottees and prior written approval of the RERA.

(13) Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14) If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a) in accordance with
the Agreement for Sale; or

(b) due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15) He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16) The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall.

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17) The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18) If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable.

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1^stproject.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30^th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1^st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

shailesh.kwebmaker

RERA: Some Issues

Introduction

After an Overview of the Real Estate (Regulation and Development) Act, 2016 (“the Act”) in last month’s Feature, let us examine some critical issues under the same as applicable in the State of Maharashtra. It may be noted that the RERA is a State Regulator and hence, each State and each State’s RERA is empowered to issue their own Rules and Regulations respectively. This Article restricts itself to the State of Maharashtra.

At the outset, it must be confessed, that the Act is an evolving statute and at this stage, there may be more questions than answers. Having said that, the RERA in the State of Maharashtra (“MahaRERA”) is quite proactive and has been issuing clarifications on several issues.

Promoter: Land Owners also covered

The Act requires a Promoter to register a real estate project with the RERA. As on the deadline of 31st July, 2017, over 10,000 projects were registered with the MahaRERA.

The Act defines a Promoter in an exhaustive manner by giving a very far reaching definition. It covers any person who acts (himself) as a builder, coloniser, contractor, developer, estate developer or who claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale.

An interesting issue arises as to what would be the position of a land owner who enters into a joint development agreement with a developer for say, a share in the revenue from the sale of flats or a share in the area to be developed? For instance, a landowner executes a development rights agreement with a developer and in lieu of the same would receive a 40% share of the revenues ( to be) received from the Project. Alternatively, he agrees to receive 40% of the built-up area in the project. Would such a land owner also be treated as a Promoter? The answer to this is Yes! The MahaRERA in its Order has coined the definition of the term “Co-Promoter” and defined it to mean and includes any person(s) or organisation(s) who, under any agreement or arrangement with the Promoter of a Real Estate Project is allotted or entitled to a share of the total revenue generated from the sale of apartments or share of the total area developed in the real estate project. Thus, every land owner who receives an area / revenue share would be treated as a Promoter of the real estate project. It would be permissible for the liabilities of such Co-Promoters to be as per the joint development agreement with the developer. However, for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real Estate Project. The land owner would be required to give an undertaking to the RERA, including an undertaking relating to the title to land and the date of completion of the project. Consequently and most vitally, the Order holds that the cost of land payable to land owners by the Promoter cannot be regarded as cost of Project and cannot be withdrawn from the RERA Account and that such land owners must open a separate bank account for deposit of 70% of the sale proceeds from the allottees! An intriguing part about this Order is its interplay with the Act. Section 4 of the Act mandates that 70% of the realisations from flat allottees shall be deposited in a separate designated account which would be used only to cover the cost of construction and the land cost. In a joint development agreement, the share payable to a land owner by a developer is the developer’s land cost. However, the MahaRERA’s Order expressly prohibits payment of this land cost from the separate designated account!

Recently, some land owners have approached the Bombay High Court challenging this Order of the MahaRERA. The final outcome of this case would be eagerly awaited by several land owners.

After the advanced capital gains tax liability on a land owner (started by the decision of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom)) and indirect taxes (GST/VAT/service tax as on a works contract) for the portion constructed by the developer for the land owner, this would be the final straw which breaks the proverbial camel’s back! Of course, the newly introduced section 45(5A) of the Income-tax Act seeks to provide some solace to land owners who are individuals and HUFs by postponing the capital gains tax liability. However, for a great majority of land owners they would be staring at a scenario, where on the one hand, they are asked to pay capital gains tax on the execution of a development agreement once the conditions specified in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom) are triggered and on the other hand, they cannot withdraw the money received from the flat allottees!! It may be noted that this is a restriction imposed by the MahaRERA and hence, only applies in the State of Maharashtra and not in other States (unless the Authorities in other States also issue a similar Order). Further, this Order only applies when the consideration for the land owner is in the form of a revenue / area share. If the transaction is one of an outright sale / conveyance, then this restriction is not applicable and the developer can easily use the sale proceeds to pay off the land owner. Having said that, finding a developer, in the current real estate market, willing to buy a land on an outright basis is akin to finding a needle in several haystacks. Something which even google.com would find very difficult to search. If a land owner does find such a developer, then he kills 3 birds with one stone – he can pay tax (since he has the funds), there would not be any GST liability (since there is no works contract component) and he would not be classified as a Promoter under the RERA Order. Truly an Utopian scenario!

Promoters: Contractors
A question arises whether a building contractor is required to be registered as a Promoter? The definition includes a contractor or person by any name who acts as the holder of a power of attorney from the land owner on which the building / apartment is constructed. However, the overarching requirement for registration is that the Promoter must sell one or some of the apartments. Section 3 which mandates registration makes it clear that no Promoter shall sell or offer for sale any apartment or building without prior registration. Hence, if there is no sale or offer for sale, then there should not be any requirement for registration as a Promoter. Section 3 similarly provides that any renovation, repair or redevelopment which does not involve marketing, sale or new allotment of any apartments would not require registration. Hence, a building redevelopment which does not have any free sale component would be outside the purview of registration. The FAQs issued by the MahaRERA also support this view where the answer given states that if there are 16 apartments in a society redevelopment project, registration would be required provided there are some apartments which are for sale. Hence, it stands to reason that if there is no sale component, then there would not be any requirement for registration.

Promoters: Financiers and Private Equity Funds
A similar predicament as that of the land owners may also be experienced by lenders / private equity funds who have contributed funds to the real estate project. In most cases, such financiers have step-in rights, i.e., in the event that the developer is unable to complete the project, then they would step-in to his shoes and complete the project. In addition, financiers more often than not, have strong investor protection rights which enable them to participate in the control and management of the developer’s entity. The definition of the term Promoter is extremely wide. Hence, it is a moot point whether such financiers may also be roped in within the definition of a Promoter / Co-Promoter? This may even hamper any exit to be provided by the developer to the financier since payments to Promoters do not fall within the permissible uses from a designated bank account. It may be possible to contend that mere presence of such rights may not make a lender to be treated as a Promoter till they are actually exercised.

This may force financiers to utilise secured debt structures in which only the project is mortgaged in their favour without any exotic rights. In such an event, the financier would not be treated as a Promoter and the designated bank account can be used to repay the lender. In any case, the obligations would be attracted once the mortgage is foreclosed and the financier proceeds with the incomplete tasks.

Designated Account to be maintained

The Act requires that the Promoter must maintain a separate designated bank account. 70% of all realisations from flat allottees must be deposited in this account to cover the cost of construction and the land cost and must be utilised for that purpose only. The balance 30% may be withdrawn without routing the same to the designated account. For making withdrawals from this account, 3 Certificates are required. The provisions applicable in the State of Maharashtra in this respect are spread over the Central Act, the Rules (framed by the Maharashtra State Government), the Regulations (framed by the Maharashtra RERA), the Forms (issued by the Maharashtra RERA) and the Clarifications (issued by the Maharashtra RERA). All these diverse provisions have been harmonised and analysed below for the ease of ready reference:

(a) Designated Bank Account – 70% of all amounts realised for the real estate project from the allottees, shall be deposited in a separate bank account to cover the cost of construction and the land cost and shall be used only for that purpose. These deposits may include advances received against allotment.

(b) Procedure for Withdrawals – The Promoter is entitled to withdraw amounts from the designated bank account, to cover the cost of the project (land and construction and borrowing), in proportion to the percentage of completion of the project. Withdrawal is permissible only after it is backed by 3 certificates stating that the withdrawal is in proportion to % completion of the project. The Promoter is required to submit the following 3 certificates to the bank operating the designated account:

– Firstly, a certificate in Form 1 from the project Architect certifying the % completion of construction work of each of the buildings/wings of the project;

– Secondly, a certificate in Form 2 from the Engineer for the actual cost incurred on the construction work of each of the buildings/wings of the project; and

– Thirdly, a certificate in Form 3 from a practicing Chartered Accountant, for the cost incurred on construction and the land . The practicing Chartered Accountant shall also certify the proportion of the cost incurred on construction and land to the total estimated cost of the project. The total estimated cost of the project multiplied by such proportion shall determine the maximum amount which can be withdrawn by the Promoter from the separate account.

The Promoter is required to follow the above at the time of every withdrawal from the separate account till Occupancy Certificate in respect of the project is obtained. On receipt of the Completion Certificate in respect of the project, the entire balance amount lying in the separate account can be withdrawn by the Promoter.

However, as a concession, MahaRERA has allowed a Promoter to do away with the practice of submitting 3 certificates for every withdrawal from the designated bank account. He may obtain the same and retain them on record and furnish them to the auditor at the time of the annual audit. The Promoter would have to submit a self-declaration to the bank once every quarter and this would suffice for the withdrawals.

– Total Estimated Cost (Land Cost + Construction Cost) of the project based on the Form 2 issued by the engineer.

– Total Cost Incurred (Land Cost + Construction Cost) of the Real Estate Project based on an actual verification of the books of account by the CA.

– % completion of Construction Work (as per the Architect’s Certificate in Form 1). However, the MahaRERA has clarified that this need not be filled in by the CA for all ongoing certificates and should be filled in only in the final certificate issued after 100% of the construction work has been completed.

– Proportion of the Cost incurred on Land Cost and Construction Cost to the Total Estimated Cost. (Total Cost Incurred / Total Estimated Cost).

– Amount which can be withdrawn from the Designated Account (Total Estimated Cost * Total Cost Incurred / Total Estimated Cost)

Less: Amount withdrawn till date of this certificate as per the Books of Accounts and Bank Statements

– Resulting figure is the Net Amount which can be withdrawn from the Designated Bank Account

The CA certifying Form 3 should be different than the statutory auditor of the Promoter’s enterprise.

(d) Components of Form 3:

(A) Land Cost includes all costs incurred by the Promoter for acquisition of ownership and title of the land, including premium payment; Premium for TDR/ FSI; stamp duty, transfer charges, etc.

In cases, where the Promoter, due to inheritance, gift or otherwise, is not required to incur any cost for the land, then his cost is determined on the basis of the Stamp Duty Ready Reckoner value of the land prevailing on the date of registration of the real estate project with the MahaRERA.

In respect of the land cost, the MahaRERA has clarified that the fair market value of the acquisition cost shall be the indexed cost of acquisition of the land computed as per the Income-tax Act provisions. One wonders how should this indexation be applied while issuing a certificate because the term “fair market value of the indexed cost” is not to be found in Form 3. A suitable clarification on this would be appreciated.

Further, it has been clarified that interest specifically done for land acquisition should be added. Interest for construction of rehab component in a project is also treated as land cost. Costs incurred for slum rehab, relocation of tenants in a redevelopment project, etc., are all includible in land cost.

(B) The Cost of Construction includes all costs, incurred by the Promoter, towards the on-site and off-site expenditure for the development of the Real Estate project, including payment to any Authority and the Principal sum and interest, paid to certain lenders.

In respect of the Cost of Construction, the MahaRERA has clarified that:

(i) The term “incurred” means products or services received creating a debt in favour of the supplier or received against a payment made. It is a moot point whether payment of advances towards cost is permissible? A suitable clarification on this would be appreciated.

(ii) The development / construction cost should not include marketing, brokerage expenses incurred for the sale of flats. These, though part of the project cost, should not be met out of the designated account but should be met from the other accounts / funds of the Promoter.

(iii) While principal sum should be shown in brackets it must not be treated as a part of the construction cost.

(iv)Income-tax payable by the Promoter is not a part of the construction cost.

(v) Cancellation amounts paid to allottees who cancel their bookings can be treated as a part of the construction cost and can be withdrawn from the designated account.

(e) Annual Audit; The Promoter must get his accounts audited by 30th September of every financial year and must produce a statement of accounts duly certified and signed by auditor to the MahaRERA. The Annual Report on statement of accounts must be in Form 5.

Form 5 requires the auditor to certify that the amounts collected for a particular project have been utilised for that project alone and that the withdrawal from the designated bank account has been in accordance with the proportion to the percentage of completion of the project. If not, then the Form must specify the amount withdrawn in excess of the eligible amount or any other exceptions. MahaRERA has clarified that auditor must certify that 70% of the realisations have been used for the project (the balance 30% could be used for any purpose).

(f) Mismatch in Certificates and Audit: The Regulations contain a very important provision. They state that if the Form 5 issued by the auditor reveals that any Certificate issued by the project architect (Form 1), engineer (Form 2) or the chartered accountant
(Form 3):

– Has false or incorrect information and

– the amounts collected for a particular project have not been utilised for the project and

– the withdrawal has not been in compliance with the proportion to the percentage of completion of the project,

then the MahaRERA, in addition to taking penal actions as contemplated in the Act and the Rules, shall also take up the matter with the concerned regulatory body of the said professionals of the architect, engineer or chartered accountant, for necessary penal action against them, including dismemberment.

Thus, while % of completion of work needs to be mentioned in ongoing Form 3 issued by a CA (as per the relaxations given by the MahaRERA), the withdrawals must be in sync with the proportion to the percentage of completion of the project. In fact, the Auditor is required to specifically report on this issue and if it is found that this condition has been violated, then the RERA may even complain to the ICAI against the CA issuing Form 3. Thus, there is a unique scenario where the CA need not report on % completion but he must ensure withdrawal is in compliance with % completion. Hence, it would be in the interest of the CA to always ensure that his certificate clearly specifies whether the withdrawal is in proportion with the percentage of completion of the project.

The abovementioned rules will have to be followed by the co-promoter as well, to the extent applicable.

Conclusion

The Act is a major reform in India’s real estate sector and as is the case with any transformation, there are bound to be teething problems and unsolved queries. As the sector progresses on the learning curve, lessons will be learnt and issues may get resolved.

At this stage, it would be worthwhile to alert CAs issuing certificates under the Act, to remember Shakespeare’s quote “Discretion is the Better Part of Valour!” Thus, they should exercise due care and caution while certifying and in cases of doubt or ambiguity, consider asking the Promoter to obtain a legal opinion. Avoid acting in haste and repenting in leisure!!

shailesh.kwebmaker

New Construction in Mumbai

Introduction

Real estate development is big
business in a metropolis such as Mumbai. However, what happens if all new real
estate development is abruptly halted by the High Court? A large part of the
economy would come to a grinding halt. However, this is what happened in Mumbai
on account of an Order passed by the Bombay High Court. The Order was passed to
tackle the growing problem of solid waste management in the City and the
inefficiency of the Municipal Corporation of Greater Mumbai (MCGM) in tackling
it. Nevertheless, it caused a great deal of issues and strife for the real
estate community. Now, a Supreme Court Order has given some respite from this.

Bombay
High Court’s Order

A Public Interest Litigation (PIL)
was filed before the Bombay High Court against the inefficient disposal of
solid waste arising during construction of real estate properties in the City
of Mumbai. Based on this, the Bombay High Court passed its Order in the case of
Municipal Corporation of Greater Mumbai vs. Pandurang Patil, CA No.
221/2013 Order dated 29.02.2016.

The Court observed that everyday
the MCGM was illegally dumping over 7,400 metric tonnes of solid waste at its
dumping sites in Mumbai. This figure was expected to significantly increase on
various counts, including the several buildings being constructed in the City.
This illegal dumping would cause increased pollution along with posing fire
hazards. On the other hand, there were a large number of constructions going on
in the city. In fact, the State Government had amended the Development Control
Regulations by providing for grant of more and more Floor Space Index (FSI).
Thus, the Court held that the State Government was encouraging unsustainable
growth.

Further, under earlier PILs, the
High Court had granted time to the MCGM to set up waste disposal and processing
facilities at the dumping grounds which time had also expired and nothing was
done by the MCGM. The Court held that something drastic needed to be done to
improve the situation, such as, to impose some restrictions on the unabated
development in the city. Moreover, it was the duty of the Court to ensure that
the provisions of the Environment Protection Act,1986 and the Municipal Solid
waste (Management and Handling) Rules, 2000 were implemented in as much as the
breach thereof would amount to depriving a large number of citizens of Mumbai a
fundamental right guaranteed under the Constitution of India, which was, the
right to live in a pollution free environment.

Accordingly, the High Court
extended the time granted to the MCGM for installing waste processing
facilities till 30^th June 2017. It noted that neither the said
Municipal Corporation nor the State Government had any solution whatsoever for
ensuring that the quantity of solid waste generated in the city should not
increase. Further, it was of the view, that the State Government was more
worried about the impact of imposing any restraint on the new constructions in
the city on the real estate industry. It felt that on one hand there was no
real possibility of any Authority complying with the Management of Solid Waste
Rules and on the other hand, the development by construction of buildings in
the city continued on a very large scale. There were also proposals for grant
of additional FSI by amending the Regulations. It therefore, was of the view
that, in case of certain development proposals, restrictions had to be imposed.
More so, because neither the State Government nor the Municipal Corporation has
bothered to make a scientific assessment of the impact of large scale
constructions going on in the city on the generation of the solid waste in the
city.

The Court was conscious of the fact
that in the city of Mumbai there were a large number of re-development projects
which were going on and the occupants of the existing premises might have
vacated their respective premises. Therefore, for the time being, it did not
impose any restrictions on the grant approval for proposals/applications for
the re-development projects including the construction of sale component
buildings under schemes sanctioned by the Slum Rehabilitation Authority (SRA).
However, it held that restrictions would have to be imposed on consideration of
fresh proposals/applications submitted for new construction of the buildings
for residential or commercial purposes.

Finally, the Bombay High Court
placed the following curbs on new development/construction in Mumbai:

(a) Development
permissions shall not be granted either by the MCGM or the State Government on
the applications/proposals submitted from 1^st March 2016 for
construction of new buildings for residential or commercial use including
malls, hotels and restaurants. Such applications would be processed, but the
commencement certificate shall not be issued. However, this condition would not
apply to all the redevelopment projects and to the buildings proposed to be
constructed for hospitals or educational institutions. It would also not apply
to proposals for repairs/reconstruction of the existing buildings which do not
involve use of any additional FSI in addition to the FSI already consumed.

(b) Even
if there was an amendment of the Regulations made hereafter providing for grant
of additional FSI in the city, the benefit of the same shall not be extended to
the building proposals/ Applications for development permissions including for
the re-development projects submitted on or after 1^st March 2016.

Supreme
Court’s Order

Aggrieved by this total ban on new
construction, the Maharashtra Chamber of Housing Industry approached the
Supreme Court by filing a Special Leave Petition. The Supreme Court gave its verdict
in Maharashtra Chamber of Housing Industry vs. Municipal Corporation of
Greater Mumbai, SLP(Civil) No. D23708/2017, Order dated 15^th March
2018.

We make it clear that this order is
not intended to set aside or modify the aforesaid impugned judgement. We have
considered the matter only in order to explore the possibility of safe method
of permitting certain constructions in the city of Mumbai for a limited period
to pave the way for further orders that may be passed. We are satisfied that a
total prohibition, though selective, has serious ramifications on housing
sector which is of great significance in a city like Mumbai. It also has a
serious impact on the financial loans which have been obtained by the
developers and builders. Such a ban makes serious inroads into the rights of
citizens under Article 19, 21 and 300A of the Constitution of India. It might
be equally true that the activities and the neglect in disposing of the debris
invades the rights of other citizens under Article 21 etc. That issue is
left open for a proper determination.

The Supreme Court passed an Order
presenting the following solution:

(a) It
directed that any construction that was permitted hereafter for the purpose of
this order would be only after adequate safeguards were employed by the
builders for preventing dispersal of particles through the air. This would be
incorporated in the building permissions.

(b) According
to the MCGM, 10 sites had been located for bringing debris onto such specified
locations which require to be filled with earth. In another words, these sites
require land filling which will be done by this debris.

(c) The
MCGM would permit a builder to carry on construction on its site by imposing
the conditions in the permission, that the construction debris generated from
the site, would be transported and deposited in specific site inspected and
approved by the MCGM.

(d) The
Municipal Corporation shall specify such a site meant for deposit of
construction debris in the building permission. Any breach would entail the
cancellation of the building permission and the work would be stopped
immediately.

(e) The
Municipal Corporation would not permit any construction unless it has first
located a landfill site and has obtained ‘No Objection Certification’ or consent
of the land owner that such debris may be deposited on that particular site.
The Municipal Corporation shall incorporate in the permission the condition
that the construction was being permitted only if such construction debris was
deposited.

(f) For
Small generators of Construction and Demolition Waste, the Waste would be
disposed of in accordance with the ‘Debris On-Call Scheme’ of the MCGM.

(g)
For Large generators of Construction and Demolition Waste, the waste would be
disposed of as per the Waste/Debris Management Plan submitted by the
owner/developer at the time of applying for permissions and as approved by the
BMC.

(h) Builders
applying for permissions would have to give a Bank Guarantee of amount ranging
from Rs.5 lakh to Rs.50 lakh depending upon the size of the project and mode of
development, which bank guarantee shall remain in force solely for the purpose
of ensuing compliance of the Waste Management Plan/Debris Management Plan
approved by the MCGM, till the grant/issuance of the Occupation Certificate.

(i) The
MCGM was instructed to submit a detailed report to the Supreme Court after the
expiry of 6 months from the date of the Order (i.e., 15^th September
2018) and till such time the Supreme Court’s Order would remain in force. It
also ordered that no construction debris would be carried for disposal to the
Deonar and Mulund dumping sites.

Conclusion

While
the High Court’s Order may appear harsh, sometimes desperate situations call
for desperate measures. At the same time, it is laudable that instead of
adopting a very technical or legal approach, the Supreme Court has come out
with a workable solution. One only wishes that the MCGM and the State
Government come out with a concrete action plan to tackle this menace of solid
waste management!

shailesh.kwebmaker

Staying In Parents’ House – A Matter of Right?

Introduction

In the usual American/Western way
of life, a son stays with his parents till the age of 16 year and thereafter,
he goes to college in another State after which he lives in his own house.
Living with one’s parents in their home is very rare and unusual. However, in
India the matter is entirely opposite. An Indian son continues to live with his
parents in their home even after becoming a major and in several cases even
after starting a family of his own. Strange as it appears to several
Westerners, this is the usual way of life in India. However, what happens when the parents want
to evict their adult son from their home? Can they do so or does the son have a
vested right to reside in their house?

The Delhi High Court had an
occasion to consider such an interesting issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016.

Facts of the Case

A senior citizen couple were
residing on the ground floor of their two-storied home in Delhi. They had
allowed their married elder son and his wife to live on the 2^nd floor
and their married younger son and his wife on the 1^st floor. They did so on account of their natural love
and affection for their sons.

The parents claimed that the
entire house was self-acquired by them out of their own funds. The property
documents, i.e., the General Power of Attorney, the Agreement to Sell, the
Receipt and their Will all were in favour of the father. The sons did not have
any documentary evidence to prove that they were the rightful owners or that
the sons contributed to the purchase of the home.

The parents and their sons could
not get along due to constant quarrels. Matters came to such a headway that the
parents filed police complaints against their sons’ families. They also issued
a public notice disowning their sons and evicting them from their self acquired
property. The parents approached Court for a decree directing them to vacate
the two floors in their possession and also to restrain them from creating any
third party interest in the property.

The sons denied the parents’ claim
that the property was self acquired and also denied their claims of being the
exclusive owners. Their contention was that they have also contributed to the
purchase of the property and construction costs and hence, they should be
regarded as co-owners. Accordingly, the suit for eviction failed.

The Delhi High Court’s Judgment

The Court observed that the sons
were not able to substantiate any evidence to prove that the parents were not
exclusive owners of their property. Further, they have not denied that the
property stands in their father’s name and have not been able to claim any
ownership rights separate from their parents. They could not prove that they
have contributed to the purchase of the property.

The Court held that where the
house is a self acquired house of the parents, a son whether married or
unmarried, has no legal right to live in that house and he can live in that
house only at the mercy of his parents upto such time as his parents allow.
Merely because the parents have allowed him to live in the house so long as his
relations with the parents were cordial, does not mean that the parents have to
bear his burden throughout their life. Since there was no evidence to prove the
sons’ right in the property and on the contrary, there was evidence to prove
that the property was the sole property of the parents, it was clear that the
sons could be evicted by their parents.

This is an important and correct
verdict given by the Delhi High Court. There have been many instances of
children forcing their parents to allow them to reside in homes belonging to
their parents. This decision would come as a shot in the arm for such parents.
However, it must be noted that in case the property is ancestral or cost of
which is contributed by the sons then this decision would have no application.
Of course, what is ancestral is a question of fact and would depend upon the
circumstances of each case. Generally, ancestral property refers to property
belonging to at least 3 generations, i.e., one’s parents and grandparents.
However, it may be noted that in case the parents gift the house to the son
during their lifetime then he becomes the rightful owner and claim right of
ownership over the same.

Dwelling House

Another ancillary factor to be
borne in mind is the amendment by the Hindu Succession (Amendment) Act, 2005 to
the Hindu Succession Act, 1956 in respect to dwelling houses. The erstwhile
section 23 of the Hindu Succession Act, 1956
provided that when a Hindu dies without a will, i.e., intestate, and he
has left behind Class I male and female heirs and his property includes a
dwelling house, then the female heirs could not claim a partition of such
dwelling house till such time as the male heirs chose to divide their
respective shares then. However, she was entitled to a right of residence
therein. The erstwhile section carved out an exception that if such female heir
was a daughter, then she was entitled to a right to residence in the
dwelling-house only if she was unmarried or had been deserted / separated from
her husband, or was a widow. Hence, the
females were dependent on the males to
claim their right of partition. This provision was intended to ensure that sons
living in their parents’ home were not rendered homeless by a claim for
partition by their sisters. The Supreme Court in Narasimha Murti vs.
Susheelbai, AIR 1996 SC 1826 has defined the expression `dwelling
house’by stating that it is referable to the dwelling house in which the
intestate Hindu was living at the time of his/her death; he/she intended that
his/her children would continue to normally occupy and enjoy it; The intestate
Hindu regarded it as his permanent abode. It further held that section 23 (as
it stood before its deletion in 2005), limited
the right of the Class-I female heirs of a Hindu who died intestate
while both male and female heirs were entitled to a share in the property left
by the Hindu owner including the dwelling house. It was an exception to the
general partition. So long as the male heir(s) chose not to partition the
dwelling house, the female class-I heir had been denied the right to claim its
partition subject to a further exception, namely, the right to residence
therein by the female class-I heir under specified circumstances. In other
words, the dwelling house remained indivisible.
But the moment the male heir chose to let out the dwelling house to a
stranger/third party, as a tenant or a licensee, the dwelling house became
partible. Here, the conduct of the male heir was the cause and the entitlement
of the female Class-I heir was the effect and the latter’s claim for partition
got ripened into right as they were to sue for partition of the dwelling house,
whether or not the proviso came into play.

This section has been deleted
altogether with effect from 9^thSeptember 2005. Now, a female heir
can ask for a partition of the house property where the coparceners are
residing. Thus, this is another scenario where the sons could be rendered
homeless.

Conclusion

While it was apparent that a son can claim no
vested right in his parents’ self acquired property, this clear cut verdict
helps to clarify matters. Irrespective of his marital status, an adult son
cannot claim that he has a legal right to stay in his parents’ home.

shailesh.kwebmaker

WhatsApp as Evidence….. What’s that?

Introduction

We are inundated by electronic
data and increasingly even by social media! Social media and Apps, such as,
WhatsApp, Facebook, LinkedIn are fast replacing other traditional forms of
communication and human interaction. However, one frontier which has yet not
been fully breached by the social media is the Indian courts. Can chats on
WhatsApp be admitted as evidence in a Court case? This was an issue which the
Bombay High Court recently had an occasion to consider in the case of Kross
Television India Pvt. Ltd vs. Vikhyat Chitra Production, Notice of Motion (L)
No. 572/2017. Certain other High Court judgments have also had an
occasion to rely on WhatsApp Chats as evidence. Let us examine some of these
interesting cases.

Background

Evidence in courts in India is
admissible provided it confirms to the contours of the Indian Evidence
Act, 1872. This Act applies to all judicial proceedings in or before
any court in India. It defines evidence as meaning and including all statements
which the court permits or requires to be made before it by witnesses in
respect of matters of fact which are under inquiry. Such evidence is known as
oral evidence. The Act also deals with documentary evidence. The definition of documentary
evidence in the Indian Evidence Act was modified by the Information
Technology Act, 2000 to provide that all documents including electronic
records produced for the inspection of the court would be known as documentary
evidence. Hence, electronic records have been given the status of evidence.
Section 2(1)(t) of the Information Technology Act defines an electronic record
to mean any data, record or data generated, image or sound stored, received or
sent in an electronic form or micro film or computer generated microfiche.

Section 65B of the Indian Evidence
Act deals with admissibility of electronic records as evidence. Any information
contained in an electronic record which is stored, recorded or copied in
optical / magnetic media (known as computer output) produced by a ‘computer’ is
also deemed to be a document provided 4 conditions are satisfied. Further, such
a document shall be admissible as evidence. The 4 conditions which must be
satisfied are (a) the computer output must be produced by the computer during
the period when the computer was used to store or process information by
persons having lawful control over it; (b) information of the kind contained in
the output was regularly fed into the computer; (c) the computer was operating
properly throughout the period; and (d) the information contained in the
electronic record reproduces information fed into the computer in the ordinary
course of activities.

The term ‘computer’ is not
defined in the Indian Evidence Act but the Information Technology Act defines
it to mean any electronic, magnetic, optical or other high-speed data
processing device or system which performs logical, arithmetic, and memory
functions by manipulations of electronic, magnetic or optical impulses. Thus,
this definition is wide enough to include a smartphone also!

The Delhi High Court in a criminal
case of State vs. Mohd. Afzal, 107(2003) DLT 385 has held that
computer generated electronic records are evidence and are admissible at a
trial if proved in the manner specified by section 65B of the Indian Evidence
Act. It has given a very vivid explanation of the law relating to electronic
records being admissible as evidence. It held that the normal rule of leading
documentary evidence is the production and proof of the original document
itself. Secondary evidence of the contents of a document can also be led under
the Evidence Act. Secondary evidence of the contents of a document can be led
when the original is of such a nature as not to be easily movable. Computerised
operating systems and support systems in industry cannot be moved to the court.
The information is stored in these computers on magnetic tapes (hard disc).
Electronic record produced there from has to be taken in the form of a print
out. Section 65B makes admissible without further proof, in evidence, print out
of a electronic record contained on a magnetic media a subject to the
satisfaction of the conditions mentioned in the section. Four conditions are
mentioned. Thus, compliance with the conditions of section 65B is enough to
make admissible and prove electronic records. It even makes admissible an
electronic record when certified that the contents of a computer printout are
generated by a computer satisfying the four conditions, the certificate being
signed by a person occupying a responsible official position in relation to the
operation of the device or the management of the relevant activities. Thus,
section 65B(4) provides for an alternative method to prove electronic record
and not the only method to prove electronic record. It further held that the
last few years of the 20^th century saw rapid strides in the field of
information and technology. The expanding horizon of science and technology
threw new challenges for the ones who had to deal with proof of facts in
disputes where advanced techniques in technology were used and brought in aid.
Storage, processing and transmission of date on magnetic and silicon medium
became cost effective and easy to handle. Conventional means of records and
data processing became outdated. Law had to respond and gallop with the
technical advancement. Hence, the Delhi
High Court concluded that electronic records are admissible as evidence in
Court cases.

In M/s. Sil Import, USA vs.
M/s. Exim Aides Silk Exporters, 1999 (4) SCC 567, the Supreme Court
held that a notice in writing for a bounced cheque must be given under the
Negotiable Instruments Act to the drawer of the bounced cheque. It held that
the legislature must be presumed to have been aware of the modern devices and
equipment already in vogue and also in store for future. If the court were to
interpret the words giving notice in writing in the section as restricted to
the customary mode of sending notice through postal service or even by personal
delivery, the interpretative process would fail to cope up with the change of
time. Accordingly, it allowed a notice to be served by fax.

WhatsApp relied on

There have been a few cases where
WhatsApp chats have been relied upon by the Courts while deciding cases. In a
bail application before the Bombay High Court in the case of Kaluram
Chaudhary vs. Union of India, Cr. WP No. 282/2016 the accused produced
a call record of WhatsApp communications between himself and his wife, which
showed that at the relevant time he was in communication of his wife on
WhatsApp, whereas the panchanama drawn showed that he was subjected to search
and seizure and his phone, bearing the same number on which his wife was
chatting with him as above, was shown as having being recovered from him. Thus,
he claimed that the arrest was perverse and the entire case was false. Although
the High Court rejected the bail application it held that the electronic
records of WhatsApp chats were matters of evidence, which would have to be
strictly proved in accordance with law at the trial stage.

Similarly, based on threats issued
to a person on WhatsApp, the Madras High Court directed the police to conduct
an enquiry in the case of H.B. Saravana Kumar vs. State, Crl. O.P. No.
10320/2015. The Court relied on a CD containing the WhatsApp chats as
evidence of the threats.

Recent case of Kross Television

The recent case of Kross
Television before the Bombay High Court was one pertaining to a case of plagiarism
and copyright violation. Kross Television had pleaded that Vikhyat Chitra
Production had made a Kannada movie, Pushpaka Vimana which in effect was
a copy of a Korean movie. Kross Television had purchased the official rights of
this Korean film but before they could make the movie, Vikhyat Chitra
had already plagiarised the original Korean film by making Pushpaka Vimana.
Accordingly, Kross moved the High Court seeking an injunction against Vikhyat Chitra. However, for this to
take place, first they needed to serve a Notice on Vikhyat Chitra so that it
would know that it has a case pending against it. They tried obtaining the
address of Vikhyat Chitra from various sources and sent couriers but the
defendant kept changing its address to avoid service of the Notice. They even
served the Notice on 2 email addresses belonging to the defendant. Ultimately,
they managed to call a mobile number of AR Vikhyat, the head of Vikhyat
Chitra and spoke with him. WhatsApp Chats with him showed that he stated
that he did not understand anything and would check with his legal team and
revert. However, there was still no response from Vikhyat Chitra.

Accordingly, Kross Television
moved the High Court for ex-parte injunction. In a scathing order, the
High Court has held that it did not see what more could be done for the
purposes of this Motion. It cannot be that rules and procedure are either so
ancient or so rigid (or both) that without some antiquated formal service mode
through a bailiff or even by beat of drum or pattaki, a party cannot be said to
have been ‘properly’ served. The purpose of service is put the other party to
notice and to give him a copy of the papers. The mode is surely irrelevant.
Courts have not formally approved of email and other modes as acceptable simply
because there are inherent limitations to proving service. Where an alternative
mode is used, however, and service is shown to be effected, and is
acknowledged, then surely it cannot be suggested that the Defendants had ‘no
notice’. To say that is untrue; they may not have had service by registered
post or through the bailiff, but they most certainly had notice. They had
copies of the papers. They were told of the next date. A copy of the previous
order was sent to them. Defendants who avoid and evade service by regular modes
cannot be permitted to take advantage of that evasion.

The High Court relied on the
WhatsApp chats with AR Vikhyat, the head of Vikhyat Chitra Production, as
evidence that he has received the Notice. It also relied on the fact that the
WhatsApp status of this head showed a picture of Pushpaka Vimana.
Further, (and probably for the first time), the High Court relied on TrueCaller
App which showed that the mobile number indeed belonged to AR Vikhyat.

Considering all these electronic
evidences, the High Court held that if Vikhyat Chitra believed they
could resort to these tactics to avoid service, they were wrong. They may
succeed in avoiding a bailiff; they may be able to avoid a courier or a postman
but they have reckoned without the invasiveness of information technology. Vikhyat
Chitra in particular did not seem to have cottoned on to the fact that when
somebody calls him and he responds, details can be obtained from in-phone apps
and services, and these are very hard to either obscure or disguise. There are
email exchanges. There are message exchanges. The Court held that none of these
established that the defendants were not adequately served. Accordingly, it
held that the defendants should bear the consequences of their actions.
Ultimately, the High Court granted an interim injunction against Vikhyat Chitra
Production from the showing the movie in all forms, cinema, TV, DVDs, etc.,
and also granted a host of other restrictions against it pending final disposal
of the suit.

Thus, in this case, the Bombay
High Court relied not just on WhatsApp chats but also on the TrueCaller App of
the defendant. This surely is one of the most revolutionary verdicts delivered
by the Courts.

In a similar development,
according to certain reports, the court of the Haryana Financial Commissioner
in the case of Satbir Singh vs. Krishan Kumar has served a
summons on a non-resident through WhatsApp since his physical address in India
was untraceable. The court ordered that the summons should be sent on the
defendant’s WhatsApp from the mobile of a counsel, who would produce proof of
electronic delivery via WhatsApp by taking a printout and duly authenticating
it by affixing his own signature.

Conclusion

The Delhi High Court has held that
the law did not sleep when the dawn of information technology broke on the
horizon. The world over statutes were enacted and rules relating to
admissibility of electronic evidence and its proof were enacted. It is
heartening to note that the Bombay High Court and the Madras High Court have
relied on WhatsApp chats and TrueCaller as evidence.

However, at the same time one would also like to
sound a note of caution since often the veracity and authenticity of social
media and Apps could be in doubt. Cyber security could often be compromised and
if the Court relies on hacked data then there could be serious consequences.
Nevertheless, a step in the right direction has been taken by the Courts! So
check your WhatsApp carefully next time, you might just have received a Court
summons!

shailesh.kwebmaker

Deficient Stamp Duty – Cause for Imprisonment?

Introduction

Stamp Duty is the 2^ndlargest
source of revenue for the Maharashtra Government. The fact that the Government
is becoming very vigilant to check stamp duty evasion is a good move so as to
ensure that there is no revenue leakage. However, having said that, does every
case of deficient stamp duty justify an imprisonment on the ground that there
was a fraudulent act or a forgery or a case of corruption between the assessee
and the Sub-Registrar? Shooting from the hip and arresting people at a drop of
the hat is something which should be avoided by the authorities at all costs!
There exist enough safeguards in all revenue statutes to tackle cases of tax
evasion. Let us consider one such case which travelled all the way up to the
Supreme Court – State of Maharashtra vs. Ravindra Babulal Jain, SLP (Cr.)
No. 1881/2016.

Facts of the case

Ravindra Jain and others,
respondents in the case, purchased a piece of land admeasuring 8 acres 4
gunthas situated at Aurangabad by way of a public auction and by following a
tender process. The consideration paid by them of Rs. 3.60 crore was the
highest of several bidders. Since the property fell within the green zone, the
price paid by them was optimum. They got a sale deed registered in respect of
the land by showing a market value of the said property as Rs.3,500/- per
square meter at a time when the market value of the said property was
Rs.4,100/- per square meter. Based on this fact, the Anti Corruption Bureau,
acting on a private complaint, lodged a case against them as well as the
concerned Sub-Registrar alleging that all of them in connivance caused a
revenue loss to the tune of Rs.12,76,000/- to the State Government. It was also
alleged that they completed the aforesaid transaction by preparing false
documents, false records and fraudulently and dishonestly used the said records
as genuine ones. The cases were registered under the Indian Penal Code read
with section13(2) of the Prevention of Corruption Act as well as sections 59
and 62 of the Maharashtra Stamps Act, 1958. Accordingly, all the accused in
this case as well as the Sub-registrar and his assistant were arrested and
later released on bail. Subsequently, the accused moved the Bombay High Court
for quashing the FIR lodged against them by filing Cri. Appln. No.
4614/2012.

Allegations against the Accused

The Prosecution argued before the
Bombay High Court that the accused purchased the land for a consideration of
Rs. 3.60 crore. While presenting the sale deed for its registration in December
2008, they did not disclose the true market value of the aforesaid land which,
according to the prosecution, was Rs.4100/- per square meter as per the Ready
Reckoner rates declared by the Government in the year 2008. It was alleged that
the applicants showed the market value of the said property as Rs.3,500/- per
square meter which was the Ready Reckoner rate of the earlier year, i.e., of
2007.

According to the Prosecution, as
per Ready Reckoner rates of the year 2008, the market value of the subject
property was Rs.7.05 crore and the stamp duty payable on the same was Rs.35.26
lakh. The accused, declared the market value of the subject property as Rs.4.50
crore based on the Ready Reckoner rates of 2007 and accordingly paid stamp duty
of Rs.22.50 lakh only. Hence, it was alleged that the purchasers of the said
land paid less stamp duty to the extent of Rs.12.76 lakh and caused a revenue
loss to the Government to that extent.It was also alleged that while
registering the subject instrument, the accused used false and forged documents
as genuine one and conniving with the then in charge Assistant Sub Registrar,
cheated the Government by causing loss of Rs.12.76 lakh. It was further alleged
that not mentioning the zone number within which the property fell clearly
indicated the malafide intention of cheating the Revenue. Consequently, the
Prosecution invoked various provisions of the Indian Penal Code, 1860,
viz, section 119 (Public Servant concealing design to commit offence which
it is duty to prevent), section167 (Public Servant framing an incorrect
document with an intent to cause injury), section 418 (Cheating with
knowledge that wrongful loss may ensue to person whose interest offender is
bound to protect), section 468
(Forgery for purposes of Cheating), section 471 (Using as genuine a
forged document); section 13(2) of the Prevention of Corruption Act,
1988 (criminal misconduct by public servant) as well as section 59 (Penalty
for executing instrument not duly stamped) and section 62 (Penalty for
failure to set forth facts affecting duty in the instrument) of the Maharashtra
Stamp Act, 1958.

High Court’s Verdict

The Bombay High Court considered
the facts of the case. At the outset it noted that section 119 and section 167
of the Indian Penal Code (IPC), as well as section 13(2) of the
Prevention of Corruption Act can only be attracted against public servants. The
accused in the present case were private individuals (separate proceedings were
launched against the sub-registrar) and hence, these sections automatically
failed. Thus, the Court was only concerned whether a fit case against the
accused under sections 418, 471 and 468 of the Indian Penal Code survived?

It held that section 418 of the
IPC dealt with Cheating with knowledge that wrongful loss may ensue to person
whose interest offender is bound to protectand no such case was apparent from
the material on record. Hence, even that section did not survive.

It next considered the offences of
section 468 (Forgery for purposes of Cheating) and section 471 (Using as
genuine a forged document). In this respect, it observed that the Prosecution
had made the following specific accusations:

(i) The applicants submitted the
in-put form which was not correctly filled.

(ii) The applicants intentionally
did not mention the zone number within which the subject property was situated.

(iii) The ready reckoner rate and
zone number were not mentioned at the top of the document of sale deed.

(iv) The market value of the
subject property was deliberately shown less.

(v) The market value of the
property was fraudulently assessed as per the ready reckonerrates prevailing in
2007 when the same ought to have been assessed at the ready reckoner rates of the
year 2008. This was done with a view to confer pecuniary advantage to the
accused which resulted in wrongful loss to the Government.

(vi) The accused and the other two
accused officials had a common intention to cheat the Government.

The High Court observed that no
offence could be made under the IPC in the present case. Even if the in-put
form was incorrectly filed or the zone number was not mentioned or the market
value was incorrect it was not a case of using a false document or one of
forgery! Merely making a false claim in a document does not make the
document a false one. Further, making a false statement cannot amount to
forgery. It gave a precise definition of a forged document as meaning only one
which purports to be signed or sealed by a person who in fact never did so.
Thus, it quashed the allegations u/ss. 468 and 471 of the IPC also.

Lastly, the High Court analysed
the correctness and the legality of the allegation that the accused
deliberately, showed the market value of the property less with a view to make
a wrongful gain for them and cause wrongful loss to the Government. It stated
that there was a specific allegation against the accused that, they with a
fraudulent and dishonest intention did not disclose the true market value of the
subject property while presenting the deed of sale of the said property for its
registration before the Sub Registrar and thereby cheated the Government by
causing revenue loss. It considered the definition of market value u/s.2(na) of
the Stamp Act Market Value to mean in relation to any properly which is the
subject matter of any instrument means the price which such property would have
fetched if sold in open market on the date of execution of such instrument or
the consideration stated in the instrument whichever is higher.

Accordingly, the High Court held
that the whole approach adopted as by the Prosecution in determining the market
value of the subject property appeared erroneous. It relied on Jawajee
Nagnatham vs. Revenue Divisional Officer, Adilabad, A.P. (1994) 4 S.C.C. 595,
which held that the Ready Reckoner prepared and maintained for the purpose of
collecting stamp duty had no statutory base or force and it could not form a
foundation to determine the market value mentioned thereunder in instrument
brought for registration.

It further considered R.
SaiBharathi vs. J. Jayalalitha, 2003 AIR S.C.W. 6349 where the Supreme
Court held that, “… the guideline value will only afford a
prima-facie base to ascertain the true or correct market value. Guideline value
is not sacrosanct, but only a factor to be taken note of if at all available in
respect of an area in which the property transferred lies. In any event, for
the purpose of Stamp Act guideline value alone is not a factor to determine the
value of the property and the authorities cannot regard the guideline valuation
as the last word on the subject of market value.”

Similar Supreme Court decisions
not considered by the Bombay High Court but which are on the same lines
include, Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991
P&H 26.

Hence, the High Court concluded
that the very foundation of the charges that the market value was deliberately
shown less got uprooted. It went on to state that even if the market value was
shown less, the Sub-registrar could have referred the instrument for
adjudication to the Collector u/s. 32A(2) of the Stamp Act. Since this was not
done, it was implied that the Sub-registrar accepted the value. Considering
that the said property was bought under a public auction and tender process and
by paying the highest price, the Sub-registrar may have considered all these
facts in accepting the stated value.

The Court held that prima facie
it found no fault with the Sub-registrar’s approach. It noted that in any event
the Collector had suo moto powers of revision u/s. 32A(5) of the Stamp Act.
Further, this section empowered the Collector to levy a penalty of 2% per
month. This power was already exercised by the Collector in the present case.
The Court wondered that when this action was already availed, where was the
propriety in launching criminal proceedings under the IPC and more so when
there did not seem any cogent, concrete and sufficient material against the
accused. A similar case of alleged cheating was considered by the Bombay High
Court in Sanjay Shivaji Dhapse vs. State of Maharashtra (2014 All M.R.
(Cri.) 3617). There the Division Bench of the Court held that not
affixing stamp of adequate amount would amount to irregularity and it is always
subject to verification / check by the concerned Government Officer. However,
it held that a criminal complaint could not lie against such an irregularity.

Hence, on a holistic view, the
Court in Ravindra’s case concluded that there was no offence under any section
of the IPC. The only guilt if at all which could be attributed would be that of
applying the reckoner rates of 2007 instead of 2008. However, the correct
sections to penalise that offence would be sections 59 and 62 of the Stamp Act
and not the IPC. Section 59 provides a fine and an imprisonment for any person
who with the intention to evade duty executes any instrument. Further, section
62 levies a fine for not setting forth all facts and circumstances in the
instrument which affect the chargeability of stamp duty. It was pleaded by the
accused that even those offences might not be attracted in the instant case in
light of section 59A of the Stamp Act which provided that no person could be
prosecuted u/s. 59 for an instrument which was admitted in Court. In Ravindra’s
case, the instrument was admitted before the Civil Judge. However, the Bombay
High Court did not go into merits of the case and instead only focused on the
fact that there was no offence under the IPC.

Hence, the High Court dropped all
criminal complaints in the instant case.

SLP to Supreme Court

Aggrieved by the above order, the
State preferred an SLP before the Supreme Court. The Supreme Court dismissed
the SLP by stating that it did not find any legal and valid ground for
interference with the Bombay High Court’s Order.

Conclusion

The Stamp Duty Reckoner is fast
becoming a single point linkage for several revenue statutes. The 1% VAT
composition Scheme, the Fungible FSI Premium, the deemed sales consideration
u/s. 50C and section 43CA of the Income-tax Act, the buyer’s Income from Other
Sources u/s. 56(2) of the Income-tax
Act, etc., are all connected with the stamp duty ready reckoner
valuation. At a time like this, treating every irregularity in computing stamp
duty as a criminal offence would have drastic consequences.

India is not a Banana Republic where people can
be arrested on a mere difference in the stamp duty reckoner rate and the actual
value on which duty is paid. There could be several explanations for the
difference and even if there are none, arrest should be the last frontier which
should be resorted to. There are enough anti-abuse provisions, penalties which
the authorities can avail of under the Stamp Act. One hopes that after this
rationale decision, tax and other authorities would adopt a more genteel
approach towards taxpayers!

shailesh.kwebmaker

Maintenance of Parents

Introduction

Ageing is a natural phenomenon!
But what if in one’s twilight years one’s own children don’t take care of a
person or even worse subject him / her to mental and physical abuse and agony?
There have been cases where the children have not provided even for basic
maintenance and daily needs of their parents. In such a scenario, the
Government of India thought it fit to introduce a legislation to provide
simple, inexpensive and speedy provisions which would enable the suffering
parents to claim maintenance from their children. Accordingly, “The
Maintenance and Welfare of Parents and Senior Citizens Act, 2007” was
enacted on 31^stDecember, 2007 as a Central Act to provide for more
effective provisions for the maintenance and welfare of parents and senior
citizens guaranteed and recognised under the Constitution of India. Let us
consider some of the provisions of this social welfare statute.

Maintenance of Parents and Senior
Citizens

The Act provides for the setting
up of a Maintenance Tribunal in every State which shall adjudicate all matters
for maintenance, including provision for food, clothing, residence and medical
attendance and treatment. The following persons can make an application to the
Tribunal for maintenance of such needs so that he can lead a normal life:

(a) A parent (whether biological,
adoptive or step) or a grandparent can make an application against one or more
of his major children. Interestingly, the parents need not be senior citizens,
i.e., they can be less than 60 years of age.

(b) A childless senior citizen (an
Indian citizen who is at least 60 years of age) can make an application against
his major relative who is legal heir and who is in possession of the senior’s
property or who would inherit his property after the senior’s death. Any person
who is a relative of the senior and who has sufficient means shall maintain him
provided he is in possession of the property of the senior or would inherit his
property. If more than one such relatives are entitled to inherit his property,
then the maintenance would be proportionate to their inheritance.

While the senior must be an
Indian and at least 60 years of age, there is no such condition in respect of a
parent. In fact, the Act provides that it applies to citizens of India residing
abroad. How the Act would enforce its jurisdiction in a foreign land is a moot
point.

The application to the Tribunal
can be made by the senior citizen / parent himself, any other person or NGO
authorised by him. The Tribunal can even take suomoto cognisance of the
issue.

After inquiry, the Tribunal would
pass an order for maintenance and failure to comply with its order can lead to
penal action and imprisonment. The maximum maintenance allowance which may be
ordered by the Tribunal shall be such as may be prescribed by the respective
State Governments but not exceeding Rs. 10,000 per month. A claim for
maintenance can alternatively be made by the applicant under Chapter IX of the
Code of Criminal Procedure, 1973 but he cannot make it under both.

The Act also provides for the
constitution of an Appellate Tribunal before whom an appeal against orders of
the Maintenance Tribunal can be filed. Interestingly, the Act only gives the
right of appeal to a senior citizen or a parent aggrieved by the order of the
Maintenance Tribunal. It contains no provision for an appeal by the relative
aggrieved by the order of the Maintenance Tribunal! This is rather strange.
Another interesting facet is that the Act provides that a lawyer cannot
represent either party before the Maintenance Tribunal or the Appellate
Tribunal. However, if a parent so desires, then he can ask the State
Government’s District Social Welfare Officer to represent him. Why should an
Act deprive an old person from availing of legal representation? What if the
senior is a person who is unable to attend proceedings owing to ill-health,
incapacitation? He would then be forced to find some person / NGO who would
appear for him. Is it that easy to find someone?

Abandoning Seniors

If any person who has been given
the care or protection of senior citizens, leaves them in any place with the
intention of wholly abandoning them, then he shall be punishable with
imprisonment for a term of up 3 month and / or fine of Rs. 5,000. Intention of
wholly abandoning would be demonstrated only through circumstantial evidence
and actual conduct and the onus would be on the person who alleges abandonment.
Such a case would be tried before a Magistrate Court and not by the Maintenance
Tribunal.

Protection of Life and Property

Section 22(2) of the 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. Some of the important steps laid down under the Action Plan
under Rule 20 are as follows:

(a) Every police station must
maintain an up-to-date list of seniors living within its jurisdiction, especially
those living by themselves. One wonders whether this is being done in practice?

(b) A police officer with a social
worker should visit all seniors at least once a month and as soon as possible
on requests of assistance.

(d) Every station must maintain a
register of all offences committed against seniors.

(e) Antecedents of servants working
for seniors must be promptly verified by the police on request from seniors.

(f) A monthly report must be
submitted to the District Magistrate / Director General of Police about crimes
against seniors and the status of complaints and preventive steps taken.

(g) Every Police Commissioner must
start a toll-free help line for seniors. Mumbai police has set up an Elder Line
at 1090.

Void Transfers

Section 23 of the 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. 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.

In Promil Tomar vs. State of
Haryana, (2014) 175 (1) PLR 94, the Punjab and Haryana High Court has
held that the words ‘gift or otherwise’ in the section would include the
transfer of possession of a property or part thereof. It would cover a transfer
by way of lease, mortgage, gift or sale deed. Even a transfer of possession to
a licencee by a senior citizen would be covered. In Sunny Paul vs. State
NCT of Delhi, WP(C) 10463/2015 (Del), the Delhi High Court has held
that interest of the senior citizen as tenants/licencees of the property is
also covered under the section even though they are not owners of the property.
It further held that a claim for maintenance under the Act and an application
for setting aside a void transfer u/s. 23 of the Act are separate and different
remedies and one is not a pre-condition for the other

In Rajkanwar vs. Sita Devi,
AIR 2015 Raj 61, the Rajasthan High Court has held that a Will would
not be covered under the above provision since it is not a transfer inter vivos
and does not involve any transfer. A Will is only a legal expression of the
wishes of the testator.

Eviction from House

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 one has not been allowing him to live
peacefully? Different High Courts have taken contrary views in this respect.
The Kerala High Court in CK Vasu vs.The Circle Inspector of Police, WP(C)
20850/2011 has taken a 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 while interpreting the provisions, the
object of the Act had to be kept in mind, 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. A similar
view was taken in Jayantram Vallabhdas Meswania vs. Vallabhdas Govindram
Meswania, AIR 2013 Guj 160 where the Court held that setting aside of
void transfers u/s. 23 would even include cases where only possession of
property has been given instead of an actual legal transfer. It thus upheld the
vacation of the premises as directed by the Tribunal. A very interesting
judgment was delivered by the Division Bench of the Punjab & Haryana High
Court in J. Shanti Sarup Dewan, vs. Union Territory, Chandigarh, LPA
No.1007/2013 where it held that there had to be an enforcement
mechanism set in place especially qua the protection of property as
envisaged under the said Act.It held 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
but that too without any interim injunction. It was not the other way round
that the son and his family kept staying in the house and asked his parents to
go to the Civil Court to establish their rights knowing fully well that the time
consuming civil proceedings may not be finished during their life time.

The Court held that it did not
have the slightest of hesitation in coming to a conclusion that all necessary
directions could thus be made under the said Act to ensure that the parents
lived peacefully in their own house without being forced to accommodate their
son.

Recently, a Single Judge of the
Delhi High Court had an occasion to consider all the aforesaid judgments on the
power of eviction of the Tribunal. It held that the requirement that the
children or relatives must be in line to inherit the property was mandated only
for issuing direction with regard to maintenance. To invoke jurisdiction for
protection of life of the senior citizen or setting aside void transfers no such
pre-condition had to be satisfied. Further, directions to remove the children
from the property was necessary in certain cases to ensure a normal life of the
senior citizens. After considering all decisions on the issue, the Court held
that it was in agreement with the view expressed in the case of Nasir (supra)
that the provisions of Act, 2007 have to be liberally construed as one of the
primary objects of the Act is to protect the life and property of senior
citizens. Consequently, it held that u/s. 23 of the Act, the Maintenance
Tribunal could issue an eviction order to ensure that senior citizens live
peacefully in their house without being forced to accommodate a son who
physically assaults and mentally harasses them or threatens to dispossess them.

Since the Act conferred on the
Maintenance Tribunal the express power to declare a transfer of property void
at the option of the transferor u/s. 23, it had to be presumed that the intent
of the Legislature is to empower the Maintenance Tribunal to pass effective and
meaningful orders including all consequential directions to give effect to the
said order. The direction of eviction was a necessary consequential relief or a
corollary to which a senior citizen would be entitled upon a transfer being
declared void. It accordingly directed the Police Station to evict the son.

Conclusion

This is an interesting
social welfare statute designed to provide speedy redressal to parents and
seniors. While there continue to be judicial debates on whether eviction is possible,
one tends to think that the decisions upholding eviction would ultimately
prevail. The Delhi High Court, in a somewhat similar case of Sachin vs.
Jhabbu Lal, RSA 136/2016(analysed in detail in this Feature in the
BCAJ of January 2017) has held that in respect of a self acquired
house of the parents, a son had no legal right to live in that house and he
could live in that house only at the mercy of his parents up to such time as
his parents allow. That decision was not rendered under the context of this Act
but yet the ratio was the same. To conclude one only wonders, do we need a law
or a Court to tell us to take care of our parents? The times, truly have
changed!

shailesh.kwebmaker

LIFTING THE CORPORATE VEIL

Introduction

A company is a separate legal entity with a perpetual succession and an identity distinct from its members. Members may come and go but a company continues to exist independent of its members. This is a principle of law which has been laid down since the time the very first statute dealing with companies came into existence. However, there are times when the Courts decide to look behind the company, i.e., lift or pierce the corporate veil and ascertain who are the real beneficiaries behind the entity. Such scenarios are very few and far between but they do exist and are resorted to by the Courts in the rarest or rare cases.

Recently, the Supreme Court in the case of Estate Officer UT Chandigarh vs. M/s. Esys Information Technologies P Ltd, CA No 3765/2016 (“Esys’s case”) had an occasion to deal with the circumstances when the corporate veil may be lifted.

Corporate Identity

Section 9 of the Companies Act, 2013 provides that from the date of incorporation of a company, all its members shall be a body corporate by the name under which it is formed and the company shall be capable of owning property and shall have a perpetual succession. Thus, this section lays down the corporate identity of a company which is distinct and separate from its members.

Factual Matrix of Esys’s Case

Esys,a subsidiary of a Singapore company, was allotted a site at an Information Technology Park at Chandigarh under the Allotment of Small Campus Site in Chandigarh Information Services Park Rules, 2002. Esys was supposed to carry out construction of a campus site but before doing so, 98% of its shareholding was transferred by its Singapore-based holding company to a Dubai-based group company. The Dubai-based group company, in turn, transferred its controlling stake to another company, known as Teledata Informatics Ltd. In neither case was permission obtained for the transfer of shares. The Estate Officer concluded that since the shareholding changed hands after land allotment and that too without the prior permission of the Estate Officer, there was a violation of the terms of the allotment letter. The particular clause of the allotment letter being referred to by the Officer stated that the transfer of the site would not be allowed for 10 years from the date of allotment without the prior permission. It may be allowed in the event of merger or split of the allottee and that too after obtaining prior permission. Further, all cases of transfer were subject to payment of prescribed transfer charges.

As a result of the transfers, not only did the Dubai-based company became the owner of the land but it was further transferred to Teledata. This fact of transfer to Teledata was suppressed on oath by the Director of Esys but was discovered by the Estate Officer from an affidavit filed by the Director before the High Court of Singapore in another matter. In that affidavit the Director had very clearly conceded that Teledata was the new owner of Esys. The Estate Officer concluded that the manner in which the transfer was made was not permissible as per the Rules and terms of the allotment letter. The holding company and its subsidiaries were two distinct legal entities and hence, the corporate veil should be lifted so as to unearth the mala fide, dishonest and fraudulent design of the allottee. Accordingly, the Officer contended that this amounted to an illegal transfer of the land and also ordered that the allotted site be resumed. The Appellate Authority upheld this Order of the Estate Officer.

High Court’s verdict

The Punjab and Haryana High Court overruled the verdict of the Appellate Authority. It refused to lift the corporate veil in the case under discussion. It stated that there was neither a transfer of the allotted site nor a merger of the allottee. The allottee was a juristic entity and continued to remain as such. It relied upon an old decision of Saloman vs. Saloman, 1897 AC 22(1) which held that a company is separate and distinct legal entity. It also relied on the Supreme Court’s decision in the case of Bacha F. Guzdar vs. CIT, 27 ITR 1(SC) where the Court held that that a shareholderhas got no right in the property of the company. His only rights are the right to vote and right to dividend, if declared, but that does not, either individuallyor collectively, amount to more than a right to participate in the profits of the company. The company was a juristic person and was distinct from the shareholders. It was the company which owned the property and not the shareholders. It also discussed the judgment in the case of Andhra Pradesh State Road Transport Corporation vs. ITO, AIR 1964 SC 1486 which held that a shareholder does not own the property of the corporation or carries on the business with which the corporation is concerned. The High Court further held that the argument that the principle of lifting of the corporate veil should be applied, did not arise in the impugned case since the shareholders were distinct from the company and there was no change in the name of the allottee. The allotment continued in the name of the company. Change in shareholding could not be construed to be violative of the allotment letter as the company was a distinct and separate entity and composition of share holding did not change the nature of the company. It accordingly set aside the Officer’s site resumption order.

Based on this the Estate Officer appealed to the Supreme Court where a pointed question was raised by the Supreme Court to the director as to whether the shares of Esys have been transferred to Teledata? The director stated on oath that they have not been which was in fact, contrary to the truth.

When can the Veil be Lifted?

The Supreme Court held that in Juggilal Kamlapat vs. CIT 73 ITR 702 (SC), it has been laid down that it is true that from juristic point of view a company is a legal personality entirely distinct from its members and it is capable of enjoying rights and being subjected to rights and duties which are not the same as those enjoyed or borne by its members but in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. It further discussed the decisions of Jai Narain Parasrampuria vs. Pushpa Devi Saraf, 2006 (7) SCC 756;State of U.P vs. Renusagar Power Co., AIR 1988 SC 1737 wherein the Supreme Court held that it was well settled that the corporate veil could in certain situations can be pierced or lifted. In the expanding horizon of modern jurisprudence, lifting of corporate veil was permissible. Its frontiers were unlimited. It must, however, depend primarily on the realities of the situation. The aim of legislation was to do justice to all the parties. The principle behind the doctrine was a changing concept and it was expanding its horizon Whenever a corporate entity was abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable therefor. The Apex Court observed that the corporate veil even though not lifted was becoming more and more transparent in modern company jurisprudence. It held that the case of Saloman vs. Saloman, 1897 AC 22(1) was still popular but the veil has been pierced in many cases. The lifting of the veil has been held to be permissible in Life Insurance Corporation of India vs. Escorts Ltd. AIR 1986 SC 1370 which held that it may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern.

Though not considered in this decision but the Supreme Court in Vodafone International Holdings BV vs. UOI, 341 ITR 1 (SC) had also dealt with this issue by stating that lifting of the corporate veil is readily applied in the cases coming within the Company Law, Law of Contract, and Law of Taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction. The Court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal facade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. This principle is also applied in cases of a holding company – subsidiary relationship- where in spite of being separate legal personalities, if the facts reveal that they have indulged in dubious methods for tax evasion. This decision examined the concept of whether a transaction should be “looked at” or “looked through”. The amendments made by the Finance Act, 2012 to section 9 and section 2(47) of the Income-tax Act, 1961, which introduced the concept of taxation of Indirect Transfers, are nothing but an extension of the doctrine of lifting of the corporate veil.

Apex Court’s Decision

After considering various factors, the Supreme Court overruled the decision of the High Court in Esys’s case. It also held that prima facie from the affidavit of the director filed in Singapore, there was a transfer in favour of Teledata. Inspite of a direction to disclose the facts, there was a concealment of material facts. Esys was guilty of concealing the truth and thus, it held that the provisions of the allotment letter have been clearly violated and the Estate Officer was within his rights to resume possession of the land.

Fallout of this Decision

This decision raises several unanswered questions. Was this view taken by the Supreme Court merely because the director lied on on oath or would the doctrine of lifting the veil be applied in all cases where shares of a company are transferred? It appears that the Court was driven towards this view because of the concealment by the director. However, if there was no concealment, would the decision of the Supreme Court been different? It is relevant to note that the allotment letter contained no restriction on the transfer of shares of the allottee! All that it prohibited was a transfer of the site.

This question is relevant in several other situations. In case of transfer of shares of a company owning a valuable piece of land at Mumbai would stamp duty be levied @ 0.25% as on a transfer of shares or 5% as on conveyance of property? The Mumbai ITAT in the case of Irfan Abdul Kader Fazlani, ITA No. 8831/Mum/11 has held that section 50C cannot be applied to the sale of shares of a property owning company. The veil cannot be pierced in such a case to contend that what is being sold is actually land and building.

Similar questions also arise in flats where collector’s charges are to be paid. These charges are currently being avoided because what is being sold are shares of the company and not the property per se.

Further, if shares of such a company are long-term capital assets but the land held by the company is short-term capital asset, then would the gain on sale of shares be treated as short-term capital gain? A similar question was placed before the Karnataka High Court in Bhoruka Engineering Industries Ltd vs. DCIT, 356 ITR 25 (Kar). In that case, shares of a listed company were sold through the exchange and capital gains exemption was claimed u/s. 10(38). The only asset of the company was land. The AO contended that the veil should be lifted since what had been sold was virtually land and hence, the exemption should be denied.

The High Court denied this plea of the Department and held that the transaction was real, valuable consideration was paid, all legal formalities were complied with and what was transferred was the shares and not the immovable property. The finding of the assessing authority that it was a transfer of immovable property was contrary to the law and contrary to the material on record. It held that they committed a serious error in proceeding on the assumption that the effect of transfer of share was transfer of immovable property and therefore, if the veil of the company was lifted what appeared to them was transfer of immovable property. According to the High Court, such a finding was impermissible in law.

Conclusion

One can only hope that the lifting of the veil is resorted to in select cases, such as, those where there are instances of fraud or deceit. A wrong use of this decision could open up a Pandora’s box and it could be like Vodafone’s case being revisited all over again – one only hopes this purdah is not lifted easily!! _

shailesh.kwebmaker

Joint Holder or Nominee is the Question

INTRODUCTION
Succession planning is catching up with modern India. Earlier, people in India would think of wills, trusts and other modes of estate planning only when they were of a ripe old age. However, today even younger people are considering what is the best mode of planning for one’s assets so that there is a smooth transmission to the family. And rightly so, since life is uncertain and hence, planning for one’s affairs would only mean that an already mourning family has one less problem to face!

When it comes to estate planning, the most basic form of planning is a joint ownership of assets and a nomination. However, there is a fair deal of confusion as to the difference between these two and which is superior of the two. Let us examine the meaning of these two very important tools and when to use which.

JOINT HOLDING
A joint holder as the name suggests is joint in ownership along with the 1st holder or the main holder. Joint ownership could be in respect of bank accounts, demat accounts, share certificates, flat ownership certificates, etc. A joint holding is the opposite of a single / sole ownership. Depending upon the mode of joint holding, in certain assets, the joint holder can operate the assets along with or after the lifetime of the primary holder. To illustrate in the case of bank accounts, the following modes are possible:

(a) Either or Survivor – under this mode, either of the joint holders can operate the account. Moreover after the death of the primary member, the joint holder would automatically become the sole holder of the account.

(b) Former or Survivor – under this mode, the joint holders can operate the account only after the death of the primary member. Once the primary member dies, the joint holder would automatically become the sole holder of the account. However, during the lifetime of the primary member, the joint holder cannot operate the account.

Table F of Schedule I to the Companies Act, 2013 lays down the model Articles of Association of a limited company. Clause 23 of this Table F provides that on death of a joint holder of shares, the survivor member would alone be recognised by the company as having any title to his interest in the shares.

NOMINATION
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.

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

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

A nomination continues only up to and until such time as the will is implemented. No sooner the will is implemented, 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), in the context of a nomination under a life insurance policy held 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. Once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), the Supreme 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 v 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 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. A similar view has been taken by the Bombay High Court in Nozer Gustad Commissariat vs. Central Bank of India, 1993(2) Bom.C.R.8 and Antonio Jaoa Fernandes vs. Asst. Provident Fund Commissioner, 2010(3) All MR 599 in respect of balance standing in the employee provident fund of the deceased.

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. 4646of 2006(SC). 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 nominationhaving 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 cooperative society nominates a person, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee.The Supreme Court concluded, that it was open to the other members of thefamily of the deceased, to pursue their case of succession or inheritance in respect of the flat, in consonance with the law.

The position was a bit murky when it came to a nomination in respect of shares in a company or a depositary account. The Companies Act, 2013 in the form of section 72 read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014 (in respect of nomination for physical shares) and Bye Law 9.11 made under the Depositories Act, 1996 (which deals with nomination for securities held in a dematerialised format) provide 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. 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 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 the Companies Act and the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone in supersession of the testamentary/intestate succession. 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. It held that 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.

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. 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.

A division bench of the Bombay High Court in Shaktia Yezdani vs. Jayanand Jayant Salgaonkar, Appeal No. 313/2015 Order dated 01.12.2016 considered both the earlier Single Judge decisions. It also analysed all the Supreme Court and High Court decisions on the superiority of a will over a nomination. It held that the provisions of the Companies Act are not materially different from the provisions of other Acts which provide for nomination. A nomination does not become a testamentary disposition under the Indian Succession Act. As has been consistently held, a nominee does not get an absolute title to the property. Nomination never overrides testamentary or intestate succession. The legislative intent by virtue of the Companies Act is not to make nomination a third mode of succession after testamentary or intestate succession. It concluded that the provisions of the Companies Act have nothing to do with the law of succession. Hence, the view of the Single Judge in Harsha Nitin Kokate’s case (supra) was incorrect and that of the Single Judge in Jayanand Jayant Salgaonkar was correct. Thus, the Division Bench has, for the time being, placed nomination even under the Companies Act / Depositories Act, at par with nomination for other assets, i.e., subservient to a will/ intestate succession.

WHICH IS SUPERIOR – JOINT HOLDING OR NOMINATION?
The big question which most people are asking is that what should be done – a joint ownership or a nomination of both? A joint holder is definitely on a higher pedestal as compared to a nominee since he is already entered as an owner. All that the bank/depositary participant /society needs to do is to strike out the name of the deceased primary member and take the joint holder on record as the primary member. So the descending order of hierarchy when it comes to succession planning would be Will – Joint Holding – Nomination. Of course, one can even place a trust right at the top of the pyramid. Thus, in cases where one is certain that after him the asset should go to a particular person then a joint holding is definitely advisable, e.g., in the case of a husband and a wife. In addition, a nomination may be created as an alternative beneficiary, e.g., in favour of the child of the couple. If there are joint holders, the nomination must be signed by all the joint holders and the nominee’s right would arise only when all the joint holders die.

One overarching fact to be borne in mind is that neither a joint holder nor a nomination creates a legal ownership over the asset in question. That is determined solely on the basis of the will (in cases of testamentary succession) or by the intestate law (e.g., the Hindu Succession Act, 1956 in case of Hindus dying intestate or Indian Succession Act for Parsis dying intestate).

It is advisable that the fact of joint holding/nomination is also reproduced in the will of the person. Moreover, the beneficiaries under the will should be co-terminus with the joint holders/nominees wherever possible to avoid any variance and disputes. Further, always have a habit of reviewing all joint holdings and nominations. There have been several instances of people making nominations or adding joint holders long back and then forgetting about it. In many cases, these past actions come back to haunt the family of the deceased by causing succession hurdles.

CONCLUSION
Considering the confusion and myths surrounding succession planning, joint ownership, nomination, is it not time to entirely redo the Indian Succession Act, 1925? Is it right to interpret succession issues in the light of a 92-year old Act? There should be a comprehensive law dealing with all forms and modes of estate planning across various asset classes. That would go a long way in reducing the pending litigation before our judiciary since a large number of cases pertain to succession disputes!

shailesh.kwebmaker

Gratuitous Possession of Property

Introduction

Consider a case of a person who
was in need of a house to stay and some close relative of his helped him by
allowing him to stay gratuitously in his spare house. This person continues
staying in this house for a significantly long period of time due to the
goodwill gesture extended to him by his relative. Since possession is often
considered to be nine-tenths of the law, can he now claim that by virtue of
such a long period of possession, he has acquired a legal right in the property
and hence, he also has a title to the property? Strange as this proposition may
sound, this is a reality which several people are experiencing.

The Delhi High Court had an
occasion to consider a somewhat analogous issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016 (analysed in detail in this Feature in the
BCAJ of January 2017). In that case, the Delhi High Court held that in
respect of a self acquired house of the parents, a son had no legal right to
live in that house and he could live in that house only at the mercy of his
parents up to such time as his parents allow. Merely because the parents have
allowed him to live in the house so long as his relations with the parents were
cordial, does not mean that the parents have to bear his burden throughout
their life.

However, would the position be on
a different footing if a close relative was allowed to stay in a house for a
fairly long period of time out of sympathy, natural love and affection? This
was the issue deliberated by the Supreme Court in the case of Behram Tejani
vs. Azeem Jagani, CA 150/2017 (SC).

Facts of the Case

A person named Mohammed Ali Tejani
(“the deceased”) died, leaving behind a will. Prior to his death, he had a
fractional ownership in various immovable properties, flats in Mumbai. One such
property was a residential flat. The deceased resided in this flat with his
wife and his family members. After his death, his wife and his daughter’s son
(‘grandson’) continued to reside in this flat.

Under his will, the deceased
bequeathed his fractional ownership in all his immovable properties, including
the abovementioned residential flat, to his 4 brothers in equal proportion. He
did not provide for any life interest benefit or carve out any interest in this
flat for his wife or his grandson. The will was sought to be probated.

The grandson prayed before the
Bombay City Civil Court for a temporary injunction restraining the
beneficiaries under the will from dispossessing him and his grandmother from
the aforesaid flat since they were in use and possession of the same.

In reply to this, his 4 grand
uncles, i.e., the deceased’s brothers (also the beneficiaries named by the
deceased under his will) stated that the wife of the deceased was merely
allowed to use and occupy the suit premises by the defendants out of love and
sympathy without any fees or compensation; that the suit premises belonged to
them as co-owners since the testator had bequeathed his right, title and
interest in the building to them. They further stated that nonetheless, out of
sympathy, close blood relationship and out of love and affection, the
deceased’s wife had been allowed to use the suit premises. Further, since she
has no right, title or interest in the suit premises she could have no right to
permit any other person much less her grandson to interfere with the ownership
right of the co-owners. Accordingly, they opposed the grant of any interim
relief to the grandson.

The Bombay City Civil Court
dismissed the injunction prayer of the grandson. It held that the deceased’s
wife herself had no right in this premises. Only on a sympathetic ground she
was allowed to occupy the premises. In such facts, when the grandson came
before the Court claiming equitable relief like injunction, he had to prima
facie show some rights to claim the relief. If protection was asked for,
one must clearly seek ascertaining his legal rights. He merely claimed that he
was residing with his grandmother and if she herself did not have a right in
the property, then an injunction type of a protection could not be granted in
favour of the grandson.

On appeal, the Bombay High Court
overruled the verdict of the City Civil Court and upheld the grant of a
temporary injunction. It held that legal right of possession alone cannot be
the basis unless it is adjudicated, for overlooking the “settled possession”.
While deciding the possession right the City Civil Court had actually given a
finding against the maternal grandmother and decided that even she had no right
to occupy the premises and therefore, there was no question of permitting her
grandson to reside therein. The concept of “settled possession” could not be
equated with in all matters-“legal possession”. It depended upon the facts and
circumstances of a case.

It further held that the lower
Court proceeded on a wrong footing of law that the possession can be granted
only to the person who has a legal right to occupy the premises and no one
else. It felt that the law must take its due course with a foundation to
dispossess the person in possession of the premises only after a due trial. In
view of the same, it was inclined to observe that the order passed by the City
Civil Judge was against the settled principle of law with regard to the
possession of the property. It was however, made clear that the High Court was
only dealing with the protection of the possession of the premises and not the
ownership and/or title of the maternal grandmother of the plaintiff.

Accordingly, the beneficiaries
under the will of the deceased appealed to the Supreme Court.

Supreme Court’s Verdict

The Apex Court analysed the will
and observed that the will bequeathed the entire interest of the deceased in
the immovable properties in favour of his brothers. Neither the deceased’s wife
nor the grandson had any interest in these properties. She did not have any
right qua the premises in question but was permitted to occupy merely
out of love and affection. The status of the grandmother was thus of a
gratuitous licensee and that of her grandson was purely of a relative staying
with such a gratuitous licensee.

The Court referred to its earlier
decision in the case of Rame Gowda (Dead) by LRS. vs. M. Varadappa
Naidu(Dead), 2004(1) SCC 769. In that decision, the Supreme Court dealt
with the issue of settled possession by a person. It referred to Salmond on
Jurisprudence which held “that few relationships are as vital to man as that
of possession, and we may expect any system of law, however primitive, to
provide rules for its protection. . . . . . . Law must provide for the
safeguarding of possession….. Legal remedies thus appointed for the protection
of possession even against ownership are called possessory, while those
available for the protection of ownership itself may be distinguished as
proprietary.”

It also analysed its decision in Lallu
Yeshwant Singh (dead) vs. Rao Jagdish Singh, (1968) 2 SCR 203 where it
was held that the Law respects possession even if there is no title to support
it. It will not permit any person to take the law in his own hands and to
dispossess a person in actual possession without having recourse to a court. No
person can be allowed to become a judge in his own cause. Next, in Nair
Service Society Ltd. vs. K.C. Alexander, (1968) 3 SCR 163, the Apex
Court held that a person in possession of land assumed character of an owner
and exercising peaceably the ordinary rights of ownership has a perfectly good
title against all the world but the rightful owner. When the facts disclosed no
title in either party, possession alone decided. The court quoted Loft’s maxim ‘Possessio
contra omnes valet praeter eur cui ius sit possessionis (He that hath
possession hath right against all but him that hath the very right)‘ and
said, “A defendant in such a case must show in himself or his predecessor
a valid legal title, or probably a possession prior to the plaintiff’s and thus
be able to raise a presumption prior in time”.

The Court thus held that it was
clear that so far as the Indian law was concerned, the person in peaceful
possession was entitled to retain his possession and in order to protect such
possession, he may even use reasonable force to keep out a trespasser. A
rightful owner who had been wrongfully dispossessed of land may retake
possession if he could do so peacefully and without the use of unreasonable
force. If the trespasser was in settled possession of the property belonging to
the rightful owner, the rightful owner shall have to take recourse to law; he
cannot take the law in his own hands and evict the trespasser or interfere with
his possession. The law will come to the aid of a person in peaceful and
settled possession by injuncting even a rightful owner from using force or
taking law in his own hands, and also by restoring him in possession even from
the rightful owner (of course subject to the law of limitation), if the latter
has dispossessed the prior possessor by use of force. It is the settled
possession or effective possession of a person without title which would
entitle him to protect his possession even as against the true owner. The
concept of settled possession and the right of the possessor to protect his
possession against the owner had come to be settled by a catena of
decisions, such as, Munshi Ram and Ors. vs. Delhi Administration,(1968) 2
SCR 455;Puran Singh and Ors. vs. The State of Punjab (1975) 4 SCC 518 and Ram
Rattan and Ors. vs. State of Uttar Pradesh (1977) 1 SCC 188. The Court
further observed that it was difficult to lay down any hard and fast rule as to
when the possession of a trespasser can mature into settled possession. The ‘settled
possession’ must be (i) effective, (ii) undisturbed, and (iii) to the knowledge
of the owner or without any attempt at concealment by the trespasser. The
phrase ‘settled possession’ did not carry any special charm or magic in it; nor
was it a ritualistic formula which could be confined in a strait-jacket. An
occupation of the property by a person as an agent or a servant acting at the
instance of the owner would not amount to actual physical possession.

It laid down the following tests
which could be adopted as a working rule for determining the attributes of
‘settled possession’ :

(i) that the trespasser must be in
actual physical possession of the property over a sufficiently long period;

(ii) that the possession must be to
the knowledge (either express or implied) of the owner or without any attempt
at concealment by the trespasser and which contains an element of animus
possidendi. The nature of possession of the trespasser would, however, be a
matter to be decided on the facts and circumstances of each case;

(iii) the process of dispossession
of the true owner by the trespasser must be complete and final and must be
acquiesced to by the true owner; and

(iv) that one of the usual tests to
determine the quality of settled possession, in the case of culturable land,
would be whether or not the trespasser, after having taken possession, had
grown any crop. If the crop had been grown by the trespasser, then even the
true owner has no right to destroy the crop grown by the trespasser and take
forcible possession.

Next, the Supreme Court analysed
the ratio of another of its earlier decisions, Maria Margarida Sequeira
Fernandes and others vs. Erasmo Jack De Sequeira (Dead) through LRS, 2012 (5)
SCC 370. In this case, the appellant was married to a Naval Officer who
was transferred from time to time outside Goa and hence, on the request of her
brother she gave possession of the premises to him as a caretaker. The
caretaker held her property only on her behalf. The brother filed a suit for injunction
against his sister, the legal owner.

The Supreme Court observed that in
civil cases, pleadings were extremely important for ascertaining the title and
possession of the property in question. Possession was an incidence of
ownership and could be transferred by the owner of an immovable property to
another such as in a mortgage or lease. A licensee held possession on behalf of
the owner. Possession was important when there were no title documents and
other relevant records before the Court, but, once they come before the Court,
it is the title which has to be looked at first and due weightage be given to
it. Possession cannot be considered in vacuum. There was a presumption that
possession of a person, other than the owner, if at all it was to be called
possession, was permissive on behalf of the title-holder. Further, possession
of the past was one thing, and the right to remain or continue in future was
another thing. It was the latter which was usually more in controversy than the
former, and it was the latter which had seen much abuse and misuse before the
Courts. A title suit for possession had two parts – first, adjudication of
title, and second, adjudication of possession. If the title dispute was removed
and the title was established, then, in effect, it became a suit for ejectment
where the defendant must plead and prove why he must not be ejected.

In an action for recovery of
possession of immovable property, upon the legal title to the property being
established, the possession of the property by a person other than the holder
of the legal title was presumed to have been under and in subordination to the
legal title. It is for the person resisting a claim for recovery of possession
or claiming a right to continue in possession, to establish that he has such a
right. To put it differently, wherever pleadings and documents established
title to a particular property and possession was in question, it will be for
the person in possession to give sufficiently detailed pleadings, particulars
and documents to support his claim in order to continue in possession.

In Maria Sequeira’s case, the
brother did not claim any title to the suit property. Undoubtedly, the sister
had a valid title to the property which was clearly proved.The lower Courts had
failed to appreciate that the premises in question was given by the sister to
her brother herein as a caretaker.The brother’s suit for injunction against his
sister was not maintainable, particularly when it was established beyond doubt
that he was only a caretaker and he ought to have given possession of the
premises to the sister who was the true owner of the suit property on demand.
Admittedly, he did not claim any title over the suit property and he had not
filed any proceedings disputing the title of the appellant. The Supreme Court
held that an occupation of the property by a person as an agent or a servant at
the instance of the owner will not amount to actual physical possession.

It further held that the
possession of a servant or agent was that of his master or principal as the
case may be for all purposes and the former cannot maintain a suit against the
latter on the basis of such possession. Merely because the plaintiff was
employed as a servant to look after the property, it cannot be said that he had
entered into such possession of the property as would entitle him to exclude
even the master from enjoying or claiming possession of the property or as
would entitle him to compel the master from staying away from his own property.

In Maria Sequeira’s case, the
Court held that Principles of law which emerged were as under:-

(i) No one acquired a title to the
property if he or she was allowed to stay in the premises gratuitously. Even by
long possession of years or decades, such person would not acquire any right or
interest in the said property.

(ii) A caretaker, watchman or
servant can never acquire interest in the property irrespective of his long
possession. The caretaker or servant had to give possession forthwith on
demand.

(iii) The Courts were not justified
in protecting the possession of a caretaker, servant or any person who was
allowed to live in the premises for some time either as a friend, relative,
caretaker or as a servant.

(iv) The protection of the Court
could only be granted or extended to the person who had a valid, subsisting
rent agreement, lease agreement or license agreement in his favour.

(v) The caretaker or agent held a
property of the principal only on behalf of the principal. He acquired no right
or interest whatsoever for himself in such property irrespective of his long
stay or possession.

Hence, in Maria Sequeira’s case,
the judgment of the lower Courts were set aside and the Supreme Court directed
that the possession of the suit premises be handed over to the sister, who was
admittedly the owner of the suit property.

Accordingly,
after analysing and following the ratio of the above decisions, the Supreme
Court in Tejani’s case, concluded that a person holding the premises
gratuitously or in the capacity as a caretaker or a servant would not acquire
any right or interest in the property and even long possession in that capacity
would be of no legal consequences. In the circumstances, the City Civil Court
was right and justified in rejecting the prayer for interim injunction and that
decision was correct. However, it clarified that the matter having come up
before the Supreme Court from an interim order and since the main suit itself
was pending, observations made by it were not to be taken as concluding the
controversy and the merits of the matter will be gone into by the Court at the
appropriate stage.

Conclusion

It is apparent that a gratuitous possessor can
claim no vested right in the legal owner’s property. This clear cut verdict
helps to clarify matters. This decision read with the Delhi High Court’s
decision that an adult son cannot claim that he has a legal right to stay in
his parents’ home would go a long way in resolving several possession disputes.

shailesh.kwebmaker

Nomination in a Flat

Introduction

Nomination is increasingly used
in co-operative housing societies, depository/demat accounts, mutual funds,
Government bonds/securities, shares, bank accounts, etc. a nomination means
that the owner of the asset has designated another person in his place after
his death.

Once a person dies, his interest
stands transmitted 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.

A 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.

While there have been several
Supreme Court decisions on the question of the role of a nomination, recently,
the Supreme Court had an occasion to consider the issue in the context of a
flat in a co-operative society.

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. 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.

The Supreme Court’s in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases
214 (SC), in the context of a nomination under a life insurance policy
under the insurance act, 1938 has held that it does not have an effect of
conferring on the nominee any beneficial interest in the amount payable under
the life insurance policy on the death of the assured. It only indicates the
hand which is authorised to receive the amount on the death of the insured.

Again in Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR
306 (SC),the Supreme
Court examined the effect of a nomination in respect of a
national Savings Certificates and held
that nominee is only an administrative holder. any amount paid to the 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.

Flat In A Co-Operative Housing Society

Let us now consider the position
in the context of a flat in a co-operative society. Section 30 of the
maharashtra Co-operative Societies act,
1960 (‘the act”) provides as
follows:

“Section 30 – Transfer of interest on death of member

(1) On the death of a
member of a
society, the society shall
transfer the share or interest of the deceased member to a person or persons
nominated in accordance with the rules, or, if no person has been so nominated
to such person as may appear to the committee to be the heir or legal
representative of the deceased member.

Provided that, such nominee, heir
or legal representative, as the case may be, is duly admitted as a member of
the society:

Provided further that, nothing in
this sub-section or in section 22 shall prevent a minor or a person of unsound
mind from acquiring by inheritance or otherwise, any share or interest of a
deceased member in a society.

(2) Notwithstanding anything
contained in sub-section (1), any such nominee, heir or legal representative,
as the case may be, may require the society to pay to him the value of the
share or interest of the deceased members, ascertained in accordance with the
rules.

(3) A society may pay all other moneys due to the
deceased member from the society to such nominee, heir or legal representative,
as the case may be.

(4) All transfers and payments duly made by a
society in accordance with the provisions of this section shall be valid and
effectual against any demand made upon the society by any other person.”

Thus, in the event of the death
of a member of a Society, the Society is required to transfer the member’s
interest to such person as may appear to the Committee to be the heir or legal
representative of the deceased member. The Act does not define the term “heir”.
The Supreme Court in the case of N. Krishnammal vs. R. Ekambaram, 1979 AIR SC
1298, has defined the term as follows:

“…The word “heirs”, as
pointed out by this Court in Angurbala Mullick v. Debabrata Mullick (1) cannot
normally be limited to “issues” only. It must mean all persons who
are entitled to the property of another under the law of inheritance.”

The Act also does not define who
is a “Legal representative”. Hence, one may refer to the Civil Procedure Code.
Section 2(11) of the Code of Civil Procedure, 1908defines a “Legal
Representative” as follows:

“(11) ” legal representative
” means a person who in law represents the estate of a deceased person,
and includes any person who intermeddles with the estate of the deceased and
where a party sues or is sued in a representative character the person on whom
the estate devolves on the death of the party so suing or sued;”

High Court Rulings

The Bombay high Court in another 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 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….”

Again in the Gopal
Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, 1981 BCR, 1010 case, the
Bombay high Court has observed, in the context of a nomination made in respect
of a flat in a co-operative housing society, as follows:

“………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. …….
once a person is nominated and the Society transfers the share or interest of
the deceased to him, he becomes the owner. If that is to be accepted it will
follow that if a Society accepts a person as the heir or legal representative
and transfers the share or interest to him, that person will become the owner. That
obviously, cannot he the intention of the legislature. Society has no power,
except provisionally and for a limited purpose to determine the disputes about
who is the heir or legal representative, therefore, follows that the provision
for transferring a share and interest to a nominee or to the heir or legal
representative as will be decided by the Society is only meant to provide for
interregnum between the death and the full administration of the estate and not
for the purpose of conferring any permanent right on such a person to a
property forming part of the estate of the deceased. The idea 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.”

A Single judge 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 section
30 does not provide for a special rule of Succession altering the rule of
Succession laid down under the personal law.

Supreme Court’s Decision

The position of a nominee in a
flat in a co-operative housing society was recently analysed by the Supreme
Court in Indrani Wahi vs. Registrar of
Co-operative Societies, CA NO. 4646 of 2006(SC). This decision was rendered
under the context of the West Bengal Co operative Societies act, 1983. In the
impugned case, a father died leaving a nomination in favour of his married
daughter. His widow and son challenged the same on various grounds. The matter
traveled from the deputy registrar of Cooperative Societies up to the high
Court and ultimately to the Supreme Court.

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 cooperative society nominates a
person, the cooperative society is mandated to transfer all the share or
interest of such member in the name of the nominee. It is also essential to
notice, that the rights of others on account of an inheritance or succession is
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
concerned cooperative society, and was binding on the said society. The
cooperative 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.

Conclusion

Thus, the legal position in this respect is very
clear. A 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. However, the
possession of the flat must be handed over by the society immediately to the
nominee till such time as the succession issue is legally settled.

shailesh.kwebmaker

Property held by a Hindu Female is her Absolute Property – N’est-ce pas?

Introduction
The above Title, ‘Isn’t a Hindu Female’s Property, her Absolute Property?’, may appear as a rhetoric question to readers! However, having said that it would be interesting to note that the question is not as cut and dried as it appears and this issue has travelled all the way to the Supreme Court on numerous occasions. 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 (“the Act”), which deals with property of a Hindu female. A recent Supreme Court decision in the case of Jupudy Pardha Sarathy vs. Pentapati Rama Krishna, Civil Appeal No. 375/2007 (Jupudy’s case) has analysed the position laid down by various judgments on this subject.

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. Section14 which is the crux of the issue needs to be studied closely.

Section14(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 section 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 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 Deen Dayal & 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 section 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.

Section 14(2) carves out an exception to section14(1) of the Act. It states that nothing contained in sub-section (1) of section 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 section 14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of section 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 section14(2) made it clear that the object of section 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.

Factual Matrix of Jupudy’s case
A person had 3 wives and his 1st wife had predeceased him. His 3rd wife had no child and so, under his Will, he left her a house to be enjoyed for her life and after her life it was to go to his son from his 2nd wife. He also left her certain washroom facilities and right to fetch water from the well during her lifetime. All of these were also to devolve on his son after her death. The focussed issue before the Apex Court was whether the right to these properties so bequeathed on the 2nd wife was her absolute property by virtue of section 14(1) or whether it was a limited estate u/s. 14(2) since she was made an owner only for her lifetime?

Decisions on Section14
Several decisions of the Supreme Court have analysed section14(1) and section14(2) in depth. Some of the important 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 section14(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. Vidya Wanti, (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 section14(1), i.e., as an absolute owner inspite 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 section 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. Section14(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. Tulasamma vs. Sesha Reddi, (1977) 3 CC 99

In this landmark case, the Supreme Court clarified the difference between sub-section (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 compromise decree arising out of 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, section14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting s/s. (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 section 14(2) even if the instrument allotting the property prescribes a restricted estate in the property. S/s. (2) must, therefore, be read in the context of s/s. (1) so as to leave as large a scope for operation as possible to s/s. (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 preexisting right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted estate 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. Culwant 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.

Thota Sesharathamma vs. Thota Manikyamma, (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. Tulasamma’s decision was followed and section 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 Tulasamma’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 section14, 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 Subramanyan vs. Soumi Mazumdar (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 subsection (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 section14(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 section14(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 section 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 fell. This restriction on her right so provided, was really respected by section 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).

Nazar G. Rama Rao vs. T. G. Seshagiri Rao (2008) 12 SCC 392

The Court held that if no issue was framed and also no evidence was led to substantiate the plea that the female was occupying the premises in lieu of maintenance, section 14(1) cannot automatically apply to every case.

Final Verdict in Jupudy’s case
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, section14(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 and hence, the decision of G. Rama’s case cannot apply here.

Conclusion
Section14(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 is provision is used as a shield and not a sword. Section14(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. Due care should be taken in drafting a Will under which a Hindu lady is getting a limited estate to demonstrate that it is in effect a restricted interest and not something in lieu of maintenance.

shailesh.kwebmaker

The End of Male Exclusivity as HUF kartas

Introduction
Quick quiz – when you hear the word ‘karta’, signifying a manager of a Hindu Undivided Family (“HUF”) what is the first thing which comes to mind? In most cases, the answer would be that it signifies a male descendant of the joint family who is the manager of the joint family business or estate. This has been the norm for several hundreds of years, i.e., only a male relative can be a karta. This is because under the Hindu Law, only men could be coparceners of an HUF. Women could be members but not coparceners. However, an epic amendment in September 2005 to the Hindu Succession Act, 1956 (“the Act”) changed all of that. The repercussions of that amendment are being felt even today and are the subject matter of various novel legal issues.

The 2005 amendment provided that a daughter has an equal right as that of a son in an HUF. One of the questions which has arisen as a result of this amendment is that can a daughter also be a karta of an HUF? While there has been a strong opinion in favour of this view, it is only now that this issue was tested before a judicial forum and the Delhi High Court has given its favourable view. Let us analyse this interesting question and some more questions emanating from the same.

Concept of an HUF
The Act governs the law relating to intestate succession among Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew.

Traditionally speaking, an 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 would automatically become coparceners by virtue of being born in that family. A unique feature of an 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 mother of a person also could not become a coparcener in an HUF.

The Watershed Amendment which started the Revolution
Under section 6 of the Act, on the death of a Hindu, his interest in an HUF devolves by Will or by intestate succession and not by survivorship. This is contrary to the position prior to 2005 when the interest devolved by survivorship. Thus, under survivorship, if a father died, his interest in the HUF devolved upon the other surviving HUF members. Now the position is that his interest would go either as per his Will or in cases where he has not made a Will, then as per the intestate succession pattern laid down under the Act.

To neutralise gender biases existing prior to 2005, the Central Government amended the Hindu Succession Act, 1956 by the 2005 Amendment Act which was made operative from 9th September 2005. This marked a watershed in the Hindu Law History because covenants laid down by Manusmriti where done away with. The amendment not only altered the succession pattern, but also changed the way HUFs were hitherto managed.

Section 6 of the amended Hindu Succession Act, 1956 provides that a 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; and
c) be subject to the same liabilities in respect of the said coparcenary property as that of a son.

Thus, the amendment, by one stroke, put all daughters at par with sons and they could now become a coparcener in their father’s HUF by virtue of being born in that family. In Ram Belas Singh vs. Uttamraj Singh, AIR 2008 Patna 8, the High Court held that the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son and will have the same rights in the coparcenary property as she would have if she had been a son and shall also 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. It held that the Act makes it very clear that the term “Hindu Mitakshara coparcener” used in the Act now includes daughter of a coparcener, also giving her the same rights and liabilities by birth as those of the son.

In Ganduri Koteshwaramma vs. Chakiri Yanadi, (2011) 9 SCC 788, the Court held that the effect of the amendment was that the daughter of a coparcener had the same rights and liabilities in the coparcenary property as she would have been a son and this position was unambiguous and unequivocal. Thus, on and from September 9, 2005, the daughter was entitled to a share in the ancestral property and was a coparcener as if she had been a son.

A daughter, thus, has all rights and obligations in respect of the coparcenary property, including testamentary disposition. Importantly, this position continues even after her marriage. Hence, all though she can only be a member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF.

Meaning of a Karta
A karta of an HUF is the manager of the joint family property. Normally, the father and in his absence the senior most member acts as the karta of the HUF. It is the karta who takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF.

In the case of CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that the managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the copartner of the joint family.

The Supreme Court in Tribhovandas Haribhai Tamboli vs. Gujarat Revenue Tribunal, 1991 SCR (2) 802 held that the managership of the Joint Family Property went to a person by birth and was regulated by seniority and the Karta or the Manager occupied a position superior to that of the other members. It further held that the father’s right to be the manager of the family was a survival of the patria potastas (Latin for power of the father) and he was in all cases, naturally, and in the case of minor sons, necessarily, the manager of the joint family property. In the absence of the father, or if he resigned, the management of the family property devolved upon the eldest male member of the family provided he is not wanting in the necessary capacity to manage it.

In Varada Bhaktavatsaludu vs. Damojipurapu Venkatanarasimha (1940) 1 MLJ 195, the Madras High Court held that when there was an eldest member of an HUF, the presumption was that under the Hindu Law he was the manager of the family.

Can a Female be a Karta – Position till 2005
Till 2005, the unanimous opinion was that only a male descendant of an HUF could become a karta. Let alone a karta, a female could not even become a coparcener. In CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that coparcenership is a necessary qualification for managership of a joint Hindu family. The Court further held that even the senior most female member of an HUF could not be a karta. She would be a guardian of her minor sons till they become major but never the karta because of the fact that she was not a coparcener. Similarly, various decisions have held that a wife cannot be a karta of her husband’s HUF.

Delhi High Court’s Decision
In Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015, the Delhi High Court was faced with the crucial decision of whether a lady who was the eldest child of all the coparceners of the HUF could be a karta or would the eldest son instead be the karta? It was contended by the son that the amendment to the Act only dealt with succession issues and did not expressly deal with the managership of an HUF.

However, the daughter countered this argument by relying on the Supreme Court’s observations in the case of Seth Govindram Sugar Mills (supra). According to the Supreme Court, being a coparcener was a necessary qualification for becoming a karta and since a female was not a coparcener she could not become a karta. She further contended that after the 2005 amendment, this impediment has been removed and a daughter is now statutorily recognised as a coparcener. Hence, reading the aforesaid Supreme Court judgment and the 2005 amendment together, she could become a karta. The 174th Report of the Law Commission of the India, dated 5th May 2000 was also relied upon which recommended that the eldest daughter can become a karta. The Delhi High Court found favour with the arguments raised on behalf of the daughter and held that it would indeed be odd if a daughter had equal rights of inheritance in an HUF property but could not become a karta of the same HUF. It further held that the Act was a socially beneficial legislation which gave equal rights of inheritance to both males and females. It held that the Act recognised the rights of females to be coparceners and provided for gender equality. In such a scenario, there was no reason why a daughter could not be a karta. It even added that this would be the case even after her marriage. Thus, the High Court declared the eldest daughter to be the karta of her father’s HUF.

Some More Questions
Is it not paradoxical that a married daughter can be a karta of the HUF of her father but not of the HUF of her husband? Is that not a classic case of there yet being a gender bias? There is a lady who is good enough to be a coparcener in her father’s HUF but not fit enough to be a coparcener of her own husband’s HUF? Indeed, this is an area which needs immediate rectification. Unfortunately, in this case, the remedy cannot be judicial since it would have to be through an amendment to the Act.

Further, since a daughter can now become a coparcener in her father’s HUF, do her children automatically become coparceners in their maternal grandfather’s HUF? The answer seems to be yes since the amendment Act clearly provides that the daughter would have the same rights as a coparcener as those of a son! Thus, if the daughter’s son or daughter is the eldest amongst the cousins, would he /she become the coparcener in their maternal grandfather’s HUF, in precedence to the son’s children? The answer, again, seems to be yes! So there could be a scenario where the daughter’s daughter is a karta of an HUF?

Inspite of the 2005 amendment, several HUFs have yet continued with the son as the karta even in cases where his sister is elder to him. What happens in such cases? Does the karta get automatically replaced or does the sister in all cases need to move Court? What happens to the transactions carried out by the son post September 2005 as karta of the HUF? Can the other members of the HUF /the sister challenge them for want of authority? These are some of the interesting questions which come to mind. One wishes that the amendment was more holistic and far sighted in nature.

Conclusion
With this judgment, another male bastion falls… and it’s about time. One wishes that the Legislature had expressly clarified this issue of managership when it carried out the 2005 amendment. Maybe it is time for an altogether new Hindu Succession Act, instead of carrying out another ad-hoc amendment to the present Act which is already celebrating its 60th anniversary. HUFs yet constitute entity for owning properties and businesses in India and hence, the Act urgently needs a Version 2.0. On a lighter vein, one wonders, whether, in case of a female manager, the term karta should now be joined by the term ‘Karti’?

shailesh.kwebmaker

SICA vs. SARFAESI – And the Winner Is…..

Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) is an Act meant to protect the interests of secured creditors by giving them a mechanism by which they can enforce their secured interests without resorting to any Courts or Debt Recovery Tribunals. Thus, it is a creditor protection Act. On the other hand, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) is an Act to protect and revive companies suffering from industrial sickness. Thus, it is a debtor protection Act.

A very interesting question arises here – should these two special Acts have a head-on collision, which one would prevail? This was the issue which the Supreme Court was faced with in M/s. Madras Petrochem Ltd vs. BIFR, Civil Appeal Nos.614-615/2016, (Order dated 29th January 2016). The Apex Court analysed the interplay between the SARFAE SI and the SICA.

At a time when the Indian banking system is creaking under the weight of bad loans/NPAs and we are witnessing several high-profile loan default cases, this decision has several far reaching ramifications. According to press reports, over Rs. 1.14 lakh crore of bad loans were written off by public sector banks alone in 2012-15!

Overview of the SARFAESI
According to the SARFAE SI, a secured creditor can enforce any security interest created in its favour. This can be done without the intervention of any Court or Tribunal. If the borrower fails to repay the liabilities then the creditor can adopt one or more of the measures enshrined under this Act which includes, taking possession of or taking over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; appointing a manager to manage the secured assets taken over by the secured creditor; requiring any person who has acquired any of the secured assets from the borrower and who has to pay any money to the borrower, to pay such amount to the secured creditor, etc. Details of the procedures have been laid down for taking over possession of and selling of movable/ immovable assetsby the secured creditor.

Section 37 of this Act states that the provisions of the Act would be in addition to and would not override the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. Further, section 35 of this Act provides that the provisions of the SARFAE SI would have effect over any other inconsistent law.

Overview of the SICA
Under the SICA, any company whose networth has been fully eroded by its losses must make a reference to the Board of Industrial and Financial Reconstruction (BIFR). If the BIFR decides to admit the reference, then an inquiry will be made by the BIFR and efforts will be made to revive the company or if these efforts fail or are not possible, then the BIFR would order winding-up. However, no reference can be made to the BIFR where financial assets, i.e., any loan given to the sick company has been acquired by a securitisation company under the SARFAE SI. Further, if a reference is pending before the BIFR, then it would abate if 3/4th of the secured creditors decide to take recourse to the SARFAE SI to enforce their secured interest.

One of the most relevant provisions of the SICA is section 22 which provides that where any reference is made to the BIFR and it is admitted then no suit/proceedings will lie against the sick company for recovery of money or for the enforcement of any security against the sick company except with the consent of the BIFR. Thus, section 22 provides a shield to sick companies against any recovery proceedings. Accordingly, the issue before the Supreme Court in the current case was whether section 22 would bar any recovery measures by banks / FIs under the SARFAESI Act?

DRT Act
Yet another legislation to assist banks and financial institutions to deal with the menace of bad loans is the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) which allows banks/FIs to approach specially constituted Debt Recovery Tribunals for expeditious adjudication and recovery of debts. The Supreme Court in Mardia Chemicals Ltd. vs. Union of India (2004) 4 SCC 311 held that the SARFAE SI was enacted because the DRT Act had failed to achieve its desired results.

Contours of the 3 Statutes
The Supreme Court considered the genesis of these three legislations. It held that each of these dealt with different aspects of recovery of debts due to banks and financial institutions. Two of them referred to the creditors’ interests and how best to deal with recovery of outstanding loans and advances made by them, whereas the SICA dealt with certain debtors which were sick industrial companies and whether such debtors having become sick, were to be rehabilitated.

Interplay between SICA and Ot her Acts
The Supreme Court analysed the SICA’s relationship visa- vis other statutes. The decided cases on this issue were as follows:

(a) The SICA prevailed over the State Financial Corporations Act, 1951 since both were special statutes dealing with sickness/recovery of debts and containing non-obstante clauses, but SICA was the later Act– Maharashtra Tubes Ltd vs. State Industrial and Investment (1993) 2 SCC 144.

(b) The SICA prevailed over the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 by virtue of an amendment in 1994 to SICA since the amendment was later than the 1993 Act – Jay Engineering Works vs. Industry Facilitation Council (2006) 8 SCC 677.

(c) The Arbitration and Conciliation Act, 1996 which contained a non-obstante clause was subordinate to SICA because the Arbitration Act’s non-obstante clause had a limited application to the extent of judicial intervention in arbitration proceedings – Morgan Securities and Credit P Ltd vs. Modi Rubber Ltd (2006) 12 SCC 642.

(d) The Companies Act being a general Act would yield to the SICA being a special Act – Tata Motors Ltd vs. Pharmaceutical Products of India Ltd (2008) 7 SCC 619. The same was the verdict in the case of Raheja Universal Ltd vs. NRC Ltd (2012) 4 SCC 148 which held that the Transfer of Property Act, 1882 being a general law was subordinate to the SICA which was a special law.

(e) The DRT Act and the SICA are both special laws – one to provide measures for restoration of sick companies and the other to provide for speedy recovery of debts of banks. However, with specific reference to sick companies, the SICA is a special law while it is a general law when it came to recovery of debts. In this respect, DRT was a special law. The DRT Act was also later in time than the SICA. However, since the DRT Act contained a specific provision in s.34(2) which provided that it would be in addition to and not in derogation of the SICA, it was held that the SICA would prevail over DRT – KSL & Industries Ltd vs. Arihant Threads Ltd (2015) 1 SCC 166.

SC’s Observations
The Supreme Court observed that section 37 of the SARFAE SI expressly provided that it would not be in derogation but in addition to 4 Acts ~ the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. The SICA was not one of these 4 Acts. Hence, the Legislature was conscious of the fact that SARFAE SI would not be in addition to the SICA and could in fact, override it. This proposition was strengthened by the fact that section 41 of the SARFAESI amended the SICA but section 37 excluded the SICA. While the DRT Act was expressly mentioned u/s. 27, the SICA was not. Therefore, the SARFAESI must be given precedence over the SICA.

Further, section37 contained the words “or any other law for the time being in force” and section 35 contained that the provisions of the SARFAE SI would override any other inconsistent law. The Supreme Court applied the harmonious construction rule and held that section 35 was subject to the 4 laws expressly carved out in section 37. Thus, as respects these 4 laws, the SARFAESI would not override them. Moreover, the words “or any other law for the time being in force” contained in section 37, when viewed in connection with the 4 securities’ market laws, would only be restricted to other laws having relation to the securities market. Even on this count, the SICA would not be included u/s. 37 since it is not a special law dealing with the securities market.

It also observed that the Companies Amendment Act, 2002 as well as the Companies Act, 2013 incorporated the provisions of the SICA by providing for a reference to be made to the National Company Law Tribunal instead of the BIFR. Neither of these have been notified but interestingly, none of these Acts contain a provision similar to section 22 of the SICA. Thus, going forward, creditors would be able to initiate recovery proceedings even when reference is pending before the Tribunal. The modified laws lean in favour of creditors being able to realise their debts outside of the court process. It analysed statistics of debt recovery which showed that of the total bad loans recovered in 2011-12, over 70% was under the SARFAESI Act and only 28% was under the DRT Act. This according to the Court, showed the efficacy of the SARFAESI Act. Hence, it concluded that it would be loathe to give an interpretation which would thwart the recovery process under the SARFAE SI, which alone seems to have worked at least to some extent. Accordingly, it held that section 22 of the SICA would have to yield way to the recovery proceedings taken by banks/FIs under the SARFAE SI and the SICA would not offer a shield to the debtor company.

The SARFAESI Act is a complete code in itself and the earlier judgments rendered under the DRT Act cannot apply to it. Further, the incorporation of certain provisions of the Companies Act in the SARFAE SI Act shows that even the Companies Act is harmonised with it – Pegasus Asset Reconstruction P Ltd vs. M/s. Haryana Concast Ltd, Civil Appeal 3646/2011 (SC).

There are many situations in which the bar u/s. 22 of the SICA would not apply, for instance a rent act eviction petition on the ground of non-payment of rent. Such eviction petitions have been held not to be suits for recovery of money – Gujarat Steel Tube Co. Ltd. vs. Virchandbhai B. Shah, (1999) 8 SCC 11. In Kailash Nath Agarwal vs. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, the U.P. Act under which recovery proceedings initiated against guarantors at a post-decree stage were held to be outside the purview of section 22.

Recovery Matrix
The Supreme Court laid down the recovery matrix for banks/other creditors in case of a sick company as follows: (a) In all cases where unsecured creditors of a sick company are involved, the SICA would override all the recovery proceedings, including under the DRT Act.

(b) Where secured creditors of a sick company are involved, the SICA would give way to the recovery proceedings, if any, initiated by the banks / FIs under the SARFAE SI. In this event, the recovery proceedings would be as under:

(i) If there is more than one secured creditor, then 60% of the secured creditors must agree to enforce their security under the SARFAE SI. In such a case, the SICA proceedings would abate.

(ii) If 60% consent is not achieved, then the bar on legal provisions u/s.22 of the SICA would apply.

(c) If instead of taking recourse under the SARFAE SI, secured creditors decide to approach the DRT under the DRT Act, then the shelter under the SICA would continue to be available to the sick company since the Supreme Court has held that the SICA is superior to the DRT Act.

Conclusion
This is a path-breaking judgment as far as banks are concerned. There are numerous instances of sick companies taking shelter under the SICA to prevent loan recoveries by banks and FIs. This decision should act as a booster shot to the floundering banking sector. At a time when the RBI is goading the banks to fasten the recovery process, this should encourage banks and asset reconstruction companies to monetise all NPAs under the SARFAE SI. It is interesting to note that in the decision under discussion, the company was referred to the BIFR in December 1989 while the Supreme Court’s decision permitting sale came in January 2016, a time gap of 27 years! Is it not surprising that the Indian banking system is mired with bad loans?

Numerous attempts to repeal the SICA have failed with this Act yet ruling the roost. Recently, the Finance Minister blamed the slow and complex legal system plagued with delays for the bad loan mess. He also mentioned that India desperately needed a comprehensive bankruptcy and insolvency code. Till the time something urgently is done on this front, this judgment would provide some solace to the banks.

shailesh.kwebmaker

The Most Unkindest Cut of All….. Or is it?

Introduction
It was Julius Caesar who described the backstabbing by Brutus as the most unkindest cut of all, since it came from a trusted friend. A similar feeling of distrust is brewing amongst Hindu women in India on the passage of the Repealing and Amendment Act, 2015 by the Parliament which was notified on 13th May, 2015. This is an Act to repeal certain old and obsolete Acts as a part of the Government’s push towards ease of doing business. Why then this resentment, would be the first question which crops up.

One of the several Acts which have been repealed is the Hindu Succession (Amendment) Act, 2005. Jog your memory a bit and you would recall that the Hindu Succession (Amendment) Act, 2005 was the very same path-breaking Act which placed Hindu daughters on an equal footing with Hindu sons in their father’s HUF. Hence, after this Act has been repealed with effect from 13th May 2015 does it mean that Hindu daughters again stand to lose out on this parity with Hindu sons and are relegated to the earlier position? Has the Parliament taken away an important gender bender right? Let us unravel this seemingly Sherlockian mystery.

The 2005 Amendment Act
The Hindu Succession (Amendment) Act, 2005 ushered in great reforms to the Hindu Succession Act, 1956. The Hindu Succession Act, 1956, 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, 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 such property and the order or preference among them.

By the 2005 Amendment Act, the Parliament amended section 6 of the Hindu Succession Act, 1956 and the amended section was made operative from 9th September 2005. Section 6 of the Hindu Succession Act, 1956 was totally revamped. The amended section provided that a daughter of a coparcener:

a) became, by birth a coparcener in her own right in the same manner as the son;
b) had, the same rights in the coparcenary property as she would have had if she had been a son; and
c) was, subject to the same liabilities in respect of the coparcenary property as that of a son.

Thus, the amendment equated all daughters with sons and they could now become a coparcener in their father’s HUF by virtue of being born in that family. She had all rights and obligations in respect of the coparcenary property, including testamentary disposition. Thus, not only did she become a coparcener in her father’s HUF but she could also make a will for the same. The Delhi High Court in Mrs. Sujata Sharma vs. Shri Manu Gupta, CS (OS) 2011/2006 has held that a daughter who is the eldest coparcener can become the karta of her father’s HUF.

One issue which remained unresolved was whether the application of the amended section 6 was prospective or retrospective? This issue was recently resolved by the Supreme Court in its decision rendered in the case of Prakash vs. Phulvati, CA 7217/2013, Order dated 16th October 2015. The Supreme Court examined the issue in detail and held that the rights under the amendment are applicable to living daughters of living coparceners (fathers) as on 9th September, 2005 irrespective of when such daughters are born and irrespective of whether or not they are married. Thus, in order to claim benefit, what is required is that the daughter should be alive and her father should also be alive on the date of the amendment, i.e., 9th September, 2005. Conversely, a daughter whose father was not alive on that date cannot be entitled to become a coparcener in her father’s HUF.

Effect of the Repealing Act of 2015
As explained earlier, the Repealing and Amendment Act, 2015 has repealed the Hindu Succession (Amendment) Act, 2005. What is the effect of this repeal? Does s.6 of the Hindu Succession Act now hark back to the preamended position? Would a daughter whose father was alive on 9th September 2005 no longer be entitled to be a coparcener in her father’s HUF? Further, if she is the eldest coparcener, would she no longer be entitled to be the karta of her father’s HUF?

The answer to these dreaded questions is an emphatic No! Recourse may be made to section 6-A of the General Clauses Act, 1897 which states that when any Act repeals any other Act by which the text of another Act was amended by express omission/insertion/substitution of any matter, then unless a different intention appears, the repeal shall not affect the continuance of any such amendment made by repealed Act.

This position was also explained by the Calcutta High Court in Khuda Bux vs Manager, Caledonian Press, AIR 1954 Cal 484. In this case, the Factories Act, 1934 was repealed by section 120 of the Factories Act 1948. The Repealing and Amending Act of 1950 repealed section 120 of the 1948 Act. Hence, it was contended that even the repeal of the Factories Act of 1934 had now disappeared, because the repeal effected by section 120 of the Act of 1948 had itself been repealed. The Act of 1934 could no longer be said to have been repealed or, in any event, the Act of 1948 could no longer be said to have repealed and re-enacted it. The High Court set aside this plea and held that this was based upon a mistaken belief of the scope and effect of a Repealing and Amending Act. Such Acts had no legislative effect, but were designed for editorial revision, being intended only to excise dead matter from the statute book and to reduce its volume. Mostly, they expurgate amending Acts, because having imparted the amendments to the main Acts, those Acts had served their purpose and had no further reason for their existence. The only object of such Acts was legislative spring-cleaning and they were not intended to make any change in the law. Even so, they are guarded by saving clauses drawn with elaborate care. Besides providing for other savings, that section said that the Act shall not affect “any principle or rule of law notwithstanding that the same may have been derived by, in, or from any enactment hereby repealed.”

Thus, the repeal of an amending Act has no repercussion on the parent Act which together with the amendments remained unaffected. On the same principles is the decision of the Supreme Court in Jethanand Betab vs The State of Delhi, AIR 1960 SC 89. The Indian Wireless Telegraphy Act,1933 provided that no person shall possess a wireless telegraphy apparatus without a licence and section 6 made such possession punishable. The Indian Wireless Telegraphy (Amendment) Act,1949, introduced section 6(1A) in the 1933 Act, which provided for a heavier punishment. The Repealing and Amending Act, 1952, repealed the whole of the Amendment Act of 1949. A person was convicted u/s. 6(1A) but he contended that section 6(1A)was repealed and thus, his conviction should be set aside. The Supreme Court negated the accused’s plea and held that the general object of a repealing and amending Act is stated in Halsbury’s Laws of England, 2nd Edition, Vol. 31, at p. 563, thus:“…..does not alter the law, but simply strikes out certain enactments which have become unnecessary. It invariably contains elaborate provisos.” The Apex Court held that it was clear that the main object of the 1952 Act was only to strike out the unnecessary Acts and excise dead matter from the statute book in order to lighten the burden of ever increasing spate of legislation and to remove confusion from the public mind. The object of the Repealing and Amending Act of 1952 was only to expurgate the amending Act of 1949, along with similar Acts, which had served its purpose.

Karnataka High Court’s decision
The Karnataka High Court in Smt. Lokamani vs. Smt. Mahadevamma AIR 2016 Kar 4 had an occasion to consider the impact of the Repealing Act of 2015 on section 6 of the Hindu Succession Act, 1956. In this case it was argued that section 6 of the Hindu Succession (Amendment) Act, 2005 was now repealed by the Repealing and Amending Act, 2015. Therefore, the status of coparcener conferred on the daughter of a coparcener under the amended Act was no more available to the plaintiffs. Thus, the express question considered by the High Court was whether the Repealing and Amending Act, 2015, which repealed the Hindu Succession (Amendment) Act, 2005 to the whole extent, had the effect of repealing amended section 6 and restoring the old section 6 of the Hindu Succession Act, and thereby took away the status of coparcener conferred on the daughters giving them equal right with the sons in the coparcenary property? The High Court negated the contention that the 2005 amendment to section 6 was repealed. It relied on section 6A of the General Clauses Act and a decision of the Constitution Bench of the Supreme Court in Shamrao Parulekar vs. District Magistrate Thana, AIR 1952 SC 324 and held that it was clear that section 6 of the Hindu Succession Act, 1956 was substituted by section 6 of the Hindu Succession (Amendment) Act, 2005. The effect of substitution of a provision by way of an amendment was that, the amended provision was written in the place of earlier provision with pen and ink and automatically the old section was wiped out. So, there was no need to refer to the amending Act at all. The amendment should be considered as if embodied in the whole statute of which it had become apart. The statute in its old form is superseded by the statute in the amended form. The Court held that amended Section of the statute took the place of the original section, for all intent and purpose as if the amendment had always been there.

Further, the Repealing and Amending Act, 2015 did not disclose any intention on the part of the Parliament to take away the status of a coparcener conferred on a daughter giving equal rights with the son in the coparcenary property. On the contrary, by virtue of the Repealing and Amending Act, 2015, the amendments made to Hindu Succession Act in the year 2005, became part of the Act and the same is given retrospective effect from the day the Principal Act came into force in the year 1956, as if the said amended provision was in operation at that time. The Court concluded that though the Amended Act came into force on 9.9.2005, section 6 as amended was deemed to have been there in the statute book since 17.6.1956 when the Hindu Succession Act came into force.

While the Karnataka High Court’s decision on the effect of the Repealing Act is in order, the latter part of the decision (refer portion in italics above) does raise a question mark. It concluded that the amendment was given retrospective effect from the date the 1956 Act came into force. This decision was rendered prior to the Supreme Court’s decision in the case of Prakash vs. Phulavati (supra) wherein it was held that the amendment to s.6 was prospective and was applicable only to living daughters of living fathers as on 9th September 2005. The Repealing Act was neither cited nor considered by the Supreme Court. The decision of the Karnataka High Court in Smt. Lokamani’s case was also not cited before the Supreme Court. Does the ratio of the Supreme Court’s decision change in the light of the Repealing Act? Does the Repealing Act make the amendment retrospective as held by the Karnataka High Court?

In my humble submission, the Repealing Act does not change the position as laid down by the Supreme Court. This view is fortified by the fact that the Supreme Court’s decision was against the Karnataka High Court’s judgment (AIR 2011 Kar 78) in the very same case which had held that the amendment to section 6 was retrospective in nature. The Supreme Court held that an amendment to a substantive provision was always prospective unless either expressly or by necessary intendment it is retrospective. In the Hindu Succession (Amendment) Act, 2005, there was neither any express provision for giving retrospective effect to the amended provision nor necessary intendment to that effect. Hence, the amendment was clearly prospective.

Conclusion
Hindu daughters should rest assured that their rights are in no way abrogated by the Repealing Act of 2015. The Indian Parliament has not played a ‘Brutus’ on them. However, the issue of prospective vs. retrospective operation of the 2005 Act may yet play out before the Courts in the light of the added angle of the Repealing Act. How one craves for the usage of clear language by the draftsman when drafting a law so that such ambiguities and technicalities do not rob the sheen of the substance of the Act!

shailesh.kwebmaker

Domestic Violence and Endangered stridhan—sC to the Rescue!

Introduction

Stridhan is one of the unique features of Hindu Law. It signifies the exclusive property of a Hindu married lady and the Courts, generally, would strive to protect the same at all costs, including from her husband and in-laws. However, what happens when the lady’s marriage has undergone a judicial separation? Further, what happens if she has approached the Courts after the decree of judicial separation? Can she compel her husband and in-laws to return her stridhan in such a scenario? Recently, all these interesting questions were posed before the Supreme Court in the case of Krishna Bhatacharjee vs. Sarathi Choudhury, Cr. Appeal No. 1545 /2015 (hereinafter referred to as “Krishna’s case”). Let us analyse some of these interesting facets through this Article.

Factual Matrix of the Case

In Krishna’s case, on dowry demands not being satisfied, a married lady was driven out of her husband’s home. Ultimately, the couple were granted judicial separation by the Family Court. Thereafter, since the husband stopped paying monthly maintenance, the lady sought help from a Protection Officer, constituted under the Protection of Women from Domestic Violence Act, 2005, and sought his help for recovery of her stridhan which was yet in her husband’s custody. She also filed a criminal appeal claiming a criminal breach of trust by her husband which was punishable u/s. 405/406 of the Indian Penal Code, 1860. All the lower Courts, including the High Court, denied relief to the lady since the claim for stridhan was made after the decree for judicial separation was passed. Further, they held that the criminal plea was time-barred by virtue of section 468 of the Criminal Procedure Code. It was in the light of these facts, that the aggrieved lady approached the Supreme Court and sought relief.

STRIDHAN

First and foremost it becomes important to understand the concept of stridhan. The term is coined from two different Sanskrit words “Stri” (meaning a lady) + “Dhan” (meaning property) = “Stridhan” (meaning a lady’s property). It thus, represents that property of a married lady over which she has exclusive domain. Only she can decide what she wants to do with such property. She can use it, gift it and will it away. The general meaning is the gift she received on marriage, from her parents, her husband, her in-laws, etc. In certain cases, property inherited by a female can also become stridhan. Thus, jewellery, personal belongings, etc., received by her on marriage would form part of her stridhan.

The position of stridhan has been explained by the Supreme Court in Pratibha Rani vs. Suraj Kumar, (1985) 2 SCC 370. The Court held that the position of stridhan of a Hindu married woman is that, she is the absolute owner of such property and can deal with it in any manner she liked. She may spend the whole of it or give it away at her own pleasure by gift or will without any reference to her husband. The entrustment to the husband of her stridhan property was like something which the wife kept in a bank and could withdraw any amount whenever she liked without any hitch or hindrance. The husband had no right or interest in it with the sole exception that in times of extreme distress he could use it. It further held that the husband had no jurisdiction over the stridhan and must return the same as and when demanded by the wife and he could not burden her with the losses of his business by using her stridhan. It was manifest that the husband, being only a custodian of the stridhan of his wife, could not be said to be in joint possession thereof and thus did not acquire a joint interest in the stridhan property.

Again in Smt. Rashmi Kumar vs. Mahesh Kumar Bhada, (1997) 2 SCC 397, the Supreme Court held that stridhan is the exclusive property of the wife on proof that she entrusted the custody over the stridhan to her husband or any other member of the family, there is no need to prove any further special agreement to establish that the property was given to the husband or other member of the family. It was always a question of fact in each case as to how property came to be entrusted to the husband or any other member of the family by the wife when she left the matrimonial home or was driven out therefrom. No absolute or fixed rule of universal application could be laid down in that behalf.

Domestic Violence Act

Next, it becomes essential to understand the important provisions of the Protection of Women from Domestic Violence Act, 2005 (“the 2005 Act”). 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 women, then she can approach designated Protection Officers to protect her. Hence, it becomes essential to consider as to what constitutes an act of Domestic Violence and who can claim shelter under this Act? Any aggrieved woman under the 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. 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 2005 Act, Parliament has taken notice of a new social phenomenon which has emerged in India, known as livein relationships. 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) T he couple must hold themselves out to society as being akin to spouses.

(ii) T hey must be of a legal age to marry.

(iii) They must be otherwise qualified to enter into a legal marriage, including being unmarried.

(iv) T hey must have voluntarily cohabited and held themselves out to the world as being akin to spouses for a significant period of time.

(v) T he parties must have lived together in a `shared household’

The concept of domestic violence is very important and section 3 of the 2005 Act defines the same as an act committed against the lady, which :

(a) harms or injures or endangers the health, safety, or well being, 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 to be an act of domestic violence under the 2005 Act. This term is defined in a wide manner and 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.

Various Supreme Court decisions have analysed the provisions of the 2005 Act. For instance, 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 have taken place before the Act came into force. The same view has been expressed in Saraswathy vs. Babu, (2014) 3 SCC 712.

Judicial Separation a Roadblock?

The question posed before the Supreme Court in Krishna’s case, was whether the decree of judicial separation was a hindrance to a plea for recovery of stridhan under the 2005 Act? Thus, does a lady cease to have recourse to this Act merely because she has obtained a decree of judicial separation. If a divorce is obtained she would not be entitled to relief under the 2005 Act. However, the Court held that the position in the case of a judicial separation was different. Judicial separation lied between a subsisting marriage and a marriage severed by a divorce. It observed that a judicial separation created rights and obligations. It permitted the parties to live apart. There would be no obligation for either party to cohabit with the other. Mutual rights and obligations arising out of a marriage were suspended. However, judicial separation did not severe or dissolve the marriage. It afforded an opportunity for reconciliation and adjustment. Though judicial separation after a certain period may become a ground for divorce, it was not necessary and the parties were not bound to have recourse to that remedy and the parties could live keeping their status as wife and husband till their lifetime. It 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 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 in Krishna’s case held that the decree of judicial separation did not act as a deterrent for the lady from claiming relief under the 2005 Act since the relationship of marriage was yet subsisting.

Period of Limitation under Cr. PC applicable?

The Code of Criminal Procedure, 1973 provides for the method and manner in which criminal cases, prosecutions, etc. would be tried in the Courts. The Code also provides for the limitation period after which the Courts would not entertain any prosecutions in respect of offences. The object of enunciating a bar on prosecutions was explained by the Apex Court in its decision in the case of State of Punjab vs. Sarwan Singh AIR 1981 SC 722. The Supreme Court held that the object in putting a time limit on prosecution is clearly to prevent parties from filing of vexatious and belated prosecutions. Section 468 of the Code provides the periods of limitation after the expiry of which a Court shall not take cognizance of an offence. The term “cognizance” may be defined to mean the judicial recognition or the judicial notice of any cause of action. According to the Supreme Court in the case of Darshan Singh Ram Kishan vs. State of Maharashtra, (1971) 2 SCC 654, cognizance takes place at a point when a magistrate first takes judicial notice of an offence.

A question arose as to whether a belated complaint by the aggrieved lady under the 2005 Act for recovering her stridhan was hit by the period of limitation provided u/s. 468 of the Code? Connected with section 468 is the concept of continuing offence u/s. 472 of the Code. Section 472 provides that for a continuing offence, a fresh period of limitation begins to run at every moment of the time during which the offence continues. The term continuing offence has not been defined and thus, one must depend upon the language of the Act. In Maya Rani Punj vs. CIT, 157 ITR 330 (SC), the Supreme Court observed that if a duty continued from day to day, then its non-performance from day to day was a continuing wrong. Again, in State of Bihar vs. Deokaran Nenshi, (1972) 2 SCC 890, the Court held that a continuing offence is one which is susceptible of continuance and is distinguishable from the one which is committed once and for all. In the case of a continuing offence, there is thus the ingredient of continuance of the offence which is absent in the case of an offence which takes place when an act or omission is committed once and for all.

Based on this discussion, the Supreme Court in Krishna’s case, concluded that the retention of stridhan by the husband or any other family members was a continuing offence. The concept of “continuing offence” got attracted from the date of deprivation of stridhan, for neither the husband nor any other family members had any right over the stridhan and they only remained custodians. Further, as long as the status of the aggrieved lady remained and stridhan remained in the custody of the husband, the wife could always put forth her claim under the 2005 Act. There could be no dispute that wife could file a suit for realisation of the stridhan but that did not debar her from lodging a criminal complaint for criminal breach of trust. Accordingly, it held that the application was not barred by the period of limitation u/s.468 of the Criminal Procedure Code.

Conclusion

Finally, the Supreme Court, in Krishna’s case, held that retention of stridhan by a husband was a continuing offence against which no period of limitation applied for filing a criminal appeal for a criminal breach of trust. Further, a decree for judicial separation was not a bar against claiming relief under the 2005 Act. Thus, she could avail of a dual remedy. The Supreme Court held that a more sensitive approach was expected from the courts in such matters. If relief could not be granted under the 2005 Act then so be it. However, before disposing of any petition for want of maintainability, a thorough discussion was a must. Courts must bear in mind that, under the 2005 Act, it was a hapless and a helpless lady who approached them and that too under compelling circumstances. The 2005 Act being a beneficial Act and one which asserts the rights of women, it must be viewed sensitively to ensure that women are not wrongly deprived of their rights.

Through this very important judgment, the Apex Court has untangled the complex criss-cross web of domestic violence, economic abuse, stridhan, period of limitation under Criminal Procedure Code and judicial separation. The cross currents flowing under each of these concepts have been analysed and dissected to arrive at a considered view.

shailesh.kwebmaker

To Market , to Market to Save Stamp Duty

Introduction
Stamp duty is often considered to be a major cost in modern-day trade and commerce. Added to this is the fact that the dual-model of Central and State Stamp Acts offer a unique stamp duty arbitrage opportunity. All of this makes for a heady cocktail of innovative stamp duty planning, counter responses by the State revenue authorities and equally novel judgments by the Courts.

Through this article, let us examine one such issue, that of stamp duty on mortgage deeds, and some recent interesting developments in this field.

History Lessons
Before understanding the present-day developments, let us first brush up our basics on stamp duty which are relevant for setting the ground for this issue.

Stamp Duty is a subject of both the Central and the State Government. This dichotomy exists because of a provision in the Constitution of India. Often a question arises, which Act applies – the Indian Stamp Act, 1899 or the Maharashtra Stamp Act, 1958.

Stamp Duty is leviable in Maharashtra on every instrument mentioned in Schedule I to the Maharashtra Stamp Act, 1958 (“the Act”) at rates mentioned in that Schedule, provided the instrument is executed in Maharashtra. A copy of an instrument whether by way of a fax or otherwise of the original instrument shall also be charged with full duty in Maharashtra in all cases where the original though chargeable with duty, has not been stamped. However, if the original has been duly stamped, then the Maharashtra Stamp Act provides that a duplicate or a counterpart will be stamped with a maximum duty of Rs. 100.

Duty is only levied on an instrument and that too provided the Schedule mentions rates for it. The definition of the term instrument has been amended to incorporate an electronic record as defined under the Information Technology Act, 2000. This definition defines an electronic record to mean data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated microfiche. Thus, even a document in the form of an electronic record is liable to be stamped. Hence, even a scanned copy of the original would be liable. What happens if a scanned copy is saved on a cloud storage is an interesting question – can it be said that the image has entered the State if the cloud server is not physically present in the State? Would mere viewing of the image be treated as an entry? These are issues which present posers similar to taxation of e-commerce transactions.

U/s. 18 of the Act, every instrument mentioned in Schedule I is liable to duty in Maharashtra if it is executed at any other place but it relates to property situated in Maharashtra and such instrument is received in the State. The Act further provides that if any instrument is chargeable with duty but it is executed outside Maharashtra then it may be stamped within 3 months of the instrument entering the State of Maharashtra.

U/s. 19 of the Act, if an instrument pertaining to property located within the State is executed outside the State but a copy of the same is received in Maharashtra, then the differential duty would be payable on the copy whenever it is received in Maharashtra.

At first, both sections 18 and 19 appear to be overlapping and dealing with the same issue. Moreover, while section 18 states that the instrument would be chargeable with the entire duty once received in Maharashtra, section 19 states that the differential would be paid once it enters the State. Is there some inconsistency? The position would be clear if one reads section 18 as applying to a case where the instrument is executed abroad, i.e., outside both Maharashtra and India, but section 19 as applying where the instrument is executed outside Maharashtra but within India. Hence, in the first case, where the instrument is executed abroad, there is no credit for any duty paid abroad since no duty was paid in India. However, in the second case, where the instrument has been executed within India but outside Maharashtra, then a credit for the duty paid in any other State of India is available. Thus, section 18 is the larger provision while section 19 may be considered to be a sub-set of section 18 of the Act.

If one instrument covers several instruments or several distinct matters then the duty would be the aggregate of all the duties chargeable on each separate instrument. However, if for executing one transaction, several instruments are executed, then only the principal instrument would be liable to duty and the other instruments would be chargeable with a duty of Rs. 100 only. This is a very important distinction which needs to be kept in mind ~ if one transaction is covered in several instruments, the duty is only once at the highest duty which would be chargeable in respect of any of the instruments employed, but if one instrument comprises more than one transaction within itself, then the duty on that one instrument would be then aggregate of all instruments.

Stamp Duty on Mortgage Deed – Duty Shopping!
The Supreme Court in Union of India vs. Azadi Bachao Andolan, 263 ITR 706 (SC) has upheld the concept of Treaty Shopping in the context of income-tax. Could such a view also be taken in the context of stamp duty? Can a company incorporated in one State decide to execute a deed in another State in order to save on precious stamp duty?

This question is put in sharper perspective when viewed in the context of say, a mortgage deed. Several Indian companies have borrowed heavily. This is all the more true for certain sectors, such as, infrastructure, realty, steel, etc. It is trite that alongwith debt comes creation of a security in favour of the lenders such as banks, financial institutions etc. Creation of a security involves execution of a mortgage deed. Executing a Mortgage entails payment of stamp duty and herein lies the possible tax saving!

A mortgage deed by way of deposit of title deeds attracts a stamp duty under the Maharashtra Stamp Act @ 0.2% of the amount secured subject to a maximum of Rs. 10 lakh. This is one of the most popular ways of creating a mortgage, especially in the real estate and infrastructure sector. Alternatively, a mortgage deed under which possession of property is not given attracts duty @ 0.5% of the amount secured again subject to a maximum of Rs. 10 lakh. .

The corresponding stamp duty figures for these two mortgage instruments, if executed in the State of Delhi would be 0.5% subject to a cap of Rs. 50,000 and 0.2% subject to a ceiling of Rs. 2 lakh, respectively.

Thus, for a single mortgage document, the savings for a company based in Mumbai executing a mortgage deed in Delhi, could range between Rs. 8 lakh to 9.50 lakh. Multiply this amount by several mortgage deeds for multiple lenders (more on that later) and there could be a substantial saving!

However, as discussed above, the moment a copy of such a mortgage deed executed in Delhi by a Mumbaibased company pertaining to property located in Mumbai enters Mumbai, the copy itself would be liable to the differential duty.

The decision of the Bombay High Court in M/s. Win-NQuiz Company Limited vs. The Authorized Officer, Bank of Baroda, 2011 (5) Bom. CR 69 is apposite on this issue. Here a mortgage deed was executed in Kolkata for a flat in South Mumbai. The instrument was impounded when presented as evidence in Mumbai since it was under stamped as per the Maharashtra Stamp Act. The Division Bench of the Bombay High Court held that where an instrument relating to property situated in the State is executed outside Maharashtra and it is subsequently received in Maharashtra, then the amount of duty chargeable on the instrument is to be the duty chargeable under Schedule I on a document of like description executed in Maharashtra less the amount of duty, if any, already paid under any other law in force in India.

Further, in L&T Finance Ltd vs. M/s. Saumya Mining Ltd, ARBP/290/2014, the Bombay High Court by its Order dated 8th July, 2014, has held that the stage of paying differential stamp duty gets triggered only when the instrument or a copy is brought into the State and not until then. Once the Act gets triggered the parties have a maximum of 3 months to set the defect right.

One for All?
Remember the motto of Alexandre Dumas’ 3 Musketeers – One for All! What if there is one deed for all lenders? Say in a mortgage deed a security is created in favour of one trustee for a consortium of lenders, would stamp duty be payable as if it is only one instrument or is it duty as on one instrument multiplied by the number of lenders in the consortium? At first blush, one may be tempted to say that duty is never on a transaction and always on an instrument and hence, since there is only one mortgage deed executed in favour of one trustee by one borrower, albeit for the benefit of several lenders, the duty should only be once. Well if you thought as this Author did, then you too were wrong according to a decision of the Supreme Court!

The decision of the Supreme Court in Chief Controlling Revenue Authority vs. Coastal Gujarat Power Ltd., Civil Appeal No. 6054 of 2015, Order dated 11th August, 2015 is very singular. To better appreciate the ratio it is necessary to first indulge a bit in the brief facts of this important judgment. A company needed financial assistance for setting up a Power Project and for that purpose it secured assistance from 13 lenders. The 13 lenders all financial institutions formed a consortium as a trust and executed a security trustee agreement appointing one banker as the lead trustee, called the security trustee. The company executed a mortgage deed with the security trustee mortgaging its immovable property assets as mentioned in the deed. The document was stamped with duty as applicable to one mortgage deed. However, the Revenue Authority claimed that the duty should have been paid 13 times over on the same instrument since there were 13 separate lenders.

The Supreme Court held that the company had formed the consortium and had executed the present mortgage instead of several distinct instruments of mortgage with the sole purpose of evading stamp duty and that the company had availed financial assistance from 13 lenders for its project and consequently, the company was required to execute mortgage deed in favour of the 13 lenders. However, in order to avoid payment of stamp duty on each mortgage deed, the company got the lenders to form a consortium and appointed one security trustee. Thus, in substance, the mortgage deed between the trustee on behalf of the lenders and the company was actually a combination of 13 mortgages dealing with the company and such lenders.

Hence, the Court held that the company could not be allowed to evade payment of stamp duty by forming a consortium. Further, the instrument in question relates to several distinct matters or distinct transactions inasmuch as the company availed distinct loans from 13 different lenders. Hence, it was manifest that the instrument of mortgage came into existence only after separate loan agreements were executed by the borrower with the lenders with regard to separate loan advanced by those lenders to the company borrower. The mortgage deed recited at length as to how and under what circumstances the property was mortgaged with the security trustee for and on behalf of lender banks. Altogether 13 banks lent money to the mortgagor, details of which were described in the deed and for the repayment of that money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan, there would have been a separate document for distinct transactions. Accordingly, it could safely be regarded as 13 distinct transactions, each liable to stamp duty even though the instrument was only one. Thus, the Apex Court upheld the stand of the revenue that the correct amount of duty was the duty payable on one mortgage deed multiplied by 13!

This decision substantially pushes up the duty liability for companies. Now, in the example discussed above, if a Mumbai-based company were to try to select Delhi as a jurisdiction, the savings could be as high as Rs. 8.5 lakh * 13 (assuming there are 13 lenders) = Rs. 1.10 crore.

Enhanced Powers
The 2015 Amendment Act has amended the Maharashtra Stamp Act, 1958 giving more powers of inspection to the Collector. If he has reason to believe that there is an evasion of duty by fraud or omission, then he may call for any registers, books, records, electronic device, electronic record, CD, disk, papers, etc. He can also enter any premises and impound any documents. Further, the maximum penalty for evasion of duty has been doubled to four times the duty evaded. Thus, an inspection for suspected evasion could lead to severe consequences.

Conclusion
The constant see-saw between companies on the one hand and the revenue department on the other hand to save valuable stamp duty reminds one of the famous nursery rhyme (albeit with a little tweak):

“To Market, to Market, to save Stamp Duty,
Home Again, Home Again, sans any Booty!!”

shailesh.kwebmaker

Will Your Will Live On?

Introduction
Consider this. A person makes a Will thinking he
has done all that is necessary for ensuring smooth succession of his
assets to his near and dear ones. Unfortunately, he dies. But even more
unfortunately, his Will is held to be invalid! Result – he is rendered
an intestate, i.e. one who died without making a valid Will and
accordingly, the law decides who gets what after his death. This could
have some unintended and unpleasant consequences. Through this Article,
let us, through Questions and Answers, consider some of those scenarios
when a deceased’s Will can and cannot be held to be invalid. The Indian
Succession Act, 1925 governs the law relating to the making and proving
of Wills.

Can a Person with Alzheimer’s disease make a Will?
Alzheimer’s
disease affects the mental capacity of a person. It is a degeneration
of the mental faculties and leads to memory loss, inability to think,
etc. In an advanced stage of the disease, it is highly doubtful whether a
person has control over his mental faculties in order to make a Will.
However, if a person suffering from Alzheimer’s disease is in a position
to make a Will, then it would be advisable to have a neurologist (and
not any doctor) who has been treating the person to certify the
testator’s mental state of mind to execute the Will. He could act as the
witness to the Will. This would add credence to the Will and the doctor
could even be examined before a Probate Court.

Similarly, in
the case of a schizophrenic, it may be advisable to have the consulting
psychiatrist certify the ability of the testator to prepare a Will at
the time of execution of the Will.

Can a Person suffering from Parkinson’s disease make a Will?
Parkinson’s
disease is also a degeneration of the brain but it affects the
movements of a person. Hence, the mental faculties of such a person may
remain intact as compared to a person suffering from Alzheimer’s
disease. Nevertheless, even in the case of such a person, it may be a
good idea to have a neurologist to certify the testator’s mental state
of mind to execute the Will, since it may be challenged in the Probate
Court whether such a person had control over his thinking ability? In
Maki Sorabji Commissariat vs. Homi Sorabji Commissariat, TS No. 60/2011
Order dated 30th April, 2014, the Bombay High Court was faced with the
very same issue as to whether the testator who was suffering from
Parkinson’s disease could make a Will? The Court held that even if the
deceased was suffering from Parkinson’s disease, the question that arose
was whether such disease could have affected sound and disposing mind
of the deceased at the time of execution of the Will? The Court held
that facts clearly indicated that he was active in various activities
including taking decisions in property matters. Thus, the Court held
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.

Can a very old person make a Will?
Unlike
the Companies Act, 2013 which raises a question mark on a person over
the age of 70 to become a Managing Director, a Will of a very old person
is valid, provided he knows what he is doing. However, if the old age
has rendered him senile or forgetful or mentally feeble, then the Will
would be held to be invalid on account of the testator’s mental
capacity. As suggested before, a neurologist should certify the
testator’s mental state of mind which should specifically refer to his
extreme old age.

Can a person suffering from terminal illness make a Will?
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.

What if all pages of a Will are not signed?
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 initialled – 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.

Can a witness to a Will also be a Beneficiary under the Will?
Generally,
no. The Indian Succession Act states that any bequest (gift) to a
witness of a 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 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.

Does a witness need to know the contents of the Will?
This
is one of the biggest fears and myths in selecting a witness. A witness
only witnesses the signing of the Will by the testator and nothing
more! He or she need not know what is inside the Will and the contents
can very well be kept a secret till when it is opened after the death of
the testator. By signing as a witness, he only states that the testator
has actually signed the Will in his presence.

Can an executor be a beneficiary under the Will?
Yes,
he can, subject to certain conditions. He must either prove the Will or
at least manifest an intention to act as the executor. Thus, he must do
some act which would demonstrate his intention to act as the executor.
These acts could include, arranging for the funeral of the testator,
taking stock of his estate, writing letters to the other legatees,
arranging for religious rites, etc.

Can an executor be a witness under the Will?
Yes,
he can. An executor is the person who sets the Will in motion. It is
the executor through whom the deceased’s Will works. Just as a company
operates through its Board of Directors, the estate of a deceased
operates through its executors. 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.

Does a bachelor/spinster need to make a new Will once he/she marries?
Yes, he can. An executor is the person who sets the Will in motion. It is the executor through whom the deceased’s Will works. Just as a company operates through its Board of Directors, the estate of a deceased operates through its executors. 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.

Does a bachelor/spinster need to make a new Will once he/she marries?

Yes. The law considers marriage as a major event in a person’s life and one which requires him/her to rethink the succession plan. Thus, any Will made prior to marriage is automatically revoked by law, on the marriage of a person. If a person dies without making a fresh Will after marriage, then he/she would be treated as dying intestate and the provisions of the relevant succession law, e.g., the Hindu Succession Act, 1956 for Hindus, would apply.

Can a Will have a generic bequest?

Bequests can be general or specific. However, 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.

What happens if the shares bequeathed undergo a merger/ demerger?

Say a Will bequeaths 1,000 shares of ABC Ltd. After the Will is prepared and before the shares are bequeathed, ABC. Ltd undergoes a scheme of arrangement pursuant to which ABC Ltd is merged with XYZ Ltd and one division of the erstwhile ABC Ltd is hived off into PQR Ltd. The original ABC shares are replaced with shares of XYZ and PQR. Would the legacy survive such a change?

The Indian Succession Act provides that where a thing specifically bequeathed undergoes a change between the date of the Will and the testator’s death and the change occurs by operation of law/in the course of execution of the provisions of any legal instrument under which the thing bequeathed was held, the legacy is not adeemed (cancelled) by reason of such a change.

The position in this respect is not explicitly clear. However, one may refer to some English and American judgments on this issue. The judgments tend to suggest that whenever a specific item bequeathed has ceased to belong to the testator, the legacy is adeemed – Bridle 4 CPD 336. A legacy is not adeemed if the alteration/change is only formal or nominal – such as a name change/sub-division of shares – Oakes vs. Oakes 9 Hare 666/Clifford (1912) 1 Ch 29. Even in a case where the reorganised company was materially the same as the old one, there was no ademption – Leeming (1912) 1 Ch 828. However, where the gift is substantially altered, there is an ademption. The testator must have at the time of his death the same thing existing; it may be in a different shape, yet it must substantially be the same thing – Slater (1907) 1 Ch 665 / Gray 36 Ch D 205.

Hence, in the example given above, it may be possible to contend, relying upon Slater’s decision, that the gift has been substantially altered on account of the reorganisation and hence, a view may be taken that the legacy adeems. However, as mentioned earlier, this is an issue which is not free from doubt. It may be noted that on ademption of a legacy, the entire Will may or may not become void. For instance, if a legacy adeems and there is an alternative beneficiary, then it would go to him. However, if there is only one beneficiary to whom the entire estate goes without any alternative beneficiary, then on ademption of the legacy, the Will may itself fail. Hence, this is a question of fact to be decided on a case-by-case basis.

Would a bequest to children of the testator include his adopted children, if not so specified?

Section 99 of the Indian Succession Act defines certain terms used in a Will. The words children means only the lineal descendants in the first degree of the testator. Thus, according to this section, adopted children would not be included in the definition of the term ‘children’ if so used in a Will. Similarly, a step-child would also not be included since that would not constitute a lineal descendant. However, it should be noted that this section does not apply to Wills made by Hindus, Sikhs, Jains and Buddhists and hence, if a Will made by them uses the term “children,” then it would include their adopted children also. Similarly, their step-children may also be included.

Conclusion

While the above are just some of the scenarios when a Will may be held to be invalid, one must bear in mind that a little care and caution and at times, sound legal advice, would go a long way in perfecting a Will. Act in haste and repent in leisure is often the case with several testamentary documents. Always remember:

“Where there’s an invalid Will, there’s a Dispute Where there’s an invalid Will, there’s a Lawsuit!!”

shailesh.kwebmaker

Female Intestate Succession – The Tide Turns (Sometimes)

Introduction
The Hindu Succession Act, 1956, is one of the
few codified statutes under Hindu Law. It governs the position of a
Hindu male/female dying intestate, i.e., 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. Thus, if a Hindu dies
leaving behind property and does not make a valid Will, then the law
decides which of his/her heirs get what and in what ratio!

There
are separate rules for succession in the case of intestate Hindu males
and Hindu females. Through this Article, let us examine the usual
succession pattern of a female Hindu and certain special circumstances
when this usual pattern changes.

Usual Succession Pattern
Before analysing the special circumstances, one must understand the usual succession pattern of a Hindu female dying intestate.

All
property, whether movable or immovable and by whatever means acquired,
belonging to a female Hindu is held by her as a full owner. A female
Hindu has absolute power to deal with her property and she can dispose
off her property by way of a Will, gift, etc.

The property of an intestate Hindu female devolves on the following heirs in the order specified below:

(a) Firstly, upon her sons and daughters (including the children of any pre-deceased children) and husband;
(b) Secondly, upon the heirs of her husband;
(c) Thirdly, upon her parents
(d) Fourthly, upon the heirs of her father
(e) Fifthly, upon the heirs of her mother

The
order of succession is in the order specified above. Thus, if she has
children and/or husband then they take the entire property
simultaneously and in preference to all other heirs.

Need for a Change?
What
is interesting to note is that in a case where she does not have any
children or husband or grandchildren of predeceased children, then her
property goes to her husband’s heirs and not to her heirs. Thus, if the
mother of her husband is alive, then her whole property would devolve on
her mother-in-law. If the mother-in-law is also not alive, it would
devolve as per the rules laid down in case of a male Hindu dying
intestate i.e., if the father of her deceased husband is alive, her
father-in-law will inherit her property and if the father-in-law is also
not alive, then her property would devolve on the brother and sister of
the deceased husband.

This position has been a bone of
contention when it comes to women’s equal rights. The 207th Report dated
June 2008 of the Law Commission of India makes a case for amending the
Hindu Succession Act to provide that in cases where an intestate Hindu
widow dies issueless, then equal rights must be given to her parental
heirs along with her husband’s heirs to inherit her property. Thus, both
her parent’s heirs and her husband’s heirs must equally inherit her
estate.

The Order Changes – Property from Parents
The above succession pattern undergoes a drastic change in two cases. These are the notable exceptions to the general law.

In
a case where a female Hindu dies intestate without leaving behind any
children or grandchildren of predeceased children, then only in respect
of the property which she had inherited from her parents the succession
position is altered. The Act provides that such property which she had
inherited from her parents would go to her father’s heirs and shall
neither go to her husband nor her husband’s heirs. Thus, three
conditions must be satisfied for this provision to apply and these are
as follows:

a) A female Hindu must die intestate;
b) She must have inherited property from either of her parents; and
c) She must not have any son, daughter or grandchildren from a predeceased son or daughter.

If
all of the above are met, then the property inherited from her father
or mother would go to her father’s heirs. Interestingly, this is so even
if her husband is alive. However, if she leaves behind a child then the
normal succession pattern would apply and even property inherited from
her parents would go to her children and husband. It must be noted that
irrespective of whether the property is inherited by her from her father
or mother, it would go only to the heirs of her father and not to heirs
of her mother.

The exception is only qua property inherited by a
lady from her parents and cannot extend to property inherited from her
husband – Reshma G. Bhandari vs. Yeshubai H. Koli, 2008(2) Bom. C.R.
294. Similarly, the words “father” and “mother” do not in any way lead
to a conclusion to include property inherited from relatives from her
father’s side or her mother’s side”, as including such additional terms
would be inconsistent with the purposes of the Legislature – Balasaheb
Anandrao Ghatge vs. Jaimala Shahaji Raje, 1977 Mh. L.J.777.

Further,
the exception only deals with inherited property. Property received by
way of a gift from parents or by Will or any other mode would not be
covered by the exception and would continue to be governed by the normal
succession pattern.

The Madras High Court while interpreting
the essence of the above exception in Ayi Ammal vs. Subramania Asari,
1966 (1) M.L.J. 411, has held that the word “inherit” is a word of known
import and ordinarily cannot give any difficulty in understanding its
content. To inherit is to receive property as heir that is succession by
descent. It referred to a dictionary definition and held that it meant
to receive property as heir. Inherit meant, succession by descent. To
take by inheritance meant to take, or to have; to become possessed of;
to take as heir at law by descent or distribution; to descend. The words
inherit and heir in a technical sense, related to right of succession
to the real estate of a person dying intestate”. The word “inherited” in
the above exception had not been used in a loose way and would not
include within its purview receipt of property from the father or mother
during their lifetime.

Similarly, the Andhra Pradesh High Court
in Babballapati Kameswararao vs. Kavuri Vesudevarao 1972 AIR(A.P.) 189,
has held that the exception only covers the acquisition of the property
by succession and not by way of a gift or under a will. The word
inherit thus can in the context only mean to receive property as heir
succession by descent. The view of the Gujarat High Court in Jayantilal
Mansukhlal vs. Mehta Chhanalal Ambalal, 1968 (9) G.L.R. 129 is also
similar.

The only persons covered by the exception are the
father’s heirs. If there are no heirs of the father then the normal
succession pattern would resume.

A very interesting question which arises is that what if the father of the Hindu female is alive? In such an event, would the property go to him or to his heirs, i.e., would the heirs of the father get the property in exclusion of the father? A Single Judge of the Andhra Pradesh High Court in Bhimadas vs. P. K. Kanthamma, ILR 1977 AP 418 held that the father was entitled to the estate during his lifetime. It is only if the father is no more that his heirs would be entitled to the estate of the female Hindu intestate. However, this decision of the Single Judge was overturned by the Division Bench of the Andhra Pradesh in Pinkana Pasamma vs. Bhimadas, 1993(1) KLT

174. According to the latter decision, the law was very clear and the father’s heirs would get the estate as if the father was no longer alive (even though he was actually alive)!
The law created a deeming fiction whereby the father was deemed to have died intestate immediately after the death of the female Hindu. A similar decision was taken by the Kerala High Court in Sindhu Ajayan vs. Damodaran Pillai, 2011(3) ILR (Ker) 12.

Property from Father-in-law

A second exception in the Act is in respect of property inherited by a female intestate from her husband or her father-in-law. If she dies without leaving behind any children or children of pre-deceased children then the property would devolve not as per the normal succession order but would devolve upon her husband’s heirs. Thus, three conditions must be satisfied for this provision to apply and these are as follows:

d) A female Hindu must die intestate;

e) She must have inherited property from either her father-in-law or her husband; and
f) She must not have any son, daughter or grandchildren from a predeceased son or daughter.

At first blush, it appears that this is a case of redundant drafting. Would not property inherited by a lady from her deceased husband or from her father-in-law in a case where her husband has predeceased her always devolve upon her husband’s heirs since that is the normal succession order under the Act? Her parents would come into the picture only under the 3rd list. Her husband’s heirs take precedence since they are in the 2nd list in the normal order. Why then was this exception inserted? However, consider a case of a female who has inherited property from her late husband or her late father-in-law and then she remarries. If she dies intestate and issueless, her second husband would claim a right to all her property, including the property which she inherited from her first husband or first husband’s father. To prevent this from happening, this exception has been enacted.

What if she has no children from the first marriage but has children from the second marriage then would this exception fail and these children and her second husband would get all her property including what she inherited from her first husband or first husband’s father? Alternatively, would the exception continue to apply since she does not have any children from the first marriage? This is a matter on which there is no express clarity.

Consider a third scenario where she has children from her first marriage but has also remarried. In such a case, this exception would surely fail and these children and her second husband would get all her property including that which she inherited from her first husband or first husband’s father.

Similarly, as in the first exception, the property must have been inherited by her and not received by will or gift or any other mode.

Conclusion

The succession law in the case of females has always been vexed and biased. While there have been some improvements over the years, there are miles yet to be covered. Should not all property received by her from her parents, by way of gift, will, succession, etc., go back only to her parents in the absence of children/husband? Should not the recommendations of the Law Commission be enacted? One often feels that instead of carrying out only amendments such as having a women director on the board (which in several cases is only symbolic), the personal succession law relating to women needs an urgent overhaul! Let us hope that one day the tide would turn for the good (instead of only sometimes as is the case today).

shailesh.kwebmaker

Can You Gift Without Giving?

Introduction Is there an error with the Title – “Can You Gift Without Giving?” Is it possible for someone to make a gift of a property but at the same time not give the property? Illogical as this may sound this oxymoron has been upheld by a 3 Member Bench of the Supreme Court of India giving it the highest form of recognition! One would wonder what is the purpose of the donor gifting if he does not intend to give the property to the donee? Let us analyse this issue in more detail to answer some nagging questions.

What is Gifting without Giving?
This is a simple way of defining the legal phrase of “retaining a life-interest benefit”. For instance, say a father wants to gift his residential flat to his son instead of under his Will so as to avoid any bequest related challenges. However, at the same time, he wants to reside in the flat in his lifetime and ensure that the flat passes to the son only upon his death. Can he achieve both the objectives? Would it not be great to kill two birds with one stone – ensuring smooth succession on death thereby avoiding Probate related challenges and at the same residing in the flat in one’s lifetime?

An answer to the above challenge would lie in creating a gift deed in favour of the son wherein the father retains the possession of the flat during his lifetime and the same would pass to the son only upon the father’s death. Is this too good to be true, is the question one would ask? The Larger Bench of the Supreme Court in its decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445 has said this is possible. Hence, a donor can gift without actually giving possession of the property.

What does the Law Provide?
The law in respect of Gifts, whether immovable or movable, is enshrined in Chapter VII of the Transfer of Property Act, 1882. Section 122 of this Act defines a gift as follows:

It is the transfer of certain existing movable or immovable property

It is made voluntarily and without consideration

By one person, called the donor, to another, called the donee

It 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, the gift is void.

Section 123 of this Act lays down the manner in which the transfer of a gift may be made:

Gift of Immovable Property – the transfer must be made by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses
Gift of Movable Property – the transfer may be effected:

• either by a registered instrument signed as aforesaid or
• by delivery of the movable property

For gift of an immovable property only one mode of transfer is permissible, i.e., by a registered gift deed. However, the Act provides two alternative modes for transfer in case of gift of a movable property, i.e., either by a registered gift deed or by delivery and possession. If the first mode, i.e., registered gift deed is selected, for a movable property then section123 does not mandate that delivery and possession of the movable property must be given. Similarly, in the case of immovable property section123 does not mandate that delivery and possession of the immovable property must be given.

Another important provision is section 6(d) of the Act which states that if the enjoyment of any property is restricted to the owner personally, then he cannot transfer the same. Thus, if a person is not the absolute owner of a property he cannot transfer the same.

Judicial History
The reason for the matter to be referred to a Three Member Bench of the Apex Court was that there were two conflicting decisions of the Division Bench of Supreme Court. In Narmadaben Maganlal Thakker vs. Pranjivandas Maganlal Thakker, (1997) and 2 SCC 255 K. Balakrishnan vs. K Kamalam, (2004) 1 SCC 581.

In the earlier case of Narmadaben Maganlal Thakker, 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 favour of the donee. The gift deed conferred only limited right upon the donee and gift was to become operative after the death of the donor. The donor reserved permanently 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 the latter Supreme Court case of K. Balakrishnan, 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 in property 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.

Rajamma’s Case
Coming to the facts of the three Member Bench decision of the Supreme Court in Rajamma, in this case, the donor made a gift of an immovable property by way of a registered gift deed which was duly attested. However, she (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?

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. The law today protects only the rules of Muhammadan Law from the provisions of Chapter VII relating to gifts.

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. Transfer by way of gift of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. Absence of any such requirement led the Court to the conclusion that delivery of possession was not an essential prerequisite for the making of a valid gift in the case of immovable property.

The Court also distinguished on facts, the earlier Supreme Court 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. The Court 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.

How is This principle helpful? The principle laid down would be very helpful in case of gifts amongst family members. The donor can gift a property and retain possession during his lifetime thereby quelling any succession disputes post his demise which are typical in the case of a Will. Added to this is the recent relaxation under the Maharashtra Stamp Act, 1958 whereby any residential property gifted to a spouse, children or grand children would attract a duty of Rs. 200 only. The Income-tax Act also exempts from taxation gifts received from certain defined relatives. If the gifted immoveable property is yielding income by way of rent, one needs to consider in whose hands such income will be taxed since the recipient of income will not be the owner of the property.

Thus, a person can have a simple, low-cost succession solution at least qua his residential property which often is a big asset for several families.

So the Moral of the Story is Gift Away But Don’t Give Away (for now)!!

shailesh.kwebmaker

Wife’s Share in an HUF, Et tu, Gender Equality?

Introduction
In recent times, there has been an effort at gender equality in India across various legislations, such as, amending the Hindu Succession Act to give rights to daughters and sisters in their father’s Hindu Undivided Family (HUF), women’s representation on the board of directors of listed and large public companies, etc. However, surprisingly one of the most basic rights of women – share of a wife in her husband’s HUF has yet not undergone a change. This position has remained constant right from the times of Manusmriti, the father of the Hindu Law. Let us examine the position in this respect.

Concept of an HUF
Just to set the background and to jog our memory, an HUF is a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consists of male coparceners and other members. Thus, the sons and grandsons of the person who started the HUF would automatically become coparceners by virtue of being born in that family. The wife of a coparcener is a member of the HUF. A unique feature of an 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. The share can be crystallised only on the partition of an HUF. A partition refers to the breaking up of the joint family and giving separate identifiable shares to all or some of the coparcerners/members of the HUF. Thus, the HUF as an entity ceases to exist and its constituents become the owners of the property which was earlier owned by the HUF. The crux of the issue is which female member of an HUF has a right to demand a partition of an HUF?

Share of a Daughter
After the Amendment on 9th September 2005 to the Hindu Succession Act, 1956, even daughters would have an equal right as sons and hence, now, even they would become coparceners in their father’s HUF. The Bombay High Court has held daughters have a right to claim partition in their father’s HUF and this applies even to daughters born before 9th September 2005 – Babu Dagadau Awari vs. Baby AIR 2015 (NOC) 446 (Bom). Thus, this has been a major relaxation in women’s rights. Grand-daughters would also become coparceners in the respective HUFs of their paternal and maternal grandfathers.

Share of a Wife
However, when it comes to the share of a wife in her husband’s HUF, the position is the opposite. Under the Hindu law, a wife does not have a right to demand a partition of her husband’s HUF. She cannot demand a partition. Her only right is to get a share in her husband’s HUF equal to her son’s share in the event of a partition of such HUF. The decision of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 is on this point.

The Karnataka High Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022, held that it was to be noted that the term coparcener of an HUF referred to a male issue i.e., a father or a son. The wives of coparceners did not get any interest by virtue of their marriage. A wife had no share, right title or interest in the Hindu Undivided Family in which her husband was a coparcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act,1956, with his sisters and daughters also. The wife, may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family she could not get any share, right, title or interest in the joint Hindu Family property which that family owned. A wife could not demand a partition unlike a daughter. She would get a share only if partition was demanded by her husband or sons and the property was actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he had as a coparcener in his HUF was wholly premature and completely misconceived. Thus, though the wife was entitled for an interest i.e., share, it was only along with her husband.

Share of a Widow
Is the position of a widow different from that of a wife whose husband is alive? Things start getting murkier now. Prior to the Hindu Succession Act, 1956, the position was different. Section 3 of the Hindu Women’s Right to Property Act, 1937 provided that when a Hindu male died intestate having behind his share in an HUF, then his widow had the same interest in the HUF as he himself had. Further, any such interest devolving on his Hindu widow was a limited interest known as a Hindu woman’s estate, and she had the same right of claiming partition as a male owner. Interestingly, this Act was repealed by the Hindu Succession Act, 1956. So an earlier law gave better protection to a widow as compared to the latter law! A Single Judge of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 has analysed the impact of this repeal and held that post-repeal, the 1937 Act affords no protection to widows. The Bombay High Court held that section 3, no doubt, gave a right to women to seek partition. However, this Act was repealed by Hindu Succession Act, 1956. Therefore, it was no longer possible to take advantage of section 3 of the Hindu Women’s Right to Property Act. If the provisions of Hindu Succession Act, 1956 are read, it would be clear that there is no provision similar to section 3 of the Hindu Women’s Right to Property Act. The legislature in its wisdom had not thought it fit to continue this right in a woman. However, another Single Judge of the Bombay High Court in the case of Smt. Kalawati Balasaheb Karne vs. Smt. Chandra Hanmant Karne, SA 405/2013, Order dated September 15, 2014, has considered this decision and held that in the wake of the revolution for emancipation of women and for recognising their rights as human beings equal to the males in respect of the properties in a Hindu family, depriving a widow simply because no other coparcerners demand partition would clearly be destructive of the movement. It must be noted that both the decisions are of Single Judges of the same High Court and hence, one cannot be said to have dominance over the other. However, both of these decisions have not considered a very old Full Bench judgment of the Bombay High Court in Sushilabai Ramchandra Kulkarni vs. Narayanrao Gopalrao Deshpande, AIR 1975 Bom 257 (FB). Although this decision dealt with the share which a widow would receive in a partition of her deceased husband’s HUF, it also held that a widow’s heir is entitled to have a partition of the HUF and separate possession thereof secured to her.

Several Courts have expressly held that a widow can claim a partition of her husband’s HUF. The Gujarat High Court in Vidyaben vs. JN Bhatt AIR 1974 Guj 23 states that she can claim a partition. It analysed section 6 of the Hindu Succession Act, 1956, which states that when a male Hindu dies leaving behind Class I female relatives (such as, wife, mother, daughter), then his interest in the HUF property shall devolve by testamentary (i.e., by Will) or intestate – succession (i.e., by law), as the case may be, under this Act and not by survivorship. It further provides that the interest of a Hindu male coparcener shall be deemed to be the share in the HUF property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not. The Court held that section 6 itself by implication gives a right to the female heir mentioned therein to claim partition of the joint family property and the moment the deceased coparcener left behind him his heirs who included a female relative specified in Class I of the Schedule the law governing coparcenary property with regard to devolution of interest would no longer be applicable and the testamentary or intestate succession as provided by this Act would govern the case. It held that the moment the interest of the deceased in the joint family, property is severed, the joint family status would come to an end and it would be open to the widow to claim partition therein. it observed that it was difficult to envisage a position that even though the share of the deceased has to be ascertained on the footing that the wife would get the share if there was partition of the huf property just prior to the death of her husband, she would not get any share after his death and that her son would take the remaining property by survivorship. the gujarat high Court also cited with approval a very old decision of the Bombay high Court in Ranubai vs. Laxman Lalji Patil, AIR 1966 Bom 169 which was on somewhat similar lines. a similar view has been expressed by the gauhati high Court in CIT vs. Mulchand Sukmal Jain, 200 ITR 528 (Gau.) where it held that the rule of pristine Mitakshara law that when, in a family consisting of father, mother and son , partition takes place between the male members, the mother may be entitled to a share equal to that the son in lieu of her claim for maintenance, but she herself cannot demand partition, cannot apply to a state of affairs reached on the death of her husband. the widow as an heir of her husband would certainly be entitled to claim the share inherited by her and, for that purpose, compel a partition. even the Karnataka high Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022 has held that a widow can demand partition of the interest in an huf which her deceased husband would have been entitled to.

It is respectfully submitted that the decisions upholding right of a widow to demand partition appear more reasonable.

The supreme Court in Gurupad Khandappa Magdum Vs. Hirabai Khandappa Magdum, 129 ITR 440 (SC) dealt with what would be share of a widow in a partition of her deceased husband’s HUF? The Court held that a widow would not only be entitled to share in the portion coming to her husband but she will also have to be allotted her own share in the coparcenary property along with son upon death of husband, i.e., she would get her own share equal to her son and also a part in her husband’s share.

Position of Different Female Relatives

Based on the above discussion, it would be interesting to note that the law provides for a different treatment as to whether a female can ask for a partition in an huf depending upon her relationship. this is better explained by the following table:

So we have a situation where a married daughter can partition her father’s HUF even if she got married years several moons ago but she cannot ask for partition of her husband’s HUF with whom she is living? Moreover, she can demand partition after her husband’s death but not during his lifetime! is this not a singularly unique proposition?

Conclusion
One wonders in these times of talk about women empowerment and so many recently launched initiatives for the girl child, why has this legal right of a married lady has not been changed? is it not high time that the Legislature walks the talk and focuses on ironing out such creases from our archaic laws? the law relating to hufs especially is one which is fraught with confusion and complexity. Would it not be desirable to have one consolidated law relating to all aspects concerning an huf instead of having some portions codified and some uncodified? Ease of doing business should also be coupled with the ease of exercising one’s personal rights. only then can we say that India is a fair and equal rights’ democracy!

shailesh.kwebmaker

Arbitration Law Amendments – Cuts Both Ways!

Introduction

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

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

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

Arbitrators’ Fees Capped

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

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

No more Recusing oneself afterwards

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

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

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

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

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

Magical Time limit for completion

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

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

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

Carrot and Stick approach for Arbitrators

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

Fast Track Procedure

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

Award against Public Policy

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

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

Conclusion

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

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

shailesh.kwebmaker

Nominee vs. Will: The Tide Turns?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

Stamp Duty Ready Reckoner

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

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

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

the Fair Market Value of the property;

the Consideration mentioned in the instrument; or

the Area of the property involved.

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

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

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

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

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

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

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

Shops/Commercial
Offices
Industrial Property
Residential Property
Developed Land

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is anybody listening?

shailesh.kwebmaker

Is Bombay a Bay?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

shailesh.kwebmaker

Release vs. Gift

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

shailesh.kwebmaker

Stamp Act – Change is the Only Constant!

Introduction
Heraclitus, a Greek Philosopher stated that “Change is the Only Constant in Life”. Lawmakers in India also follow this maxim, especially when it comes to Fiscal Statutes. The Stamp Act is no exception. Every year, the Maharashtra Stamp Act, 1958 (“the Act”) is tweaked throwing up a mixed bag of changes – some good, some bad and some ugly! The Maharashtra Stamp (Amendment) Act, 2015 has made some substantial changes to the Maharashtra Stamp Act, 1958. Let us consider the impact of these changes on the way instruments are executed in the State of Maharashtra.

Multiple Documents for a Lease
Where multiple documents are executed for a lease transaction, the Act now provides that only the principal document would be exigible with the duty as on a lease. All other instruments would be chargeable with a duty of only Rs. 100. This would avoid double taxation. Earlier this facility was only available for four transactions ~ sale, mortgage, development agreement and settlement.

Ensuring Stamp Duty Payment
Certain State Government Departments, Institutions of Local Self-Government, Semi-Government Organisations, Banks, Non-Banking Institutions, etc., which have been notified by the State Government shall ensure that proper stamp duty is paid on certain unregistered documents which would also be notified. This is to ensure better compliance with the Stamp Act in respect of unregistered documents which may escape payment of stamp duty. The Notification would be eagerly awaited. This would also place an additional burden upon banks / NBFCs. One wonders whether they are capable of determining whether or not an instrument is adequately stamped? Can one expect an officer of a bank or an NBFC to exercise a quasi-judicial function?

Penalty Doubled
Under the Act, if any instrument is inadequately /not stamped, then it shall be inadmissible in evidence for any purpose, e.g., in a Civil Court. Such instruments are admissible in evidence on payment of the requisite amount of duty and a penalty @ 2% per month on the deficient amount of duty calculated from the date of execution. Earlier, the maximum penalty could not exceed twice the amount of duty involved. The maximum penalty now cannot exceed four times the amount of shortfall in duty involved. That is a 200% increase in the ceiling limit – an amazing strike rate even by Twenty20 standards! One would have to be extremely careful and exercise caution while executing instruments so that there is no hefty penalty later on.

Claim for Refund Extended
A claim for refund of stamp duty on an instrument which has not been executed due to refusal of any party to the instrument must be filed within 6 months from the date of the instrument. However, a concession has now been provided in case of a registered agreement to sell an immovable property which has been cancelled by a registered cancellation deed before taking possession of the property. In respect of such an agreement to sell, the application for refund of stamp duty can be now made within 6 months from the date of registration of the cancellation deed.

Amendments in Schedule – I to the Act
Schedule-I to the Act provides for various Articles which lay down the stamp duty applicable on different instruments. Section 3 provides that an instrument shall be stamped as per the rates / amount specified in Schedule-I. Hence, it becomes very essential to ascertain the rate specified in Schedule-I. The 2015 Amendment Act has made several changes to this Schedule-I, let us analyse some key changes:

Conclusion
In recent times, the Stamp Law has become very important and dynamic. Businesses and advisors would be well advised to pay heed to this Act and keep pace with the changes or else they could face unpleasant consequences.

levitra

shailesh.kwebmaker

Pyramid Schemes: Fortune only at the Top?

Synopsis
Pyramid or Ponzi schemes have been in the news of late in India with some high profile arrests also being made. This Article examines the law in this regard and whether it is robust enough to deal with new age retailing such as, multi-level marketing and direct selling.

Introduction Fable time – “Give me only that much wheat as is equal to the squares in a chess board, just one grain for the first square but double the grains for each subsequent square. Thus, there would be 2 for the second square, 4 for the third and so on until the sixty fourth square.” How many grains of wheat do you think there would be at the end? If you think it would be a small number then think again, the answer is a mind boggling figure of 263 i.e., 2 x 2 sixty three times and if all this wheat were to be stocked in a pile it would reach the moon! This is the power of exponential compounding.

What is an example on Maths doing in a legal subject? It illustrates the concept of Pyramid Schemes and why they are often considered illegal. Several of these schemes are of such a nature that for the last level to make money it would need to rope in all the people in the world and yet there may be a loss! These pyramids are the opposite of the popular management phrase “Fortune at the Bottom of the Pyramid” – here it is only the top which makes money while the bottom is often left high and dry and banging on the doors of courts/police stations.

To curb such schemes, the Centre has enacted the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) declaring them illegal. Let us examine the important features of this Act.

Scheme of the Act
The Preamble to this Act states that it is enacted to ban the promotion or conduct of prize chits and money circulation. Thus, it aims to curb two schemes, the first being prize chits and the second being money circulation schemes. The second type, i.e., money circulation scheme is relevant for this discussion.

Section 3 of the Act bans money circulation schemes and even bans enrolment as members or participation therein. It provides that no person shall:

(a) promote or conduct any money circulation scheme;
(b) enroll as a member to any such scheme;
(c) participate in it otherwise; or
(d) receive or remit any money in pursuance of such or scheme.

Thus, there is a four-pronged ban on promotion/ conducting, enrolling, participating or receiving/remitting money in a money circulation scheme. The penalty for violating this section is imprisonment of a term of up to 3 years and /or a fine of Rs. 5,000. Further, unless there are special and adequate mitigating reasons, the minimum fine is Rs. 1,000 and minimum imprisonment term is 1 year. Hence, it becomes very important to understand what is and is not a money circulation scheme.

Money Circulation Scheme
This brings us to the most important definition contained in section 2(c) of the Act, i.e., money circulation scheme. The Act defines this in an exhaustive manner to mean: “any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;”

The definition is worded in a not-too happy manner and can get a bit ambiguous at times. To simplify matters, the Supreme Court in State of West Bengal vs. Swapan Kumar Guha, 1982 (1) SCC 561 has paraphrased and simplified the definition as follows:

“Money circulation scheme means any scheme, by whatever name called,
(I) for the making of quick or easy money, or
(II) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”

Let us analyse the above definition to bring out its essential elements:

(a) There must be a scheme but its nomenclature is not material. A scheme may be defined as a systematic choice of action;
(b) It must be for the making of quick or easy money (these two terms carry the maximum significance);
(c) A lternatively, it must be for the receipt of any money or valuable thing as consideration for a promise to pay money;
(d) Both of which are contingent or dependent upon the enrolment of more members into such scheme; and
(e) The payment of the money or valuable thing may be derived from the entrance money or recurring subscriptions of the members of the scheme.

Hence, if one were to strip down the definition to bare bones, it would mean a quick or easy money scheme where earnings are contingent or dependent upon getting more and more members. This is the essence or the core of a multi level marketing or a pyramid scheme. If there is no contingency or dependency on an external event of garnering more subscriptions then it cannot be termed as a money circulation scheme. Even in a case where the returns promised are so ludicrous as long as the return is not contingent, it does not fall foul of the Act. For instance, in the above-mentioned Supreme Court case, a scheme was floated in which the investors were getting returns @ 48% – 12% officially and 36% unofficially / in a clandestine manner. The Apex Court held that such a scheme was not a quick or easy money scheme. It makes no difference whether the transactions are in black money or not. While that would violate the Tax Laws, it certainly would not fall within the mischief of this Act.

The Court also gave some interesting analogies to highlight its views – a lawyer who charges a hefty sum for an SLP lasting 5 minutes, a doctor who charges likewise for a tonsil operation lasting 10 minutes and Chartered Accountants (wonder where the Hon’ble Court got that one from)/Engineers/Architects who charge likewise, all make quick and easy money. Similarly, builders and brokers are notorious for making quick money. Obviously all of these cannot be covered within the purview of the Act since the contingency element is absent.

Hence, the Court denied any prosecution under the Act since there was no mutual arrangement which was dependent on an event or contingent on enrolment of members.

Others Considerations
Another decision of the Supreme Court in Kuriachan Chacko vs. State of Kerala, 2008 (8) SCC 708 examined what were relevant and irrelevant considerations when it came to deciding whether or not a scheme was a money circulation scheme? The Court laid down the following guidelines in addition to those laid down in Guha’s case mentioned above:

(a) In the scheme under question, a member would be entitled to double the amount only if after his enrolment, additional 14 members were enrolled in the scheme. The second ingredient, namely, such payment of money was dependent on the “event or contingency relative or applicable to the enrolment of members into the scheme” was thus very much present.

(b) The definition nowhere provided that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the act would apply. the section does not provide for positive or dominant role to be played by a member of the scheme. the requirement of law is “an event or contingency relative or applicable to the enrolment of members into the scheme” and nothing more. It is immaterial by whom such members are enrolled. it may be by members, by promoters or their agents or by gullible sections of the society suo moto (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrolment of more persons into the scheme, nothing more, though nothing less.

(c) The scheme in question was a ‘mathematical impossibility’. the promoters of the scheme very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter, but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money.’

(d) It must be evident for any discerning mind that this scheme cannot work unless more and more subscribers join and the amount paid by them as unit price is made use of to pay the previous subscribers. The system is an inherently fragile system which is unworkable.

(e) Foolish, gullible and stupid persons alone may fall for the scheme without carefully analysing the stipulations of the scheme. it would be totally erroneous to assume that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons.

(f) The Court rejected the argument that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders

Gift Schemes
It is trite nowadays to see advertisements proclaiming “Free Gifts” (the issue of Gifts being Free we will deal with on another day). Do such schemes fall foul of the act? the decision of the Bombay high Court in State of Maharashtra vs. Shivji Kesra Patel, 1988 Mh.LJ 488 dealt with one such issue. A dealer in motor cycles sponsored a gift scheme under which a group of 200 members had to deposit certain monthly instalments for 30 months. Lucky draws were to be held from time to time and the winners would receive a free motor cycle. At the end of 30 months the balance members would have to buy the motor cycles by paying the prevailing market price less instalments contributed. The high Court observed that this was a money circulation scheme. Predominant in the scheme was the element of chance for a very small number of 30 out of 200 members. For the larger remaining 170 members there was nothing but loss of interest for 30 months. Hence, prosecution of the partners of the dealer firm was upheld.

Thus, all schemes providing gifts under a pyramid scheme would be well advised to check the applicability of this act.

Multi-level Marketing schemes another facet of the act which has gained popularity in recent times is its applicability to multi-level marketing schemes. High profile cases, such as, Amway, Speak Asia, QNet, etc. have seen equally high level arrests being made by the police. In a multi-level marketing scheme, there is no chain of wholesalers, retailers, dealers, etc. instead, the manufacturer sells highly priced products (usually consumer/FmCG products) directly to consumers through a chain of consumers-cum-agents. Each agent buys more products from another agent and also endeavours to garner more customers/make more agents. More the number of agents he makes, the higher would be the commission which he as well as those higher to him in the chain would earn. these agents are usually, laymen, housewives, retirees, etc. the big attraction for the agents is the `earn from home’ concept and the huge success stories of people who have made millions by selling the products. a typical multi-level marketing scheme would have a long chain of agents linked end- to-end. The shorter the chain lesser the earnings for everyone. these schemes have often been called “the greater fool schemes” – you will make money till you find a fool greater than you or greedier than you! The manufacturers have tried to distinguish their schemes as being direct selling and not being covered within the ambit of the act.

However, so far the Courts have not bought their argument on the grounds that the major money comes not from selling products but from making more members. According to some press reports, the economic offences Wing of the Police is probing over 60 multi-level marketing schemes in mumbai alone which have allegedly duped investors of over Rs. 3,000 crore. Some of these schemes were promising returns as high as 500% to investors!

The need of the hour is specific regulation dealing with multi-level marketers or direct selling and not cover them within the omnibus provisions of the act. taking a cue, Kerala and Rajasthan have enacted Guidelines for direct selling. For instance, the Kerala Guidelines provide as follows:

(a) They define Direct Selling to mean the marketing of consumer products/services directly to the consumers away from the permanent retail locations, usually through explanation or demonstration of the products by a direct seller or by mail order sales.

(b) Pyramid Schemes are defined as a scheme or arrangement which also includes any money circulation scheme involving sale of goods and services, where a person for a consideration acquires the opportunity to receive a pecuniary benefit which is not dependent on the volume of goods or services sold or distributed but is based wholly or partly upon the inducement of additional persons to participate in such a scheme or arrangement.

(c) Some of the conditions laid down for a valid direct selling are as follows and those sale activities not following these would not be considered as direct selling and would be dealt appropriately under relevant provisions:

the direct Selling entity should be a legal entity authorised to conduct business in India and which files all returns as mandated by law.

it should be a valid licensee or a permitted user of a registered trademark which identifies the promoter, goods or services distributed.

it should maintain a website with complete details of their products/services.

It shall not require a direct seller to purchase any product or collect any membership fee as a condition precedent for enrollment.

the compensation to direct sellers shall only be based

on the quantum of sale of goods and services.

a consumer must be provided a 30 day money back refund policy.

Interestingly, these Guidelines have not been issued under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) ??

Conclusion
There is no limit to human ingenuity and human greed! Ponzi schemes, Pyramid schemes, etc., would continue to thrive on account on these two factors. What is needed is a clear cut law and a dedicated regulator dealing with such schemes. Also, the law must clearly spell out the exclusion conditions for direct selling so that genuine entities are not unduly harassed. The State would have to balance its objectives of protecting innocent investors but at the same time providing a conducive environment for doing business through innovative channels. At the same time, is it not the duty of the investors to do their homework before blindly jumping for get rich quick schemes? doesn’t a 500% return promise sound utopian? after all something which sounds too good to be true, is normally so. Investors would do well if they were to remember and adopt the words from the title of jane austen’s famous novel “Sense and Sensibility”!!

shailesh.kwebmaker

Sale of Goods Act, 1930

Synopsis
This Article examines certain important element of the Sale of Goods Act, 1930, an old Act which is very relevant even today for matters connected with trade and commerce. The Act also has use while interpreting certain other statutes.

Introduction
Trade is often said to be one of key drivers of an economy. The importance of trade can be gauged from the fact that the western world was constantly asking India to open its doors to foreign investment in retail trading. When trade is such a vital constituent of a country’s economy it is essential that we understand the laws governing trade. The sale of goods in India is governed by the Sale of Goods Act, 1930 (“the Act”). While the Transfer of Property Act, 1882 applies to the transfer of immovable property, the Sale of Goods Act applies to the sale of certain movable property, being goods. This Act was earlier a part of the Indian Contract Act, 1872. However, in 1930 it was felt that there is a need for a separate dedicated legislation and hence, a separate Act was carved out. Let us examine some of the key facets of this Act.

Goods
The pivot of the Act is the definition of the term “goods”. If a particular property cannot be termed as goods then the Act does not apply to the same. This definition is also relevant since certain other Acts also refer to this definition, since what constitutes goods is often relevant for several issues.

Goods are defined under the Act to mean every kind of movable property. It includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. However, actionable claims and money are not goods. Thus, the definition is very wide to include all types of movable property other than what is expressly excluded. According to the General Clauses Act, 1897, things attached to or forming part of the land are treated as immovable property. However, the Sale of Goods Act states if they have been agreed to be severed before or under the Contract of sale, then they become goods. Since the definition revolves around movable property it also becomes essential to understand what constitutes movable and what is immovable property. Sale of immovable property is governed by the Transfer of Property Act, 1882 and this Act applies to the sale of movable property.

The following three landmark decisions of the Supreme Court dealing with what is immovable property are very relevant:

(A) T he 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.

(B) Further, the decision of the Supreme Court in the case of Duncan’s Industries Limited 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 the Sirpur’s case and held that whether a 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 fertilizer 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. It was held that it could be said that the plant and machinery could have been transferred by delivery of possession on any date prior to the date of conveyance of the title to the land.

(C) In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Court 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.

The Central Board of Excise and Customs has, under the Central Excise Act 1944, after considering several Supreme Court decisions (including those mentioned above), clarified 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.

In the context of sales tax, the Supreme Court in the case of Tata Consultancy Services Ltd vs. State of AP (2005) 1 SCC 308, has held that software, even though intangible, is goods.

Shares and stock are expressly included in the definition of goods. The Companies Act also states that shares in a company shall be movable property. However, a debenture does not constitute movable property as held by the Supreme Court in the case of RD Goyal vs. Reliance Industries Ltd, (2003) 1 SCC 81.

Actionable claims are governed by section 130 of the Transfer of Property Act and are hence, outside the purview of this Act.

The goods may be existing or future goods which would come into the seller’s possession. If however, the goods are specific, i.e., are identified when the agreement is made and they perish thereafter, the agreement becomes void. However, they must perish due to no fault of the seller or buyer.

Sale
The next vital cog in the wheel is the definition of “sale”. Section 4 of the Act defines a contract of sale of goods as:

(a) A contract. Thus, all the elements of a valid contract as laid down in the Indian Contract Act, 1872 must be fulfilled.
(b) In which there is a seller, i.e., a person who sells or agrees to sell goods;
(b) H e transfers or agrees to transfer property in goods;
(c) The transfer is to a buyer, i.e., a person who sells or agrees to buy goods; and
(d) The transfer is for a price.

Thus, the pre-requisite of a sale is the transfer of movable property being goods. This view has also been expressed in State of Madras vs. Gannon Dunkerley & Co., (1959) SCR 379 – “sale of goods …. is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.” Halsbury defines a sale as “the transfer by mutual consent of the ownership of a thing from one person to another for a money price.”

The contract may be absolute or conditional. If property in goods is transferred from seller to buyer, then such a contract becomes a sale. However, if property is transferred in future or is conditional, then such a contract is termed as an agreement to sell. Eventually, when the conditions are fulfilled or the time period elapses, an agreement to sell becomes a sale. The principles of a sale have been succinctly summed up by the Apex Court in the case of State of Tamil Nadu vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648 as follows:

“…in order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title to the goods and that such agreement should be supported by money consideration and as a result of the transactions the goods. article or the property must actually pass to the purchaser. It is settled law that the expression “sale” under the Sales Tax Act has to be understood with reference to the definition of “sale of goods” under the Sale of Goods Act. But if the title of the goods passes without any contract between the parties, express or implied, there is no sale. Similarly if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not a sale in the strict sense of the law..”

The most vital part of the definition is that the title of goods must pass from the seller to the buyer.

PRICE
A sale of goods under the Act is always for a price, i.e., for a money consideration. A price is an essential element of a contract of sale of goods. If there is no price there is no contract. This is also an essential ingredient under the Contract Law. Hence, a sale of goods as understood under the Act cannot be for a barter or for any non- monetary consideration. Such a transaction would be an exchange and not a sale. This is a very important fundamental distinction which is relevant even for several fiscal statutes. The Transfer of Property Act defines an exchange on the other hand, to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act, CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC); CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC); CIT vs. B. M. Kharwar 72 ITR 603 (SC). Recently, the Bombay High Court in Bharat Bijlee Ltd. [TS-270-HC-2014(BOM)], distinguished a slump exchange from a slump sale and held that a slump exchange does not entail capital gains tax.

The price may be either fixed by the contract or left to the negotiation of the parties or may be fixed as agreed upon. However, in the absence of the above, the buyer must pay a reasonable price. What is a reasonable price depends upon the facts of each case. In some cases, the price determination is to be decided by the valuation of a third party. If such third party cannot fix the value, then agreement is avoided.

TRANSFER OF PROPERTY IN GOODS
When the property in the goods is transferred from the seller to the buyer is the most important effect of a contract for sale of goods.

Unascertained Goods: If the goods are unascertained, then property passes only when they are ascertained. E.g., the seller agrees to sell 50 kgs. of rice but at that time he has 250 kgs. in his warehouse. No property passes to buyer until the seller identifies and appropriates 50 kgs. of rice towards this agreement. Thus, there must be a clear-cut identification as to which goods out of the generic mass are towards satisfaction of the contract.

Where there is a contract for the sale of unascertained / future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract the property in the goods passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made. Thus, an appropriation must be made by the seller or the buyer and only then would the property in such unascertained goods pass to the buyer. Further, the appropriation of unascertained goods must be unconditional. Till property passes there is no sale.

E.g., in Emperor vs. Kuverji Kavasji, 1941 43 BLR 95, a merchant agreed to sell 20 litres of liquor out of a cask containing 100 litres. It was held that until the 20 litres are separated or bottled, the property does not pass to the buyer.

The Supreme Court in the cases of New India Sugar Mills Ltd vs. CST, 1963 AIR 1207, CST vs. Husenali Adamji & Co., 1959 AIR 887, M/s. Carona Sahu Ltd vs. State, 1966 AIR SC 1153 has held that in case of sale of unascertained goods, no property is transferred to the buyer unless and until the goods are ascertained and there is unconditional appropriation of the goods in a deliverable state.

Ascertained Goods: However, if they are ascertained / specific, then property passes in accordance with the contract, i.e., when the parties want it to pass. In this respect, section 2(2) of the Act is also relevant. It defines the term delivery to mean a “voluntary transfer of possession from one person to another”. Thus, delivery of goods is one of the ways in which possession can be transferred.

Section 30 of the Act provides that a seller need not have actual physical possession of the goods sold. It is enough that he has control over the goods by making over a document of title to the goods. Possession of documents of title enable the holder of document to transfer the goods. Section 30 does not require the seller to be in actual physical possession of goods – Pramatha Nath Talukdar vs. Maharaja P M Tagore, AIR 1966 Cal 405. This view has also been laid down in Halsbury’s Laws of England, 3rd Edition Vol. 34 @ p.84 and in the English case of Nicholson vs. Harper, (1895) 2 Ch. D. 415. Unless a different intention arises from the contract, the following three rules have been laid down under the Act to determine the intention of the parties as to when the property passes to the buyer:

(a)    When contract is for sale of specific goods in a deliverable state, property passes to buyer when contract is made, irrespective of whether time of payment or delivery is postponed.
(b)    However, when under a contract for specific goods and the seller has to do something to the goods for putting them in a deliverable state, then property passes only when such thing is done and the buyer is given notice of the same. E.g., a 2nd hand car dealer agrees to sell a car but it needs certain repairs before it can run properly. Property passes only once the repairs are done and the buyer is intimated about the same.
(c)    When contract is for sale of specific goods in a deliverable state but seller has to weigh, measure, test or do some act for ascertaining the price, the property passes to buyer when such act is done and buyer is given notice of the same. E.g., a seller sells cotton at a price per ton. To ascertain the price, he needs to weigh the cotton. Till such act is done, property does not pass.

It is essential to determine when property passes because if there is any damage or loss to the goods then the same would be borne by the seller in cases where property has not yet passed to the buyer. The Act provides that unless the contract provides otherwise, the goods remain at the seller’s risk till property passes to the buyer. However, where the property has passed risk passes to the buyer even if the delivery has not yet been made. E.g., a seller sells a certain vase to a buyer but both payment and delivery are postponed till the next day. Before delivery can be effected, the vase breaks due to mishandling. The loss is to the buyer’s account since property of specific goods in a deliverable state under an unconditional contract passes immediately even if delivery is postponed. But when delivery is delayed due to the fault of any one party, the risk of loss is to his account.

NEMO DAT QUAD NON HABET
‘No one can give a better title than what he himself has’ is the meaning of the above Latin maxim. Thus, a sale by a person who is not the legal owner of the goods does not give any title to the buyer. The actual owner can recover possession of the goods from the buyer without compensating him. However, if the seller has authority of the owner; he is an authorised mercantile agent (e.g., broker, factor); he is a joint owner, etc., then he can give a good title to the buyer. Whether the buyer can raise a plea of being a bona fide purchaser without notice is a matter which depends upon the facts of each case – Sumitra Debi Jalan vs. Satya Narayan Prahladka, AIR 1965 Cal 355.

CONDITIONS AND WARRANTIES
A contract of sale may come with conditions and warranties as to the quality, fitness, title, etc. of the goods. A condition is a stipulation essential to the main purpose of the contract. If breached, the contract may be repudiated. A warranty on the other hand is collateral to the main purpose and a breach of the same gives rise to a claim for damages but not a right to repudiate the contract. Thus, sale of soft drinks with pesticides is a breach of a condition, i.e., it is fit for human consumption. However, sale of soft drinks in glass bottles instead of plastic bottles, as contracted, is a breach of a warranty. The former entitles the buyer to cancel the contract while under the latter the buyer can sue for damages. It may not be always a cut and dried situation as to whether a stipulation is a condition or a warranty and the determination of the same depends upon the contract as a whole. Even a Share Purchase Agreement (SPA) carries conditions and warranties from the seller as to the shares. Breach of material conditions can lead to cancellation of the SPA.

CAVEAT EMPTOR; QUI IGNORARE NON DEBUIT QUOD JUS ALIENUM EMIT
Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another – buyer beware of what you buy for the seller has no obligation to caution you is the meaning of this maxim. Section16 of the Act lays down that subject to this Act and any other law in force, there is no implied condition or warranty as to the fitness or quality of the goods sold by a seller. This is a statutory recognition of the above maxim. The Supreme Court in Commissioner of Customs (Preventive) vs. M/s. Aafloat Textiles (I) P. Ltd. has explained the maxim as follows:

“….Caveat emptor means “Let the purchaser beware.” It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence.

21. “Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.” (See Wallis vs. Russell (1902) 21 R 585, 615).

22. “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication he represents such defects not to exist.” (See William R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d. Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.

23. Caveat emptor, qui ignorare non debuit quod jus alienum emit. A maxim meaning “Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another. Hob. 99; Broom; Co., Litl. 102 a: 3 Taunt. 439.

24. As the maxim applies, with certain specific restrictions, not only to the quality of, but also to the title to, land which is sold, the purchaser is generally bound to view the land and to enquire after and inspect the title- deeds; at his peril if he does not.

25. Upon a sale of goods the general rule with regard to their nature or quality is caveat emptor, so that in the absence of fraud, the buyer has no remedy against the seller for any defect in the goods not covered by some condition or warranty, expressed or implied. It is beyond all doubt that, by the general rules of law there is no warranty of quality arising from the bare contract of sale of goods, and that where there has been no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in the goods, unless there are circumstances beyond the mere fact of sale from which a warranty may be implied. (Bottomley vs. Bannister, [1932] 1 KB 458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers) 14

26. No one ought in ignorance to buy that which is the right of another. The buyer according to the maxim has to be cautious, as the risk is his and not that of the seller.

27. Whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he made enquiry and took requisite precautions to find out about the genuineness of the SIL* which he was purchasing. If he has not done that consequences have to follow.”

* SIL = Special Import Licence

However, the Law also provides for the following statutory exceptions to this Rule:

(a) Where the buyer makes known to the seller that he requires goods for a particular purpose, then goods must meet such purpose. In Eternit Everest Ltd. vs. Abraham, AIR 2003 Ker 273, it was held that corrugated asbestos sheets are mainly used for roofing of buildings for protecting the building from sun and rain and it is not being used for a variety of purposes. The leakproof of the asbestos sheet is the essential quality of the sheets and only if it is leakproof, it can be said to be fit for the purpose for which it is purchased.

(b) Where goods are bought by description from a seller who deals in goods of that description, then there is an implied condition as to the merchantable quality of the goods. In Agha Mirza Nasarali Khoyee & Co. vs. Gordon Woodroffe & Co., AIR 1937 Mad 40 it was held that goods are treated as being of merchantable quality if they are of such quality that any defects which a buyer of ordinary diligence and experience would have detected by due diligence in the use of all ordinary and usual means (what is due diligence, depending upon the circumstances).

CONCLUSION
This is a very important mercantile Law which is relevant for commercial matters. It is essential for businesses to keep in mind the provisions of this Act while entering into contracts for sale and purchase of goods.

shailesh.kwebmaker

REITs: Providing Liquidity to Illiquid Assets!

Synopsis
When a cheque issued to a creditor is dishonoured, where does the creditor file a suit against the debtor – in the Court which has jurisdiction over the creditor or in a Court which has jurisdiction over the debtor? This one issue has been oscillating back and forth with several Supreme Court decisions giving their view one way or the other. There now seems to be some finality on the matter …. … … … or is it?

Introduction
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 six years have passed since that Report and this figure is expected to have leapfrogged! The Magistrate 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.

Section138 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. 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 bounces, should the suit 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 has recently seen several Supreme Court and High Court decisions leading to a see-saw, one way and the other. A slew of decisions have come out strongly in favour of the accused unlike the earlier decisions which were procomplainant. Let us look at the history and the current position on this very important aspect which has made several creditors and banks jittery.

The Law: Section 138 of the Negotiable Instruments Act
Before we plunge into the issue on hand, let us pause for a moment and examine the impugned section. Section138 of the Act 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 accounts, then such person shall be deemed to have committed an offence. The penalty for this offence is imprisonment for a term which may be extended to two years and/or with a fine which may extend to twice the amount of the cheque. In order to invoke the provisions of section138, the following three steps are necessary:

(a) 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;

(b) 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 account of money by giving a notice in writing, to the drawer of the cheque; and

(c) 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 30 days from the date from which the cause of action arises (i.e., the notice period).

Where to file the case – Bhaskaran sets the stage!
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 compliant u/s. 138 of the Act:

(1) D rawing 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, and
(5) 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.

To continue our example above, the creditor could file his case against the Ranchi Company before the Magistrate Court in Mumbai (or Ranchi) and save himself a lot of trouble and effort, not to mention money! Suppose further, that the creditor has operations in all major cities and also bank accounts in all these cities. He deposits the cheque in his Ahmedabad branch which bounces. He issues the Notice from his Hyderabad office. As per Bhaskaran’s decision, not only can he file the suit in Mumbai or Ranchi but even from Ahmedabad and Hyderabad. Thus, the payee has full freedom to decide where to sue the drawer from. At times, this can also be used as a tool for harassment and as a pressure tactic.

Subsequent Cases Queer the Pitch
There have been several subsequent decisions but two noteworthy cases stand out. In Harman Electronics P. Ltd. vs. National Panasonic India (2009) 1 SCC 720, another two-member Bench held that the correct Court would be the one where the Notice for the bounced cheque was received and not where the Notice was sent. It also observed that section138 is being rampantly misused for territorial jurisdiction.

A subsequent three-member Bench in Shri Ishar Alloy Steels vs. Jayaswals Neco Ltd. (2001) 3 SCC 609 clarified that to be able to file a case u/s. 138 the cheque must be presented within six months on the bank of the drawer and not to the bank of the payer. The place where the complainant presented the cheque would not be relevant. Thus, the decisions of Harman and Ishar Alloy suggest that the Court of the accused should be the place where the suit should be filed. To continue our example above, the creditor could file his case against the Ranchi Company before the Jharkhand Courts.

Interestingly in Nishant Aggarwal vs. Kailash Kumar Sharma (2013) 10 SCC 72 the Supreme Court held that the ratio laid down by these two decisions in the case of Harman and Ishar Alloy did not dilute the principle stated in Bhaskaran’s case. This view was followed by the Supreme

Court in FIL Industries Ltd. vs. Imtiyaz Ahmad Bhat (2014) 2 SCC 266 and in Escorts Ltd. vs. Rama Mukherjee (2014) 2 SCC 255 all of which followed Bhaskaran.

Dashrath Rathod’s case – Cat amongst the Pigeons?
A recent decision of the three-member Supreme Court decision in the case of Dashrath Rupsingh Rathod vs. State of Maharashtra, Cr. A. No. 2287 /2009 Order dated 1st August, 2014 has led to debtors across the Country celebrating and creditors panicking. The decision of the Apex Court was as follows:

(a) T he offence contemplated u/s. 138 stands committed on the dishonour of the cheque, and accordingly the Magistrate at the place where this occurs is ordinarily where the Complaint must be filed, entertained and tried. The place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank, is located. The law should not be warped for commercial exigencies.

(b) T he place of the issuance or delivery of the statutory notice or where the Complainant chooses to present the cheque for encashment by his bank are not relevant for purposes of territorial jurisdiction of the complaints.

(c) It is also now manifest that traders and businessmen have become reckless and incautious in extending credit where they would heretofore have been ex- tremely hesitant, solely because of the availability of redress by way of criminal proceedings.

(d) Every magistrate is inundated with prosecutions u/s. 138 NI act, so much so that the burden is becoming unbearable and detrimental to the disposal of other equally pressing litigation.

(e) Courts are not required to twist the law to give relief to incautious or impetuous persons and hence, the territorial jurisdiction is restricted to the Court within whose local jurisdiction the offence was committed, which in the present context is where the cheque is dishonoured by the bank on which it is drawn.

(f) Bhaskaran’s case permitting prosecution at any one of the five places has resulted in hardship and inconvenience to the accused. Thus, it overruled Bhaskaran’s case and all subsequent decisions which followed it. Consequently, it endorsed the views expressed in the cases of harman and Ishar alloy.

(g) Courts must avoid an interpretation which can be used as an instrument of oppression by the complainant.

The Supreme Court also observed as follows in respect to the problem this order would create for Creditors:

(a) It is always open to the creditor to insist that the cheques in question be made payable at a place of the creditor’s convenience.

(b) the relief introduced by section 138 of the act is in ad- dition to the contemplations in the Indian Penal Code. It is still open to such a payee recipient of a dishon- oured cheque to lodge a First Information report (FLR) with the Police or file a Complaint directly before the concerned magistrate. If the payee succeeds in establishing that the inducement for accepting a cheque which subsequently bounced had occurred where he resides or ordinarily transacts business, he will not have to suffer the travails of journeying to the place where the cheque has been dishonoured.

Coming back to our example, the case must now deffnitely be filed before the Courts in Ranchi. Thus, it is the creditor who now would have to travel to ranchi every time there is a hearing and appoint local lawyers. this substantially pushes up the cost of litigation.

Decision Retrospective or Prospective?
Is this decision retrospective or prospective? the Supreme Court in Dashrath’s case held that this decision applied retrospectively and not just to complaints filed after the date of the Order!

The Court however held that this decision would not apply in those pending cases where the accused has been summoned to give evidence u/s. 145(2) of the act. Section 145(2) requires that the complainant has given evidence under an Affidavit and he has been summoned and examined.

All other cases where evidence recording has not commenced would be bound by this order and shall be returned to the proper jurisdictional Court in accordance with the Order laid down by the Court. If they are refiled within 30 days of their return then they shall be deemed to have been filed in time else they would be treated as being filed late. This decision would cause a series of transfer of cases in Courts across India.

Section 145(2) – a gaTeway? Considering the gateway given u/s.145(2), a series of cases have come up before the Courts as to whether they are exempt from the decision of Dashrath’s case. Some of the important principles laid down by the Bombay high Court in this respect are as follows:

(a) Peter David Pinto vs. Dinesh Ranawat, Cr. WP No. 4421 /2013 dated 9th September 2014 – Mere filing of an affidavit cannot take the case out of the princi- ples laid down by the Supreme Court. Section 145(2) would apply only when the complainant has been ex- amined/cross-examined.

(b) Suresh K. K. vs. Mansingaram, Cr. WP No. 923/2013 dated 9th September, 2014 and Sanjay Ramchandra Shrikande, Cr. WP No. 3619/2013 dated 19th Septem- ber, 2014 – even in a case which has travelled beyond section 145(2), the gateway provided by Dashrath’s case would not be available where the challenge of territorial jurisdiction has been given before the Supreme Court Order. Thus, the Supreme Court’s gateway is only applicable to cases where an objection to jurisdiction has been raised on the basis of the judgment. the Bombay high Court held that the Supreme Court order was retrospective in nature. Thus, Courts are loath to allow the gateway very easily.

Back to square one?
Can the decision in Dashrath’s case be distinguished in those cases where the cheque has been issued at par? thus, can it be said that for all cheques which are pay- able at par, the place where the cheques are deposited would have jurisdiction? this was the issue before the Bombay high Court in the case of Ramanbhai Mathurbhai Patel vs. State of Maharashtra, Cr. WP No. 2362/2014 dated 25th August, 2014. the Bombay high Court was faced with a case where “at par cheques” drawn on an ahmedabad Branch were dishonoured. They were deposited at a branch in mumbai. The Court held that by issuing cheques payable at all branches, the drawer of the cheques had given an option to the banker of payee to get the cheques cleared from the nearest available branch of bank of the drawer. It, therefore, held that the cheques were dishonoured within the territorial jurisdiction of the Court were they bounced. the Bombay high Court took this view based on its interpretation of Dashrath’s case.

It may be noted that the delhi high Court in similar facts in GVPR Engineers Ltd. vs. A. K. Tiwari, Cr. MC 3689/2009 dated 31st January, 2011 has held that the mere fact that a cheque is payable does not confer territorial jurisdiction on the place where the cheque is dishonoured. this decision was not considered by the Bombay high Court.

Stay
The Supreme Court vide its order dated 16th September, 2014 in SLP (Crl.) No. 7251/2014 has granted an interim stay to the Bombay High Court’s Order in Raman-bhai Mathurbhai Patel vs. State of Maharashtra. A final decision of the Supreme Court on this issue of cheques payable at par is expected soon.

Conclusion
One hopes that a judicial see-saw of this type where the complainants are in the dark over where to file suits is resolved soon. A reading of Dashrath’s decision shows that the question of cheques “payable at par” was not an issue before the apex Court. Since a majority of cheques are payable at par, based on this Bombay high Court decision, the suit could be filed at the place where they were deposited. the view endorsed by the Bombay high Court merits consideration considering centralised processing and clearing systems/electronic fund transfers. In today’s day and age the cheque does not physically travel to the drawer’s branch. In fact, even within a bank after centralised processing, it is the centralised unit which clears all cheques without physically receiving a cheque. One would have to wait and watch how the Supreme Court deals with these interesting arguments while finally deciding the issue!

shailesh.kwebmaker

Sexual Harassment Act-II

Synopsis

With the increasing number in women employment, their security is of paramount importance. The codification of the Sexual Harassment Act – II (‘The Act’) is a much-awaited development and a significant step towards creating awareness on the issue of workplace sexual harassment and ensuring women a safe and healthy work environment.

The author in this article has explained the key provisions of the Act, like applicability for employers to constitute an Internal Complaints Committee (ICC) to address sexual harassment complaints made by women workers, applicability of the Legal Compliance Committee where the ICC is not required, the manner in which the inquiry process is to be carried out by the ICC, etc.

Internal Complaints Committee

Every employer of a workplace, employing 10 or more workers must constitute an Internal Complaints Committee (ICC) to which aggrieved women employees can complain. Thus, if a workplace has less than 10 workers then it need not have an ICC. Note that it refers to 10 workers not 10 female workers. Hence, even if only 1 employee is a lady and the other 9 are males, an ICC is required. Further, the reference is to “workers” and not “employees”. The term workers has not been defined under the Act but one may presume it to be at par with the term “employee”. The Act is silent as to what happens when a workplace employs no women.

The constitution of the ICC should be as follows:

(a) A workplace must have an ICC for each office if the offices/administrative units are located at different places or at a divisional level.

(b) The ICC must have a minimum of 4 members of which at least half should be women.

• The Presiding Officer must always be a women employed at a Senior Level at the workplace. Hence, she must always be an internal senior employee. In case there is no senior level women employee then she can be nominated from any other workplace belonging to the same employer.

What happens if the employer has only 1 workplace and that has only 1 female employee who is not a senior level employee? Who then would be the Presiding Officer? Take a case of an office which has a receptionist as its only lady employee. Would she be the Presiding Officer even though she may be a junior level employee?

• Minimum 2 employees preferably committed to the cause of women/experience in social work or who have legal knowledge. Thus, these 2 members could be male or female.

• One external member from an NGO committed to the cause of women/familiar with issues relating to sexual harassment. Such person must have an expertise on issues relating to sexual harassment and may include a social worker with minimum 5 years’ experience with these issues or a person familiar with labour, service, civil or criminal law. Several organisations have nominated a Lady Lawyer or a Lady NGO worker with experience in this field. This person must always be an external person, i.e., not employed by the workplace. She could be a Consultant/Lawyer to the organisation also but not on its payroll.

• The employee members of the ICC should be replaced by new faces every 3 years.

Local Complaints Committee

For every District, a District Officer would be appointed under the Act. The District Magistrate/ Collector/Deputy Collector could act as such District Officer. Such District Officer would constitute a Local Complaints Committee (LCC) under the Act. The LCC would act as the redressal forum for all organisations not required to constitute an ICC, e.g., those which have less than 10 workers.

Complaint by Aggrieved Woman

Any aggrieved woman can lodge a written complaint of sexual harassment at a workplace with the ICC or the LCC as the case may be. The complaint must be lodged within 3 months from the incident or within 3 months from the last incident in case of a series of incidents. Hence, a stop gap has been provided for lodging the complaint. The Committee can provide a further 3 months’ extension for special cases. The complaint must be filed in 6 copies along with supporting documents and details of the witnesses, if any. The woman may chose to file a complaint under the IPC or any such Law with a Police Station. The Act does not take away this right of a lady.

The first response of the ICC/LCC before initiating an inquiry can be to propose a settlement between the respondent and the aggrieved woman through a conciliation process. However, the offer for such settlement must come from the aggrieved woman alone. Further, a monetary settlement cannot be made as the basis for the conciliation. A settlement would conclude the inquiry process under the Act.

One question which begs attention is must the respondent be a male only? If one reads the Act and the Rules, the definition of the respondent is only a person against whom a complaint is lodged. However, at several places the Rules refer to the preposition “he” for the respondent which tends to suggest that it must be a male alone. But there is no conclusive answer to this question. A similar position exists under the IPC. Recently, the Bombay High Court has raised a question “Can a woman be accused of outraging the modesty of another woman ..?”

Inquiry Process

If a settlement has not been reached/proposed, the Committee would make a thorough inquiry into the complaint against the respondent in the following manner:

(a) Forward a copy of the complaint to the respondent within 7 working days.

(b) Respondent to file his reply within 10 working days of the receipt of complaint by him.

(c) Committee to make a detailed inquiry as per the principles of natural justice. The inquiry must consider all facets. At least 3 members, including the Presiding Officer of the Committee must be present. It must complete its inquiry within 90 days.

(d) Where the Committee feels that there is a prima facie case for a criminal complaint, then it shall forward the same to the police for action under the IPC. Section 354 of the IPC deals with punishment for assault on a woman with an intent to outrage her modesty.

(e) No lawyer can represent either party before the Committee.

(f) During the inquiry the Committee may recommend that the employer transfers the aggrieved women, grants her leave up to 3 months or grants her any other relief. Other relief may include recommendations on restraining the respondent from reporting on the work performance of the aggrieved woman or supervising her academic activity in the case of an educational institution. Thus, the idea is to prevent victimisation as a result of the complaint.

(g) Based on its inquiry, the Committee must arrive at a finding whether or not the respondent is guilty. Accordingly, in cases where they feel that the allegation has been proved, the Committee must recommend to the employer or the District Officer to take action for sexual misconduct. The actions prescribed include:

• Writing a written apology
• Warning/reprimand/censure
• Withholding of promotion/increments • Termination of Service
• Undergoing Counseling sessions
• Carrying out community service – this is probably the first time that we are seeing community service as a means of reprimand. This is very common in the USA.

The Committee may also recommend to deduct such sum from his remuneration to be paid to the aggrieved woman. While determining the sum they will consider the mental suffering of the woman, loss in her career due to the incident, medical expenses incurred on physical/psychiatric treatment; respondent’s financial status.

(h) The entire process from complaint to action, in- cluding the names and identity of the aggrieved woman, respondent, witnesses, are to be kept confidential from the public, press, media, etc. Even an RTI Query cannot be filed in respect of the same since the Act overrides the Right to Information Act, 2005. The penalty for making such information public is Rs. 5,000. However, justice meted out can be disclosed without revealing the names and identity of the aggrieved woman, respondent, witnesses, etc.

(i) Either party may prefer an Appeal against the Committee’s Order before the Appellate Authority notified under the Industrial Employment (Standing Orders) Act, 1946.

Annual Report by ICC

Every ICC must prepare an Annual Report on their committee’s functioning and submit the same to the employer and the District Officer. It must be prepared every calendar year and should include the following:

(a) Number of complaints received in that year

(b) Number of complaints disposed off during that
year

(d) Number of workshops/awareness programmes
organised

(e) Nature of action taken by the employer/District Officer.

Duties of Employer

Every employer has been given certain duties and obligations under the Act:

(a) provide a safe working environment at the workplace and safety from the persons coming into contact at the workplace;

(b) display at any prominent place in the workplace, the penal consequences of sexual harassments and the order constituting, the ICC;

(c) organise workshops and awareness programmes at regular intervals for sensitising the employees with the provisions of the Act and orientation programmes for the members of the ICC- this is an important role which employers can play. They must educate the employees as to what constitutes harassment and the consequences of the same. A standard operating policy or a manual would be very helpful and each and every employee (whether junior or senior) should be educated on the same. External help from Lawyers/NGOs may also be taken for this purpose. It would be useful to lay down illustrations of real life situations which may be construed as harassment. Some organisations are implementing etiquette/gender sensitisation workshops/role play situations. HR Heads have a very important role to play in this respect.

(d) provide necessary facilities to the ICC/LCC for dealing with the complaint and conducting an inquiry;

(e) assist in securing the attendance of the respondent and the witnesses before the Committee;

(f) make available such information to the Committee as it may require for a complaint;

(g) provide assistance to the woman if she so chooses to file a complaint in relation to the offence under the IPC;

(h) cause to initiate action, under the IPC against the perpetrator, or if the aggrieved woman so desires, where the perpetrator is not an em- ployee, in the workplace at which the incident of sexual harassment took place;

(i) treat sexual harassment as a misconduct under the service rules and initiate action for such misconduct;

(j) monitor the timely submission of the Annual Reports by the ICC and include in the same the number of case filed and their disposal. If no report is to be filed by an ICC then he must intimate this number to the District Officer.

Penalty on Employer

The employer would be penalised for his failing to comply with the provisions of the Act:

(a) If he does not constitute an ICC although re- quired to do so;

(b) Does not take action against a respondent on the basis of the recommendation of the ICC’s inquiry;

(c) Contravenes any provisions of the Act.

The first penalty is a fine of up to Rs. 50,000. For a second conviction of the same offence, he shall be liable to twice the punishment meted out during the first offence. Further, it could also lead to the cancellation of his trade licence/approval/registration required for carrying on his business. Thus, a repeat offence carries a very serious consequence.

Dwelling Place / House

The Act has one more interesting facet. It even applies to a dwelling place or a house. The definition of a workplace includes a dwelling place or a house. The employer is defined to include a person or a household who employs or benefits from the employment of a domestic worker. The worker could be for any time, for any nature of work, etc. Further, a domestic worker has been defined as a woman who is employed to do household work for remuneration (in cash/kind) whether directly or through a placement agency. She could be temporary or permanent, part-time or full-time but excludes any member of the employer’s family. Interestingly, an employee is defined to include one who works without remuneration but a domestic worker must be one who works for a remuneration. In relation to a house, an aggrieved woman must be one who is employed at such house. Thus, in case of a workplace (which is not a house), any lady can allege harassment whether or not she is an employee. However, in case of a dwelling house, she must be an employee of that house. Hence, there are two major differences between a house as compared to a workplace other than a house.

All the provisions discussed above would apply even to a dwelling place/house which means that if a house employs 10 or more domestic workers/ servants (male or female) then it would have to constitute an ICC headed by a senior level lady servant and include one external NGO worker/ lawyer. So, if a household has a maid servant and 9 other male servants, drivers, cooks, gardeners, etc., it would have to form an ICC. One wonders whether domestic workers would be in a position to head and handle such an ICC? Is it feasible to ask them to conduct an inquiry, prepare reports and follow principles of natural justice?

Where the ICC/LCC feels that there is a prima facie case of sexual harassment against a domestic worker, then it shall forward the same to the police for action under the IPC.

False Complaints

One fear of this Act is that it could be misused and could go way of section 498A of the IPC (anti-dowry law which has been misused in some cases). Harsh penal provisions have been laid down as a deterrent for false complaints. In case of a false/malicious complaint by a lady, the ICC/LCC can take action against such complainant. The punishment could be on the same lines as that on the respondent in case of a sexual harassment.

Conclusion

Let us hope that this Act achieves the true objectives for which it was enacted and does not end up becoming just another tick-the-box/compliance list. Men would be well advised to remember Shake- speare’s Henry IV, Part I: “The better part of Valour, is Discretion; in the which better part, I have saved my life”. Think before you act or repent in leisure.

shailesh.kwebmaker

Sexual Harassment Law-I

Synopsis

The Law for prevention of sexual harassment of women at workplace has now become an Act. Up until now it was in the form of Guidelines laid down by the Apex Court. The Act is very important since it applies to all organisations, public or private, small or big and even applies to houses in certain cases. What constitutes sexual harassment is also very widely worded. Business entities should choose to ignore this Law at their own peril! We will examine this Act through a two-part Feature.

Introduction
A major landmark was achieved when the Indian Government notified, on 9th December, 2013, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“the Act”). The Act’s preamble states that it is to provide protection against sexual harassment of women at the workplace and for the prevention and redressal of complaints relating to sexual harassment. The Constitution of India guarantees every citizen a right to life and dignity and freedom to practice any profession/business. These are fundamental rights which are available equally to men and women. A safe working environment for women is one such fundamental right. Gender equality includes protection from sexual harassment and right to work with dignity. This Act seeks to achieve the same. Recent infamous events in corporate India have highlighted the urgent need for a Legislation such as this.

The roots of this Act may be traced to the pathbreaking judgment of the Supreme Court in Vishaka vs. State of Rajasthan (1997) 6 SCC 241 which was followed up by an equally important decision in Medha Kotwal Lele vs. Union of India, (2013) 1 SCC 297. Inspite of clear directions to the Government by the Apex Court to pass a Law on this subject, the Act saw the light of the day 16 years after Vishaka’s case. Let us examine this important piece of Law which, as we will see, impacts not only workplaces but also some households.

Vishaka’s Case
Vishaka’s judgment, for the first time, dealt with the hitherto untouched subject to women’s safety at work. In an unusual judgment, in the absence of any enacted law, the 3 Member Bench took it upon themselves to frame Guidelines to prevent sexual harassment of women at workplaces. The Court held that these Guidelines should be strictly observed in all working places by treating them as the Law of the land under Article 141 of the Constitution. It further held that the Court’s Guidelines and norms would be binding and enforceable in law until suitable legislation is enacted to occupy the field.

Inspite of the Court’s clear directions, some States were not complying with Vishaka’s Directions. Hence, the Supreme Court in Medha Kotwal Lele’s case, again issued further directions. It held that the Guidelines should be implemented in its true spirit. The Court passed a speaking Order wherein it directed all Government Organisations, Bar Associations, Medical Clinics/Hospitals, Offices of Engineers/Architects, etc., which employed women, to implement the Guidelines. It also instructed the Medical Council, Council of Architecture, our ICAI, ICSI, and other statutory institutes to ensure that organisations, bodies, persons, affiliated with them follow the Vishaka Directions. Further, for any noncompliance with Vishaka’s Guidelines, the aggrieved persons should approach respective High Courts.

It is in the light of this judicial activism that the Act has been passed. Now that this Act has been passed, Vishaka’s Directions would no longer apply. Let us now examine the Act’s salient features.

Application
The Act applies to the whole of India. It applies to every workplace owned by an employer where an employee, who is a lady, is employed and who is sexually harassed. The meaning of each of these four terms is very crucial since it forms the heart of the Act. This Act provides for civil remedy for sexual harassment of a lady.

Section 354 of the Indian Penal Code, 1860 (IPC) provides punishment for a harassment which is criminal in nature, i.e., if it is an assault or criminal force on the woman with intent to outrage her modesty.

Workplace
The Act applies to harassment at the Workplace and hence, it is very important to understand what constitutes a workplace? The term is defined in an inclusive manner and Table-1, given below, enlists the inclusions referred to in the definition:

Employee
Next let us understand who is an employee under the Act. The persons covered under the definition of the term employee are given below in Table-2:

It may be noted that although there is a definition of the term employee, it is not necessary that the complainant lady should be an employee of the workplace where the incident occurred. She could be any lady who was harassed at that workplace as would be evident when we see the definition of the term “aggrieved woman” given below.

Aggrieved Woman
It is important to understand who is an aggrieved woman under the Act. In relation to a workplace, it means any woman of any age, whether employed or not, who alleges to have been sexually harassed by a respondent. A respondent is a person against whom a complaint is lodged. Thus, any lady who comes to a workplace (e.g., a client, a consultant, an auditor, a patient, a student, etc.,) could allege harassment at that workplace by a respondent working there. She need not be an employee of that workplace.

However, there is some disconnect when viewed along with the definition of the term workplace. Considering again the example of the auditor-auditee, in relation to an articled clerk who alleges harassment at the auditee’s workplace by the auditee’s employee, the aggrieved woman definition is wide enough to cover an auditor who has come into an organisation. However, the definition of the auditor’s workplace includes any workplace visited by his employee. The correct forum to complain should be the ICC of the auditee since that is the workplace where the alleged incident occurred. How can the auditor’s ICC have any control over an employee of the auditee? A better clarity on this very important issue is desirable.

Employer
The obligations under the Act are cast upon the Employer. In case of a private/NGO sector, it is defined to mean one responsible for the management, supervision and control of the workplace. The term management includes the person or the Board or the Committee responsible for the formation and administration of policies for such organisation. Thus, the Board of Directors in the case of a Company, Designated Partners in case of an LLP, Partners in case of a Firm, etc., would be treated as Employers.

Sexual Harassment This brings us to the all important question, what constitutes a sexual harassment under the Act? The term “sexual harassment” is defined in a very wide and all-encompassing manner. Several people who may be under an impression that a particular act of theirs cannot constitute harassment would be in for a rude shock. It is defined to include any one or more of the following unwelcome acts or behaviour, whether directly or by implication:

a) Physical contact and advances;
b) Demand or request for sexual favours;
c) Making sexually coloured remarks;
d) Showing pornography;
e) Any other unwelcome physical, verbal or nonverbal conduct of sexual nature.

While, for some of the above acts, it is quite apparent
that they constitute sexual harassment, it
is important to fully understand the meaning of
“making sexually
coloured remarks” and “any
other
unwelcome verbal or non-verbal conduct of sexual
nature”. Circulating
lewd text/WhatsApp messages
to female colleagues,, reading aloud vulgar jokes
to female colleagues, passing abusive remarks in
the presence of women, offensive screensavers on
laptops, commenting on women, staring, stalking,

etc., may all be
covered. Even something like asking
a lady colleague out for a drink may be covered
within this definition. The list cannot be exhaustive
and needs to be considered based on the facts and
circumstances, but one important parameter for an
act/behaviour to constitute harassment is that it
must be unwelcome.

In addition, the Act also states that one or more
of the following circumstances, if they occur or
are present in relation to or connected with any
act of sexual harassment, may amount to sexual
harassment:

• Implied/explicit promise of preferential or detrimental
treatment in her employment

• Implied/explicit threat of her employment status

• Interfering with her work

• Creating a hostile/offensive work environment
for her

• Humiliating treatment likely to affect her health/
safety

(…. to be continued)

shailesh.kwebmaker

Sale vs. Exchange

Synopsis

This Article explores the difference in law between the terms “sale” and “exchange” which are both a mode of transferring property. Various Supreme Court and Other decisions have analysed this difference. The difference also has a bearing on the tax treatment of a sale and an exchange. Recently, the issue has gained importance because of the question of taxation of a slump exchange as compared to a slump sale.

Introduction

“A Rose by Any Other Name Smells As Sweet”— Shakespeare, Romeo and Juliet

While Shakespeare may be right in several cases, when it comes to the transfer of property, there is a difference between ‘Sale’ and ‘Exchange’. Property, whether movable or immovable, can be transferred in a variety of ways, such as, sale, gift, lease, mortgage, exchange, etc. Each of these terms has a different meaning and are not synonyms for one another. What is a sale and what is an exchange has often been the subject-matter of discussion under Tax and other Laws since the consequences of the same vary. Recently, the issue has come into sharp focus because of various decisions under the Income-tax Act dealing with the concept of Slump Exchange. Let us examine the meaning associated with these terms in law.

Meaning of Sale The Transfer of Property Act, 1882 defines sale (in respect of immovable property) to mean a transfer of ownership in exchange for a price paid or promise 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 Sale of Goods Act, 1930 which deals with the law relating to sale of goods is also relevant. It defines a contract of sale to mean a contract whereby the seller transfers property in goods to the buyer for a price. Where under such a contract, the goods are transferred by the seller, then the contract is called a sale. Thus, price is an essential element under both the Acts. This Act defines the term price to mean money consideration for a sale of goods. Thus, the Sale of Goods Act is very specific in respect of the definition of ‘price’.

Meaning of Exchange An exchange on the other hand, is defined by the same Act to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. The definition of exchange covers both immovable property as well as novable property/goods. Thus, the absence of money is the hallmark of an exchange. A part of the consideration may be in the form of money but there must be something more which must be in kind. E.g., Mr. A lives on a 3 bedroom flat on the 1st floor of a building and he also owns a 2 bedroom flat on the 5th floor of the same building. His neighbour Mr. X lives in a 2 bedroom flat on the 1st floor of the same building. Mr. A and Mr. X agree to swap their 2 bedroom flats, by which Mr. A becomes the owner of both the flats on the 1st floor while Mr. X now owns a flat on the 5th floor. This is a transaction of exchange. In case the properties are of different values, then some money consideration may be paid to neutralise the exchange. However, the transaction yet remains one of an exchange – Fathe Singh vs. Prith Singh AIR 1930 All 426.

Difference As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. 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. That does not make the transaction one of an exchange. 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 and not for a Deed of Exchange.

The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act:

(a) CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC)

The Court explained the distinction between an exchange and a sale by an illustration of a person selling his business to a company in exchange for its shares and a person selling his business for money and using that money for subscribing to the shares of that company. The Court held,

“……….. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale,..”

(b) CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC)

This was also a case of a sale of business to a company in exchange for shares of that company. The board of directors of a company executed a deed styled “exchange deed” whereby the company transferred all the assets of its cinema house for a consideration in the shape of certain preference shares in a sugar company. The question was whether the transaction was a sale? The Supreme Court held:

“………..that in essence the transaction …….was one of exchange and there was no sale of the assets of the cinema house for any money consideration …………

Sale is a transfer of property in goods ………… for a money consideration. But in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word “barter”. The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter .The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.”

(c) CIT vs. B. M. Kharwar 72 ITR 603 (SC) ” Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange, and not of sale, ……. ”

These decisions have very clearly laid down that the difference between a sale and an exchange is that in a sale the price is always paid in money, whilst in an exchange it is always paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.

Each of the parties to an exchange are both a buyer and a seller of property and hence, each of them has the rights which a seller has and is subjected to the liabilities and obligations of a buyer. This is an unique feature of an exchange since a person plays a dual role of a seller as well as a buyer. The decision in the case of Kama Sahu vs. Krishna Sahu, 1954 AIR(Ori) 105 also throws light on this issue:

“…..It appears from this definition that a sale should always be for a price, but in the case of exchange the transfer of the ownership of one thing is not for any price paid or promised, but for transfer of another thing in return….. If in case a transfer of ownership of an immovable property is exchanged for money, then the transaction cannot be an exchange, but a sale. It being so, unless the properties of both parties are simultaneously transferred in favour of each other, the title to the property cannot pass in favour of the one when the other party does not execute any such document in favour of the other. Exchange can be effected either by one document or by different documents. The consideration for the one document executed in pursuance of an agreement for exchange is the execution of a document by the other party. Unless it is so done, the party who has taken the deed from the other party without himself executing any document in favour of that other party, cannot claim to have got a valid title to the property until and unless he executes a similar document transferring his interest in favour of that other party. …… In the case of an exchange, the intention of parties cannot but be that there should be a reciprocal transfer of two things at the same time and that until such a thing is done, the passing of title under the one document executed in pursuance of the contract, should always be postponed till after the execution of the another document by the other party…”

There cannot be an exchange if the parties to the transaction are not the same. In the case of Than Singh and Ors. vs. Nandu Kirpa Jat and Ors., 1978 AIR(P&H) 94, a Deed of Exchange was executed for two immovable properties between two persons. On the very same day, one of the persons to the Deed of Exchange executed a Sale Deed in respect of the property which she received under the Deed of Exchange. It was contended that the exchange was actually a sale. The Court considered the definition of the terms and held:

“….The deed in question fully complies with the requisites of exchange in terms of S. 118 of the Transfer of Property Act and it admits of no other interpretation except that of exchange. The subsequent transaction may be on the same day but it is not between the same parties. Hence it cannot be said that the deed in fact is a cloak on sale and is not an exchange…”

In Sardara Singh vs. Harbhajan Singh, 1974 AIR(P&H) 345, the Court held that Chapter III of the Transfer of Property Act deals with sales of immovable prop-erty, Chapter IV deals with mortgages of immovable property and charges, Chapter V deals with leases of immovable property, and Chapter VI deals with exchanges. Hence, the very scheme of the Act clearly shows that the sales, mortgages, leases and exchanges of the immovable property are dealt with on totally different footings and it is futile to urge that one takes colour from the other.

Tax Consequences of an Exchange
An exchange is a transfer u/s. 2(47) of the Income-tax Act. Hence, an exchange would give rise to capital gains in the hands of the transferor. If the property is immovable property then the provisions of section 50C / section 43CA of deemed sale consideration would also apply. The transferor would be taxed with reference to the fair market value of the property received by him in exchange for the property given up by him. Thus, it becomes important to arrive at a valuation of the property received as well as the property transferred. Unlike in the case of a sale, where the full value of consideration is to be taxed (except in case of deeming fictions, such as, section 50C) , in the case of an exchange one taxes the fair market value of the property received in exchange. This is a very important distinction between the two.

Stamp Duty is payable on an Deed of Exchange. The higher of the values of the two properties would form the basis for levying stamp duty. The rate of stamp duty is the same as applicable on a conveyance.

Taxation of a Slump Exchange
While on the subject of Sale vs. Exchange, we may also consider the position of a ‘slump exchange’. In the case of a slump exchange, all the assets and li-abilities relating to an undertaking is transferred to a buyer company and in consideration for the same, the buyer company issues its equity shares to the seller entity. Section 2(42C) of the Income-tax Act, defines a slump sale as transfer of one or more undertaking for lump sum consideration without values being assigned to individual assets and liabilities in such a sale. The capital gain arising on a slump sale is computed as per the provisions of section 50B of the Income-tax Act.

However, how does one compute capital gains in the case of a slump exchange? As discussed above, a sale requires that the consideration be in the form of money, whereas in case of a slump exchange, the consideration is shares of the buyer company.

The Mumbai Tribunal in the case of Bharat Bijilee Ltd, TS-96-ITAT-2011 (Mum), has examined the issue of tax-ability of a slump exchange. It held that in order to constitute a “slump sale” u/s. 2(42C), the transfer must be as a result of a “sale” i.e., for a money consideration and not by way of an “Exchange”. In that case, it was held that as the undertaking was transferred in consideration of shares and bonds, it was a case of “exchange” and not of “sale” and so section 2(42C) and section 50B would not apply. As regards taxability u/ss. 45 and 48, it was held that the “capital asset” which was transferred was the “entire undertaking” and not individual assets and liabilities forming part of the undertaking. In the absence of a cost/date of acquisition of the undertaking, the computation and charging provisions of section 45 fail and the transaction cannot be assessed. Hence, there was no tax on the transaction.

A similar view has been taken in the recent decision of Zinger Investments (P.) Ltd (2013) 38 taxmann. com 388 (Hyd).

In Avaya Global Connect Ltd., 26 SOT 397(Mum), the Tribunal held that section 2(42C) only deals with a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale would not qualify as a ‘slump sale’. It was further held that if the transfer is as a result of a Court-approved Scheme of Arrangement under which no monetary consideration is paid, then it is not a sale of an undertaking by the assessee.

However, in Virtual Software and Training (P), (2008) 116 TTJ 920 (Delhi) , there was a transfer of an undertaking as a going concern in consideration for an issue of equity shares of the buyer company. The Delhi Tribunal held that such a transaction would also be covered under the definition of slump sale under the Income-tax Act. Even if the trans-action did not constitute a sale under the Sale of Goods Act or Transfer of Property Act, it would still constitute a transfer u/s. 2(47) of the Income-tax Act.

The Delhi High Court in the case of SREI Infrastructure Finance Ltd, TS-237-HC-2012 (Del) had an occasion to consider a case where a sale of an undertaking was carried out by way of a Court-approved Scheme of Arrangement for consideration in cash. The Court held that the definition of slump sale was wide enough to cover sales which took place under Court Schemes also. It may be noted that this was not a case of a slump exchange but was actually a sale by virtue of a Court Scheme.

Conclusion

The way in which a transaction is structured and its documentation drafted would determine its tax and other consequences. Unintended consequences could follow if proper care is not taken while structuring and drafting.

Exercise of due care and caution is required and we need to remember that sale and exchange are as apart as chalk and cheese and never the twain shall meet!

shailesh.kwebmaker

Development Agrement

Introduction A popular mode of developing property, especially in Mumbai, is by way of an Agreement granting Development Rights, popularly known as ‘Development Agreement’ or a ‘DA’. Instead of the land-owner executing a conveyance in favour of the builder, he enters into a DA with a developer. Thus, the landowner remains the owner of the land but he gives permission to the developer to enter upon the land and develop it. Since this is a very important way of doing business in the real estate sector, we must familiarise ourselves with this instrument.

Meaning
In the case of a DA, the owner of the land grants development rights to a builder/developer. The roles and responsibilities of the developer include the following:

(a) To obtain the necessary permissions and to be responsible for the concept, design and planning of the project.

(b) To appoint architects, engineers, various contractors and other professional personnel required for the project, and be responsible for the control, management and co-ordination of the project.

(d) To market and sell the flats/offices.

(e) To form a society/association of flat purchasers.

(f) Generally to be responsible for the construction management, contract management, material management and overall management and supervision of the project.

Along with a DA, the owner also executes a Power of Attorney in favour of the developer to enable him to carry out the above acts.

Consideration
The consideration of a DA may involve the following:

(a) Lump sum

In consideration for the above rights, the owner is given a lump sum consideration.

(b) Area sharing

In some cases, the owner decides to split the constructed area with the builder, instead of getting the monetary consideration. For example, a DA may provide that the owner would get 49% of the flats, free of cost, as a consideration for granting the DA and the builder would be entitled to the balance 51% of the flats. The builder may also agree to market the flats of the land-owner since the land-owner may not have the necessary infrastructure and expertise for the same. The entire revenue from the sale of the owner’s flats would belong to him.

(c) Revenue sharing For various reasons, the land-owner and the developer may agree that the consideration for grant of the development rights would not be a fixed sum of money. The consideration payable by the developer to the land-owner for the development rights may consist of two components as follows:

(i) certain minimum amount, plus

(ii) a percentage(s) of the revenue received from the development and sale of the property.

Thus, in this arrangement the land-owner takes on a major risk of the property not being sold or being delayed, but also has the potential of maximising his income. For instance, there may be a revenue sharing arrangement of 40: 60 between the owner and the developer. Hence, for every Rupee realised from the sale or lease of the flats/offices, the owner would earn 40% of the same.

(d) Profit sharing arrangement 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 is a partnership? The income-tax and stamp duty consequences on the owner and the developer would vary depending upon the nature of the arrangement. In this arrangement the land-owner takes on the maximum risk coupled with the potential of the maximum returns.

However, it must be noted that a mere profit sharing arrangement does not make it a partnership. Section 6 of the Indian Partnership Act is relevant for this purpose. 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 by itself make such persons partners. In the case of Vijaya Traders, 218 ITR 83 (Mad.), a 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 was similar to the Explanation 1 to section 6 of the Partnership Act and there were good reasons to think that the property assigned to the firm were 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.

At the same time, though mere sharing of profit does not automatically make it a partnership, profit sharing is an essential ingredient of partnership. In addition to profit sharing, 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. The Supreme Court decisions in the cases of K. D. Kamath & Co., 82 ITR 680 (SC) and M. P. Davis, 35 ITR 803 (SC) are relevant in this respect.

The Bombay High Court in the case of Sanjay Kanubhai Patel, 2004 (6) Bom C.R. 94 had an occasion to directly deal with the issue of whether a DA which provided for profit sharing was a partnership? 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 concerned parties 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.

Transfer of Property Act Section 53A of the Transfer of Property Act provides that where a person contracts to transfer for consideration any immovable property by writing and the transferee has, in part performance of the same contract, taken possession of the property or a part thereof, and he is willing to perform his part of the obligations under the contract, then even though a formal transfer has not yet been executed, it would be treated as a part performance of the contract and the transferor cannot claim any right in respect of the property. However, rights endowed by the contract can be enforced by the transferor. A DA is an example of a contract of part performance.

It is important to note that after the amendment by the Registration and Other Related Laws (Amendment) Act, 2001, any contract for part performance shall not be effective unless it is registered with the Sub-Registrar of Assurances. Earlier, section 53A provided that such contracts did not have to be registered.

Section 53A is a shield and not a sword and can be used only to defend the transferee’s possession — Bishwabani P. Ltd. v. Santosh Datta, (1980) 1 SCC 185. Further, it is important that the transferee (the developer in case of a DA) is willing to perform his part of the contract. If he fails to do so, then he cannot claim recourse u/s.53A — J. Wadhwa v. Chakraborty, (1989) 1 SCC 76.

Stamp duty on a DA

Very few States expressly provide for a levy of stamp duty on a development agreement. Maharashtra, Gujarat and Karnataka are a few instances of such States. Under the Bombay Stamp Act, 1958, any agreement under which a promoter, developer, etc., is given authority for constructing or developing a property or selling/transferring (in any manner whatsoever) any immovable property is exigible to stamp duty. The Stamp Acts of most States do not contain an express provision for levying stamp duty on a DA. They are generally stamped as agreements not otherwise provided for, e.g., Rs.100.

Till a few years back, such agreements in Maharashtra attracted duty under the provisions of Article 5(g-a) of Schedule-I @ 1% of the market value of the property. However, now the ad valorem rate of duty has been increased to rates applicable to a conveyance, e.g., 5% in Mumbai. Thus, as far as stamp duty is concerned now a DA is at par with a conveyance. The market value of the immovable property should be found out from the Stamp Duty Ready Reckoner.

When a power of attorney is given to a promoter or a developer for constructing or developing a property or selling/transferring (in any manner what-soever) any immovable property, it is chargeable with duty. If stamp duty has already been paid under Article 48(g) dealing with a power of attorney in respect of the same property, then stamp duty on a Development Agreement would only be Rs.100. Article 48 levies duty on different types of powers of attorney. A power of attorney, if authorising the holder to sell an immovable property or if given to a promoter/developer for constructing/developing or selling/transferring immovable property, attracts duty as on a conveyance on the fair market value of the property. Till a few years ago, this also attracted duty @ 1%. However, if duty is paid under Article 5(g-a) on the Development Agreement, then duty under Article 48 shall only be Rs.100.

Owner’s Taxation

The consideration received by the land owner would normally be taxable as capital gains in his hands. A variety of High Court and Tribunal decisions have dealt with this issue. The most prominent decision in this respect is the Bombay High Court’s decision in the case of Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom.) — which has laid down the conditions necessary to attract section 53A of the Transfer of Property Act and hence, be treated as a transfer for the owner: (1) there should be a contract for consideration; (2) it should be in writing; (3) it should be signed by the transferor; (4) it should pertain to immovable property; (5) the transferee should have taken possession of the property, and (6) the transferee should be ready and willing to perform his part of the contract. It further held that if under the Development Agreement a limited power of attorney is intended to be given to the developer and even if the actual power of attorney is not given, then the date of such Development Agreement would be relevant to decide the date of transfer u/s.2(47)(v) read with section 53A of the Transfer of Property Act. For this purpose, the date of the actual possession or the date on which substantial payments are made would not be relevant.

Other important decisions in this respect, include, Avtar Singh, 270 ITR 92 (MP); Zuari Estate Develop-ment & Investment Co. P. Ltd., 271 ITR 269 (Bom.) Asian Distributors Ltd., 119 Taxmann 171 (Mum.); ICI India Ltd., 80 ITD 58 (Cal.); Tej Pratap Singh, 127 ITD 303 (Delhi).

In view of the above decisions, it is very important to draft the DA very carefully and to properly structure the transaction regarding granting of licence, power of attorney and the possession of the property. In this connection, it may be noted that the Supreme Court in the case of Vimal Lalchand Mutha, 248 ITR 6 (SC) has held that interpretation of an agreement involves a question of law.

In Meera Somasekaran, (2010) 4 ITR (Trib) 271 (Chennai) and Arif Akhatar Hussain v. ITO, (ITAT- Mumbai) ITA No. 541/Mum./2010, it was held that section 50C would even apply to a development agreement. Thus, if the land is held as a capital asset by the owner, then section 50C would apply. It was held that the transfer of development rights amounts to a transfer of land or building and therefore section 50C is applicable, since u/s.2(47)(v) the giving of possession in part performance of a contract as per section 53A of the Transfer of Property Act is deemed to be a ‘transfer’. The fact that the assessee’s name stands in the property records is immaterial. Once the land-owner received the sale consideration and parted with possession of the property under the DA, section 53A of the Transfer of Property Act was attracted and hence, it was a transfer under the Income-tax Act.

One of the ancillary issues which arises is that whether Transferrable Development Rights (TDRs) arising by virtue of the Development Control Regulations for Greater Mumbai, 1991 or on account of society redevelopment is liable to tax? A spate of judgments, such as Jethalal D. Mehta v. DCIT, 2 SOT 422 (Mum.), have held that since TDRs qualifying for equivalent Floor Space Index (FSI) have no cost of acquisition and so sale thereof does not give rise to taxable capital gains. Other relevant decisions in this respect include, Maheshwar Prakash 2 CHS Ltd., 24 SOT 366 (Mum.), New Shailaja CHS Limited, (ITA No. 512/Mum./2007) (Mum.), Om Shanti Co-op. Hsg. Soc. Ltd., [ITA No. 2550/Mum./2008] (Mum.), Lotia Court Co-op. Hsg. Soc. Ltd., [ITA No. 5096/ Mum./2008] (Mum).

Auditor’s duty

The Auditor should enquire of the auditee, in case the auditee is dealing in property which is under a DA, whether the covenants of the DA, etc. have been duly complied. In case of any doubts, he may ask for a legal opinion. This is all the more relevant in case the client is a real estate developer. Non-compliance with this could have serious repercussions for the developer.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an Auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

shailesh.kwebmaker

Jointly Acquired Immovable Property

Synopsis

‘Joint tenancy’ and ‘tenancy in common’ are two apparently similar sounding but diametrically opposite modes of jointly owning immovable property. The Indian Law in this respect is not codified and is derived from English Law and decisions. This Article examines these concepts, their difference, their termination and their use in Hindu Law, Income-tax Act, Succession Law, etc.

Introduction

Immovable Property may be acquired singly or jointly, i.e., two or more persons together acquire the property. While joint owners are commonly referred to as co-owners, when the property is joint, then a question arises whether the purchasers are owning the property as Joint Tenants or as Tenants in Common? Both these terms may appear similar but in Law, there is a vast difference between the two. Depending upon how a property has been acquired the succession to the same would be determined. It may be noted that although the terms may indicate that this applies only to tenanted properties, they are also used for ownership properties. Hence, it becomes very important while acquiring a property that the document very clearly specifies the manner in which it is being jointly acquired. It is very interesting to note that inspite of this being a matter of such significance, neither the Transfer of Property Act, 1882 nor any other Indian enactment deals with these concepts. These are very popular under English Law and hence, we need to refer to English as well as Indian judgments to understand their essence. These concepts have been impliedly or expressly applied in various Laws. Let us examine some of the facets of these two important concepts in Property Law.

Joint Tenancy

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 coowner 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 coowner. For example, X, Y and Z are owning a building as joint tenants. Z dies. His undivided share passes on to X and Y. Joint Tenancy is generally resorted to in case of a house purchased by a husband and wife. Hence, after the death of the husband, the wife would become the sole owner, and not the heirs of the husband. This is very popular in England. Property owned by a Hindu coparcenary in which rights of family members pass by survivorship is an example of joint tenancy – Bahu Rani vs. Rajendra Bux Singh, AIR 1933 PC 72. In case of a Will, where property is bequeathed to two or more beneficiaries in an undefined share, then it may be treated as a joint tenancy.

Tenancy-in-Common

This 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 ‘tenantsin- common’.

Section 26 of the Income-tax Act provides that where property consisting of building and land appurtenant thereto is owned by two or more persons and their respective shares are definite and ascertainable, then the income under the head House Property shall not be taxed as if it were an AOP but in their individual hands in accordance with their respective shares. The Supreme Court in Indira Balkrishna, 39 ITR 546 (SC) has held that co-widows inheriting property from their husband in equal shares would be assessed u/s. 26. This section is a recognition of the concept of tenancy-in-common. However, for section 26 to apply, the shares must be fixed or clear. In Sh. Abdul Rahman, 12 ITR 302 (Lahore), it was held that due to a litigation it was impossible to determine the shares of co-owners and hence, the provisions of this section could not be applied.

Transfer of Property Act

Section 45 of the Act provides that where immoveable property is purchased two or more persons and the consideration for the same is paid out of a common fund, their share in the property is in the same ratio as their contributions to the funds. This however, is subject to a contract to the contrary. For instance, A and B’s share in common funds is in the ratio of 55:45 for buying a land. Their shares in the land would also be in the same ratio. If they contribute through separate funds then their share would be in the proportion of their funds. However, if there is no indication as to their share in the fund, then they shall be presumed to be equally interested in the property. Thus, if the shares in the funds are not known, then A and B would be presumed to hold the land equally.

However, this section does not yet fully address the issue as to whether the transferees buy as joint tenants or as tenants-in-common. In cases where the property has been acquired out of a common fund and the intention of the co-owners to own the property as joint tenancy, then it may be treated as one. In cases, where their shares in the fund are clear and demarcated, it may be treated as an acquisition by tenants in common.

What Prevails in India?

Unless a contrary intention appears from the Agreement, the Courts in India always lean in favour of tenancy in common and against joint tenancy. This is so whether the acquisition is by way of an Agreement or under a Will. The main clauses must make it very clear that the property is to be held as joint tenants or else the contrary would always be presumed – Mahomed Jusab Abdulla vs. Fatmabai Jusab Abdulla, 1947 BCI (O) 4 (Bom); Konijeti Venkayya vs. Thammana Peda Venkata Subbarao, 1955 AIR 1957 AP 619.

The Supreme Court in Boddu Venkatakrishna Rao vs. Boddu Satyavathi, 1968 SCR (2) 395 has held as follows in relation to a bequest under a Will to more than one beneficiary:

“The principle of joint tenancy appears to be unknown to Hindu law, except in the case of coparcenary between the members of an undivided family……………………..that there were indications in the will that the intention of the testatrix was that the foster children should take as joint tenants and that this was apparent from the clause in the will which provided that “the entire property should be in possession of both of them and that both of them should enjoy throughout their lifetime the said property and that after their death the children that may be born to them should enjoy the same ……

We do not think that from this one can spell out a joint tenancy which is unknown to Hindu law except as above stated. The testatrix did not expressly mention that on the death of one all the properties would pass to the other by right of survivorship. We have no doubt on a construction of the will that ‘the testatrix never intended the foster children to take the property as joint tenants. The foster children who became tenants in common partitioned the property in exercise of their right.”

The above position of HUF coparcenary property being joint tenancy property is subject to one important exception introduced by section 30 of the Hindu Succession Act, 1956. According to this section, any Hindu may dispose of by a Will his undivided interest in the coparcenary property. Under the uncodified Hindu Law, no karta/coparcener could dispose of his undivided share in the coparcenary property. His share passed by survivorship and not by succession (as is the case with all joint tenancies). Now, section 30 permits a coparcener to make a Will even for such joint property – Jayaram Govind Bhalerao vs. Jaywant Balkrishna Deshmukh 2008(3) Bom. CR. 585; CWT vs. Sampatrai Bhutoria & Sons, 137 ITR 868 (Cal). The Supreme Court in the case of Shyam Lal vs. Sanjeev Kumar (2009) 12 SCC 454, has held that:

“…In so far as the question whether under the custom governing the parties, a Will could be executed in respect of ancestral property is concerned, the same is no more res integra. ………in view of section 30 read with section 4 of the Hindu Succession Act, 1956 a male Hindu governed by Mitakshara system is not debarred from making a Will in respect of coparcenary/ancestral property….”

Even if there is anything contrary in the Act or any other custom, the interest in Mitakshara coparcenary property is capable of being disposed of by way of Will. The bar created by way of custom that the coparcenary property is not capable of being alienated by executing a will by one of the coparceners is taken away and rule of survivorship is finished to a limited extent. But the limitation continues to apply in the case of gift and other alienations which are inter vivos – Kartari Devi vs. Tota Ram, 1992(1) SLC 402 (HP).

After the 2005 Amendment to the Hindu Succession Act, even daughters who are coparceners can make a Will for their coparcenary property since they are now at par with sons.

The Indian Succession Act, 1925 states that where a legacy under a Will is given to two persons jointly and one of them dies before the person making the Will, then the other legatee takes the property in its entirety. But if the intention of the testator was to give them distinct shares (i.e., as tenants in common), then the surviving legatees gets only his share. These provisions even apply to a Will by a Hindu – Krishnadas Tulsidas vs. Dwarkadas aliandas, 1936 BCI (O) 47. Thus, unless the Will is very clear that the legatees must not have a determinate share, they will get their bequest as tenants in common.

Terminating Joint Tenancy

Joint tenancy can come to an end by any one of the following modes:
(a)   One of the co-owners selling his undivided share to an outsider;
(b) Mutual Agreement amongst all the co-owners;
(c)   Partition of joint tenancy
(d)   A manner of dealing/conduct by all co-owners which indicates an end of joint tenancy
(e)   Property vesting in the last surviving co-owner after which it becomes his sole property

Termination of joint tenancy by mutual agreement along with termination by conduct require special attention. Various old as well as very recent English decisions have dealt with this issue of termination of joint tenancy. Once joint tenancy comes to an end, the co-owners continue to hold the property as tenants in common. Some of the landmark English decisions in this respect are as follows:
(a) Williams vs. Hensman, 1861 EWHC Ch J87 / 70 ER 862 This is the most important decision which has laid down how joint tenancy can be severed. The High Court of Chancery held as follows:

“A joint-tenancy may be severed in three ways: in the first place, an act of any one of the persons interested operating upon his own share may create a severance as to that share. The right of each joint-tenant is a right by survivorship only in the event of no severance having taken place of the share which is claimed under the jus accrescendi. Each one is at liberty to dispose of his own interest in such manner as to sever it from the joint fund –losing, of course, at the same time, his own right of survivorship. Secondly, a joint-tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common………………for it must be borne in mind that a joint-tenancy is a right which any one of the joint-tenants may determine when he pleases; and, if all continue to deal on the footing of their interests not being joint, it would be most inequitable to treat it as a joint-tenancy when all the parties, whether in ignorance or not, have dealt with their interests as several.

I am of opinion, therefore, that the continuance of a joint-tenancy is not reconcilable with the covenant of indemnity to which I have referred; and I must, therefore, hold that all the shares were severed.”

(b) Rugh Burgess vs. Sophia Rawnsley, (1975) EWCA Civ 2
In this case, it was held that even if an agreement terminating joint tenancy was not in writing and was not specifically enforceable, yet it was sufficient to effect a severance. All that is required is a clear evidence of intention by both parties that the property should henceforth be held in common and not jointly.

(c)   Wallbank vs. Price (2007) EWHC 3001 (Ch)
The essence of a joint tenancy in equity is that each joint    tenant    holds    the    whole    of    the    beneficial    interest jointly and holds nothing separately. In this case a declaration by a mother that her daughters should receive her ‘half share’ either on the disposal of the property or at the discretion of the father, was
treated    as    sufficient    evidence    to    indicate    severance    of joint tenancy.

(d) Davis vs. Smith, (2011) EWCA Civ 1603
A married couple intended to serve on each other, a notice of severance of joint tenancy over their marital house, but did not. The Court held that, on carefully examining the correspondence between the parties’ solicitors, their conduct and actions, joint tenancy was severed through their course of dealings. The Court added that the conclusion of a split was inevitable and only appropriate considering the course of dealings between them. This is a very important decision since it held that even though there was no formal severance, tenancy-in-common can be created.

Termination of Tenancy in Common
Tenancy in Common can be terminated by any one of the co-owners buying out the shares of the other co-owners. Thus, after this the property becomes sole ownership. This is usually done by way of a Release Deed, under which the releasers release their share in favour of a co-owner, usually for some consideration.

The decision of the supreme Court in TN Aravinda Reddy, 120 IR 46(SC) dealt with a case of termination of a HUF’s joint tenancy property by way of a partition. By way of a partition deed, the HUF property was held by four brothers as tenants-in-common, with each having a 25% interest in the same. Subsequently, three brothers executed a release deed for their respective 25% share for a consideration in favour of the fourth brother, thereby making him the sole owner. The Court held that the acquisition of the shares by way of a release deed amounted to a purchase u/s. 54 of the Income-tax Act by the fourth brother.

In Maharashtra, a release deed attracts stamp duty as on a conveyance on the fair market value of the share released. However, if the property released is ancestral property and it is released in favour of certain defined relatives, then the stamp duty is only Rs. 200. Further, in case of a release of property without consideration, the provisions of section 56(2)(vii) of the Income-tax Act, must also be considered in all cases where the parties are not “relatives” within the meaning of the section. Conversely in cases where release is for consideration, capital gains tax incidence on the releaser must be kept in mind.

Tenancy in common can also be converted into joint tenancy by throwing such a property into the joint HUF hotchpotch after which date it would be treated as HUF property where no one member would have a determinate share. However, in such a case, the clubbing provisions u/s. 64(2) of the Income-tax Act should also be factored.

Conclusion
The Law in respect of jointly acquired immovable property is quite multi-faceted and complex. Since in India, it is entirely case law made, it becomes all the more unique. It would be advisable that while making an agreement for purchasing a property, making a Will, etc., the provisions relating to manner of joint acquisition is very clearly specified. If the intention is, for any reason, to acquire it as joint tenancy, then the wordings should be very clear.

shailesh.kwebmaker

Slum Redevelopment part II

Slum Rehabilitation Schemes

The
Slum Rehabilitation Authority (SRA) is empowered to prepare a Slum
Rehabilitation Scheme for areas within its purview. This would cover all
slums and hutment colonies within such area. The actual mechanics of
the Slum Rehabilitation Scheme are prescribed under the Development
Control Regulations of Greater Bombay, 1991 (‘DCR’) issued under the
Maharashtra Regional & Town Planning Act, 1956. Two types of Slum
Rehabilitation Schemes are permissible under the DCR and they are known
by the Regulations under which they are approved. These are:

33(10)
Scheme

In these schemes the slums are rehabilitated on the same site.
This is also known as an in-situ scheme. The salient features are as
follows:

Slum inhabitants who are on the electoral rolls of 1st January 1995 or before are covered for rehabilitation.

Actual inhabitants of the hutments are eligible for the rehabilitation
and the actual structure owner is not eligible even if his name appears
on the electoral rolls.

The DCR defines the term slums as
slums censed or declared and notified under the Act. 33(14) Scheme In
this scheme, the landowner is allowed to consume the existing Floor
Space Index (FSI) potential of the land, owned by him. The developer
constructs transit tenements out of a prescribed part of this additional
potential. The balance of the additional potential is allowed as free
sale component. This is also known as transit scheme.

The salient features of a transit scheme are as follows:

The FSI which can be exceeded for construction of transit camps is as
follows: Suburbs and extended suburbs — 2.5 Anup P. Shah Chartered
Accountant laws and Biness Difficult areas, such as Dharavi — 2.99
Island City (only for government or public sector plots) — 2.33

The normally permissible FSI on the plot may be used for the purposes
designated in the Development Plan prepared under the DCR.

The
additional FSI could be used for constructing transit camp
accommodations having which will be used for accommodating hutment
dwellers in transit on account of Slum Rehabilitation Scheme for 10
years on rent. After that period, the owner may use the tenements for
any purpose.

In the alternative, the additional FSI can also be used as specified in Table-A below:

Once the transit camps are handed over free of cost to the SRA, the
occupation certificate and water/electricity connection would be given
for the free-sale component.

Appendix IV to DCR

Appendix IV specifically
deals with Slum Rehabilitation Schemes. It applies to redevelopment/
construction of accommodation for hutment/ pavement dwellers through
owners/developers/ co-operative housing societies, such as MHADA, MIDC,
etc. The key features of this Appendix are summarised below:

Eligible hutment dwellers are entitled to, in exchange for their
structure, a free of cost residential tenement having a carpet area of
225 sq.ft. including balcony and toilet but excluding common areas.

At least 70% of the slum dwellers must agree to a Scheme for it to be approved by the SRA.

Provisions are made for slum dwellers who do not co-operate.

Tenements obtained under the Scheme are nontransferable (other than succession by heirs) for 10 years.

FSI ratio for sale component and rehab component is laid down.

The
ratio is as follows:

Suburbs and extended suburbs — the sale
component is equal to the rehab component

Difficult areas, such as
Dharavi — the sale component is 1.33 times the rehab component

Island
City — the sale component is 0.75 of the rehab component

The
maximum FSI which can be used on any slum site for the project shall be
2.5. If a higher FSI is sanctioned, then the excess over 2.5 would be
allowed as TDRs. TDRs can be used —(i) on any plot in the same ward as that in which the TDR originated but not in the Island City; (ii) on any plot north of the originating plot but not in the Island City; (iii)
in any zone irrespective of the zone in which it was generated. TDRs
cannot be used in areas under CRZ, NDZ, MMRDA areas, plots where slum
rehabilitation is undertaken, areas where permissible FSI is less than
1, notified heritage buildings.

The minimum density of the
rehab component on a plot shall be 500 tenements per net hectare, i.e.,
after deducting all reservations. In case of the minimum number not
being met, the balance shall be handed over free of cost to the SRA.

Provisions are made for providing units to commercial/office spaces,
shops which existed prior to 1st January 1995 in the slums. They are
eligible for carpet area of 225 sq.ft.

Concessions are provided in the building construction requirements which would have been otherwise applicable under the DCR.

Slum rehab can also be taken up on Town Planning Scheme Plots if they have been declared as slums.

If the slums are spread over more than one CTS/ CS number, then it is
treated as a natural subdivision. Similarly, clubbing or more than one
slum in the same zone is allowed.

Slum pockets on BMC/MHADA
lands, if adjoining to non-slum lands, can also be taken up for joint
development under DCR 33(7) and 33(10).

Welfare halls,
balwadis, society offices, religious structures, etc. must be
constructed free of cost and would form part of the rehab portion.

An amount of Rs.20,000 per tenement for rehab component and Rs.840 per
sq.mt for entire builtup area must be paid by the developer to the SRA
in such instalments and such manner as may be decided by the SRA. These
would be used by the SRA for the Schemes to be prepared for the
improvement of infrastructure in slums.

By a very recent
Circular, the SRA proposes to do away with the height restrictions on
buildings which are imposed in CRZ II Areas provided they are a part of a
33(10) or a 33(14) Scheme. The SRA has invited suggestions/objections
from the public to this proposal. Procedure under Slum Rehabilitation
Schemes

A typical Slum Rehabilitation Scheme involves the following steps:

(a) All slum/pavement inhabitants on electoral rolls on or before 1st January 1995 and who are actual occupants are eligible.

(b)
70% of such eligible occupants must come together to form a
co-operative housing society and pass a resolution appointing a chief
promoter who can apply for name reservation for the society. The chief
promoter can collect share capital of Rs.50 per member for slum
societies and Re.1 as entrance fees and to open a bank account in any
co-operative bank.

(d)
The proposed society must then take a decision to appoint a competent
developer for the society. He would act as the promoter.

(e) The
promoter can enter into an agreement with every eligible slum-dweller
while putting up a slum rehabilitation proposal to SRA for approval.

(f)
The Promoter has to appoint an architect to prepare the plans under DCR
33(10). He would submit the plans and proposal along with the scrutiny
fee. The SRA has recently decided that it would only permit contractors
registered with them to carry out slum rehabilitation schemes. The
decision follows complaints by slum-dwellers and non-government
organisations about the poor quality of construction in the
rehabilitation buildings.

(g) SRA would then scrutinise the plans and the proposal.

(h) SRA would give the letter of intent conveying approval to the scheme, approval to the layout, building-wise plan approval (Intimation of approval) and commencement certification. Earlier, these 4 were issued in instalments but now to speed up the process, they are issued in one go at least for the rehab proposal. The approval is valid for three months.

(i) The scheme must provide for temporary transit accommodation to the slum-dwellers, during the construction of rehab portion.

(j) Transit camp accommodation is provided by drawing of lots. Slum-dwellers are shifted to transit camps and huts are demolished. If these members do not agree to participate within 15 days of the approval of the proposal, they are physically evicted from the site under the provisions of sections 33 and 38 of Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971, to ensure that there is no obstruction to the scheme.

(k) After demolition of the structures, work up to plinth is completed. After checking the plinth dimensions, further permission to carry out construction beyond plinth is granted.

(l) The architect submits the building completion certificate.

(m) While applying for the occupation certificate of the rehab building, the architect is expected to give the details of tenement allotments done by the society by drawing lots in the joint names of the household head and his spouse. SRA issues computerised ID cards.

(n) Sale building construction is taken up.

(o) Separate property cards are issued for the rehab and sale portion.

(p) Once all the buildings are constructed, the land is leased to the society of slum-dwellers.

In a very important decision in the case of Lokhandwala Infrastructure P. Ltd. & Others v. Om Omega Shelters & Others, Writ Petition No. 95 of 2011, the Bombay High Court has held that it was not open to the slum-dwellers’ proposed society to enter into agreements with developers as per their whims and fancies.

The High Court did not accept arguments made by two proposed societies of 500 slum-dwellers in Worli that they were entitled to enter into or terminate development agreements without scrutiny or regulation by government bodies. The Court held that “Such a proposition would lead to a chaotic situation in the implementation of slum rehabilitation schemes. Managing committee members of proposed societies would then be at liberty to pursue their private ends and switch loyalties between rival builders on considerations of exigency. Many slum rehabilitation projects land in Court with disputes over the appointment of rival builders by slum-dwellers, with each developer claiming majority. The HC said these development agreements are not purely private contracts and have a ‘public character’ to them as the aim is to rehouse slum-dwellers with dignity. “Often the land belongs to the state, the BMC or the housing board. The state has a vital public interest in ensuring that the schemes are not trammelled by private interests,” the court observed. “Once a developer has made a proposal to redevelop a slum, authorities have to scrutinise whether a proposal involving change of developer is in the interest of slum-dwellers and whether or not the new developer would fulfil the needs and requirements of the scheme and has the necessary capacity to do so and whether the new developer has the consent of 70% of slum-dwellers,” said the Judges, adding that the authorities have to determine if the new developer would be able to fulfil all the requirements. “The second developer cannot ride on the 70% consent given to the first developer as it would only lead to ‘misuse of the scheme.’ “The dispute between a society and the developer does not lie purely in the realm of a private contractual dispute. The dispute has an important bearing on the proper implementation of the slum rehabilitation scheme and its consequences go beyond the private interests of the society and the developer. The scheme involves other stakeholders, including public bodies which own the land, whose interest ought to be protected too.”

In the present case, the dispute was between Lokhandwala Infrastructure Pvt. Ltd. and Om Ome-ga Shelters. In 2002, Lokhandwala was appointed to redevelop a plot in Mumbai. 500 slum-dwellers, who resided on the plot, formed two societies. In 2003, it applied for sanction.

Nothing moved for six years. In 2009, the two societies issued a letter terminating their agreement with Lokhandwala. The SRA called for a meeting of the slum societies in February 2010. In November 2010, the two societies, at a general body meeting, claimed that 343 of 401 eligible slum-dwellers present had consented to Omega. Based on this, the SRA CEO approved Omega as the developer instead of Lokhandwala. Lokhandwala, which challenged the SRA order, as ‘perverse’ said its proposal had never been rejected. It argued, and the Court up-held, that the new developer cannot do away with the requirement of 70% majority consent. Omega said it had individual agreements with over 80% slum-dwellers. The slum-dwellers argued that they were entitled to make a proposal and that the “developer is merely an agent of the cooperative society” to provide tenements.

The Bombay High Court held that the SRA order left much to be desired and set aside the SRA’s order favouring Omega and asked the SRA to again hear both sides and decide whether Lokhandwala continues to enjoy the support of 70% slum-dwellers and, if not, whether Omega does.

Income-tax concession

Section 80-IB(10) of the Income-tax Act, 1961 provides for a deduction from the gross total income of profits derived by an undertaking from developing and building housing projects approved before 31st March 2008. The following two conditions which are normally applicable for claiming such a deduction are not applicable in the case of a slum rehabilitation project which has been notified by the CBDT:

(a) such undertaking completes the construction in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority.

(b) the project is on the size of a plot of land which has a minimum area of one acre.

Thus, the Act provides a relaxation to slum rehabilitation schemes.

The CBDT has by Notification No. 67/2010 [F.No. 178/37/2006-IT(A-I)]/SO 1898(E), dated 3-8-2010 notified the Scheme contained in Regulation 33(10) of Development Control Regulation for Greater Mumbai, 1991 read with the provisions of Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992, as a scheme for the purposes of the said section subject to the following conditions, —

(i) slum development falling in Category VII mentioned in Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992 shall be excluded from the Scheme;

(ii) slum development falling within clause 7.7 of the Appendix IV of regulation 33(10) which provides for joint development of slum and non-slum areas shall be excluded from the Scheme; and

(iii) any amendment in the Scheme hereby notified shall be required to be re-notified by the Board.

The CBDT has by Notification No. 01/2011 [F. No. 178/35/2008-IT(A-I)]/SO 14(E), dated 5-1-2011 notified, the Scheme for slum redevelopment prepared by the Maharashtra Government under sub-section (2) of section 37 of the Maharashtra Regional Town Planning Act, 1966 and published vide Notification No. TPS-1893/973/CR-49/93A/UD-13, dated the 26-2-2004, as a scheme for the purposes of the said section subject to the condition that any amendment to the Scheme hereby notified shall be required to be re-notified by the CBDT.

By a subsequent Notification, the CBDT has clarified that as the provisions of section 80-IB(10) apply only to housing projects approved before 31st March, 2008, the above Notifications would also be deemed to apply to housing projects approved by a local authority under the aforesaid scheme on or after the 1st April, 2004 and before 31st March, 2008.

Stamp duty concession

Under the Bombay Stamp Act, 1958, the Maharashtra Government has reduced the stamp duty chargeable under Article 5(g-a) (Development Rights Agreement), Article 25 (Conveyance) and Article 36 (Lease) executed for the purpose of rehabilitation of slum-dwellers as per the Slum Rehabilitation Schemes. The duty is reduced to Rs. 100 instead of the ad valorem rates specified under these Articles. However, the reduction of duty is permissible only in respect of instruments relating to tenements allotted to the slum-dwellers for residential purpose under the Slum Rehabilitation Schemes and is not allowed for the sale/free component buildings.

Service tax concession

No service tax is payable on the taxable service of construction of residential complex referred to in section 65(105)(zzzh) of the Finance Act provided to the Rajiv Awaas Yojna. Thus, any construction for slum rehabilitation under the RAY is exempt from service tax.

FDI

Foreign Direct Investment in companies engaged in slum rehabilitation schemes is governed by the conditions specified in the Consolidated FDI Policy of 2011/ erstwhile Press Note 2 of 2005. No relaxations or concessions are provided from these conditions to a company engaged in slum rehabilitation and any FDI in a company engaged in slum redevelopment needs to comply with the following key conditions:

(a) The minimum area to be developed under each project would be as under:

(i) In case of development of serviced housing plots, a minimum land area of 10 hectares/25 acres.

(ii) In case of construction-development projects, a minimum built-up area of 50,000 sq.mts

(iii) In case of a combination project, any one of the above two conditions would suffice.

(b) Minimum capitalisation of US$10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company.

(c) The original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation.

Property tax concessions

The BMC has granted a concession in property taxes to any building constructed under a slum rehabilitation scheme under the Act. The concession was given in a phasewise manner. For the period of 2011 to 2015 the property taxes levied on such buildings would be 80% of the rate levied in a particular year.

Auditor’s duty

The Auditor should enquire of the auditee, in case the auditee is into slum rehabilitation, whether the terms and conditions of the Act have been duly complied. In case of any doubts, he may ask for a legal opinion. Non-compliance with this could have serious repercussions for the developer.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

shailesh.kwebmaker

Slum Redevelopment part I

Introduction

‘Roti, Kapda aur Makaan’ are the three basic necessities in everyone’s life. While a good number of people in India have been fortunate in obtaining these necessities, there are several who have not been so successful. This has led to India and especially Mumbai having the unique distinction of housing some of the largest slums in the world. Mumbai has over 2,000 slum clusters, each of them housing over 100 to several thousand shanties. Slums and skyscrapers existing cheek by jowl in Mumbai are a common scenario. Slums are a hazard to society, environment and health. Considering these problems, the Maharashtra Government enacted the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971 (‘the Act’). It is an Act to make a better provision for the improvement and clearance of slum areas in the State and for their redevelopment and for the protection of occupiers from forceful eviction. The shortage of land for development in Mumbai has forced developers to look at slum redevelopment as an active option. This has led to slum redevelopment schemes gaining popularity. According to a 2010 Research Report, 52% of the upcoming realty projects in Mumbai, spread over 8,600 acres, are slum redevelopment schemes. Another Research Report estimates the land value occupied by Mumbai slums to be Rs.1 lakh crore on a conservative basis.

Considering the rampant nature of slums across India, the Ministry of Housing & Urban Poverty Alleviation has come out with a Scheme titled the Rajiv Awas Yojana (‘RAY’) for slum dwellers and urban poor. It envisages States granting property for slum dwellers. The RAY envisages that each State would prepare a State Slum-free Plan of Action (‘POA’). The preparation of legislation for assignment of property rights to slum dwellers would be the first step for State POA. The POA would need to be in two parts, Part-1 regarding the upgradation of existing slums and Part-2 regarding the action to prevent new slums. In Part-1 the State would need to survey and map all exiting slums in selected cities proposed by the State for coverage under RAY. In Part-2 the Plan would need to assess the rate of growth of the city with a 20-year perspective, and based on the numbers specify the actions proposed to be taken to obtain commensurate lands or virtual lands and promote the construction of affordable EWS houses so as to stay abreast of the demand. The Centre intends to provide to States/UTs financial support and handholding/ capacity development support. The National Steering Committee for slum-free city planning — Rajiv Awas Yojana will monitor the financial and physical progress under the Scheme.

The Central Government approved the launch of the phase-1 of RAY in June 2011. As per the decision of the Cabinet Committee on Economic Affairs, the Centre will bear 50% of the cost of slum redevelopment. To encourage creation of affordable housing stock, the existing schemes of Affordable Housing in Partnership and Interest Subsidy Scheme for Housing the Urban Poor have been dovetailed into RAY. The Finance Minister has approved Rs.5,000 crores towards RAY under the 5-Year Plan up to 2012.

This Article aims to look at some of the crucial provisions under this very important Act and the process of slum improvement, clearance, redevelopment, etc.

Competent Authority

Under the Act, the State Government appoints one or more persons as the Competent Authority for administering the Act in various areas. For instance, for area belonging to MHADA, MHADA is the Competent Authority, and the Additional Collector, Mumbai is the Competent Authority for all lands in Mumbai city. Similarly, Competent Authorities are appointed for different areas in the State.

The Act also provides for the creation of a Slum Rehabilitation Authority (‘SRA’). The SRA is in charge of the Brihan Mumbai area and is headed by the Chief Minister of Maharashtra. The powers of the SRA are:

(a) To survey and review the existing position regarding slum areas;
(b) To formulate schemes for rehabilitation of slum areas;
(c) To get the slum rehabilitation schemes implemented;
(d) To do all such acts as are necessary for achieving the rehabilitation of slums.

By amendment to the Maharashtra Regional & Town Planning Act 1956, the Slum Rehabilitation Authority has been declared as a planning authority, to function as a local authority for the area under its jurisdiction. SRA has been empowered to prepare and submit proposals for modification to the Development Plan of Greater Mumbai. The SRA can declare any area as slum rehabilitation area for the rehabilitation of slums and in certain cases slum areas become slum rehabilitation area by means of deeming provisions. All such slum rehabilitation areas where slum rehabilitation schemes are proposed and being implemented, come under the jurisdiction of SRA.

The SRA can appoint officers and executives for its better functioning.

Slum rehabilitation area

Interestingly, the word ‘slum’ which is the edifice of this Act has not been defined under the Act. A slum rehabilitation area is an area declared to be one under a scheme. An area would be declared as a slum area if it fulfils the following conditions:

(i) It is a source of danger to the health, safety and convenience of the public because it has inadequate or no basic amenities, or it is insanitary, squalid, over-crowded, etc.

(ii) The buildings therein are unfit for human habitation or are dilapidated, over-crowded, lack ventilation/lighting/sanitation, etc.

Protection of occupiers

On and after the 2001 Amendment Act, protected occupiers cannot be evicted from their dwelling structure. Protected occupiers can be evicted if the State Government is of the opinion that it is necessary to do so.

An occupier has been defined to include the following:

(a) Any person who is paying the owner rent for the land or building;

(b) An owner is in occupation of his land or building;

(d) Licensee in occupation of any land or building; and

(e) Any person who is liable to pay to the owner damages for use and occupation of land or building. Owner has been defined under the Act to mean a person who receives rent of the land or building if it were let and includes:

(a) An agent/trustee who receives such rent on account of the owner (b) A Court-appointed receiver/manager (c) A mortgagee-in-possession. However, the definition of an owner excludes a Slumlord.

A Slumlord is defined to mean a person, who:

(a) Illegally takes possession of lands; or
(b) Enters into or creates illegal tenancies, leave and licence agreements, etc. on such lands; or (c) Constructs unauthorised structures for sale or hire; or
(d) Gives such lands on rental/licence for construction/occupation of unauthorised structures; or
(e) Knowingly gives financial aid to any person for the above; or
(f) Collects rent/charges from occupiers by criminal intimidation/use of force/illegal means.

No person can without the prior approval of the Competent Authority:

(a) institute any suit for the eviction of an occupier from any building or land in a slum area;
(b) apply to any Court for a distress warrant for rent arrears against any occupier.

Slum improvement

(a) If the Competent Authority is satisfied that any slum area is capable of being improved, then it may serve a notice to the owner of the property of its intention to carry out such improvement. It would invite objections and suggestions from them also.

(b) The final decision on whether to commence or abandon or modify/postpone the improve ment is that of the Competent Authority.

(c) Improvement of the slums may consist of laying of water mainlines/sewers/drains; provision for sanitation facilities, wid ening of roads, street lighting, landscaping, providing social infrastructure, such as playgrounds, parks, police station, hospitals, etc.

(d) For the above improvement, the Competent Authority may require the occupiers to vacate the premises occupied by them. It may as far as practicable offer alternative accommodation.

(e) If buildings in a slum area are unfit for hu man habitation or any area is a source of danger to the health, safety and conve nience of the public, then the Competent Authority may serve a notice on the owner to execute such works of improvement as it deems fit.

(f) It has powers to enforce the notice for carrying out works of improvement.

(g) The Competent Authority may direct that no person shall erect any building in a slum area without its prior permission.

(h) The Competent Authority can order that any building in a slum area which is not fit for human habitation should be demolished.

Slum clearance

U/s.11 of the Act, if the Competent Authority is satisfied that the most satisfactory method of dealing with a slum is the demolition of all the buildings in that area, then it may by an order direct that such area should be cleared of all buildings in accordance with the provisions of the Act. Such an order is known as a ‘clearance order’ and such area is known as a ‘clearance area’. It must also make provisions for accommodating those dishoused. The order is then forwarded to the Administrator appointed under the Act. The Administrator in Greater Bombay is a person not below the rank of a Divisional Commissioner. He may either confirm or vary or reject the clearance order.

Once an area has been cleared of its buildings, its owner may apply for redevelopment of the land. Alternatively, the Competent Authority itself may decide to redevelop the land at its cost, with prior approval of the Administrator.

shailesh.kwebmaker

Bombay Public Trusts Act

Introduction: In the State of Maharashtra, Public
Trusts are governed by the Bombay Public Trusts Act, 1950 (‘the Act’).
Under the Act, the Charity Commissioner is in charge of public trusts.
The State of Gujarat also has a law similar to the Bombay Public Trust
Act.

The Charity Commissioner has powers of supervision,
regulation and control of public trusts. All public trusts must register
under the Act with the Charity Commissioner. It should be remembered
that all public trusts are trusts, but all trusts need not be public
trusts. The Act does not apply to section 25 companies which are created
under the Companies Act, 1956. The Bombay Chartered Accountants’
Society is an instance of a public trust registered under this Act.

Definitions:
A
public trust is defined to mean an express or constructive trust for
either public or charitable purpose or both and includes a temple, a
math, a wakf, church, synagogue, agiary or any other religious or
charitable endowment and a society formed either for religious or
charitable purposes or both and registered under the Societies
Registration Act, 1860.

The word ‘trust’ is not defined under
the Act and hence, one needs to refer to the definition under the Indian
Trusts Act, 1882. Section 3 of the said Act defines a ‘trust’ 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 public
trust must be for the public at large or some significant portion of
the public. However, the number of beneficiaries must be a fluctuating
body. It is the extensiveness of object which affords some indication of
the public nature of the trust — Prakash Chandra v. Subodh Chandra, AIR
1937 Cal. 67. A trust cannot be held to be for charitable purpose if it
is not for public benefit. Thus, private charitable trusts are not
governed by this Act. The term public purpose is not capable of any
strict definition and depends upon the facts and circumstances of each
case. No rigid rules can be applied to define the same — State of Bombay
v. S. R. Nanji, AIR 1956 SC 294.

The Supreme Court in
Radhakanta Deb v. Commissioner of Hindu Religious Endowments, Orissa,
AIR 1981 SC 798, the Court held that “the cardinal point to be decided
is whether it was the intention of the founder that specified
individuals are to have the right of worship at the shrine, or the
general public or any specified portion thereof.” Thereafter, the Court
observed that the mere fact that members of the public are allowed to
worship by itself would not make an endowment a public, unless it is
proved that the members of the public had a right to worship in the
temple.

The Supreme Court formulated four tests as providing
sufficient guidelines to determine on the facts of each case whether an
endowment is of a private or of a public nature. The four tests are as
follows:

(a) Whether the use of the temple by members of the public is of right;
(b)
Whether the control and management vests either in a large body of
persons or within the members of the public and the founder does not
retain any control over the management;
(c) Whether the dedication
of the properties is made by the founder who retain the control and
management and whether control and management of the temple is also
retained by him; and
(d) Where the evidence shows that the founder
of the endowment did not make any stipulation for offerings or
contributions to be made by the members of the public to the temple,
this would be an important intrinsic circumstance to indicate the
private nature of the endowment.

Charitable purpose is defined u/s. 9 of the Act to include:

(a) relief of poverty or distress
(b) education
(c) medical relief
(d)
provision for facilities for recreation or other leisure-time
occupation (including assistance for such provision), if the facilities
are provided in the interest of social welfare and public benefit, and
(e)
the advancement of any other object of general public utility, but does
not include a purpose which relates exclusively to religious teaching
or worship.

Hence, a trust for both religious and charitable
purposes is feasible under the Bombay Public Trust Act, although the
same is not recognised u/s. 11 of the Income-tax Act (if created after
1-4-1961).

The term ‘public’ does not mean the humanity as a
whole, but some indefinite class of persons, a crosssection of the
community — CIT v. Radhaswami Satsang Sabha, 25 ITR 472 (All). Charity
need not benefit the entire mankind but should at least benefit an
ascertainable section of the community — Hazarat Pirmahomed Sahah Sahib
Roza Committee, 63 ITR 490 (SC). The trustees can decide on such
charitable purpose as they deem fit — Smith v. Massey, (1960) ILR 30
Bom. 500. A trust does not become invalid if the discretion of selecting
the charitable purpose is left to the trustees and they are free to
apply the fund in such manner and at such time and to such charities as
they deem fit — Sardar Bahadur Indra Singh Trust, AIR 1956 Cal. 164.

Registration:
Section 18 of the Act and the Bombay Public Trust Rules lay down the procedure for registration of a trust as follows:

(a) Apply to the Deputy Charity Commissioner of the region in Schedule II within three months of creation of the trust.

(b)
The application must contain the names and details of the trustees, the
trust, list of movable and immovable properties along with their
approximate market values, etc. A copy of the trust deed should also be
annexed. A memorandum must also be sent, which must contain the
prescribed particulars relating to the immovable property of the trust.
Schedule IIA to the Rules contains the format for the same. Section 22C
of the Act also provides for particulars of the memorandum.

On
receipt of the application, the Deputy Commissioner would make an
inquiry u/s.19 for ascertaining whether there exists a public trust and
whether the trust falls within its jurisdiction. The principles of
natural justice must be followed in this inquiry process. On completion
of the inquiry, the Deputy Commissioner shall record his findings with
reasons as to the matters inquired by him and may make an order for the
payment of the registration fee. The Charity Commissioner shall maintain
a Register containing all details of the trust.

Investment of trust money:
The
funds of the trust which cannot be deployed for the purposes of the
trust shall be deposited either with a bank or invested in designated
public securities. Public securities means those issued by the
Central/State Government/Railways/Local Authorities, etc.

The
money may also be invested in the first mortgage of immovable property
if the property is not leasehold for a term of years, i.e., the lease
must be indefinite, and secondly, the value of the property must exceed
the mortgage money by one-half times. Thus, if the value of the property
is Rs.1.50 crores, the investment permissible in the first mortgage is
Rs.1 crore.

Purchase of an immovable property as an investment
of trust funds would also require the permission of the Charity
Commissioner. If the property is purchased without its permission, then
the trustees would become liable for penalty for contravention of the
Act. However, the transaction is not void ab initio. This is contrary to
the provisions for sale of an immovable property. Any sale transaction
without the Commissioner’s permission is void ab initio.

Trustees
cannot borrow money for the purpose of or on behalf of

shailesh.kwebmaker

Coastal Regulation Zone

Introduction
The Environment (Protection) Act, 1986 is a general Act which deals with the protection and improvement of the environment. It fixes responsibilities on persons carrying out industrial operations and also prescribes standards to control and prevent pollution arising from the same. Section 3 of the Act provides that the Central Government may provide for restriction of areas in which operations shall not be carried out or would be subject to certain safeguards. In pursuance of these powers, the Ministry of Environment and Forests has issued the Coastal Regulation Zone (‘CRZ’) Notification to protect coastal lines and regulate activities in these areas. In a country like India and more so in a city like Mumbai, which has a very long coastal line, regulations dealing with protection of this very valuable natural resource have an important role to play.

The Ministry had originally notified the CRZ Guidelines in 1991 vide Notification No. S.O. 114(E), dated 19th February 1991. These were amended and updated from time to time. There have been about 25 amendments to this Notification between 1991 and 2009, some of which have been emanated from the Supreme Court orders. However, these have now been rescinded by the Coastal Regulation Notification 2011 issued on 6th January 2011. Keeping in mind the special needs of Mumbai, several concessions have been provided to CRZ areas within Mumbai. Let us examine some of the important provisions of the CRZ 2011.

Definition of CRZ
The following areas are declared as CRZ:

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

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

(iii) the land area falling between the hazard line and 500 mts. from HTL on the landward side, in case of seafront and between the hazard line and 100 mts. line in case of tidal influenced water body. ‘Hazard line’ means the line demarcated by the Ministry of Environment through a survey of India. This is a new development probably prompted by the recent tsunamis impacting coastal regions.

(iv) land area between HTL and Low Tide Line (LTL) known as the intertidal zone.

(v) the water and the bed area between the LTL to the territorial water limit or 12 nautical miles in case of sea. This is an important change to expand the CRZ to include territorial waters as a protected zone.

(vi) the water and the bed area between LTL at the bank to the LTL on the opposite side of the bank, of tidal influenced water bodies.

The significance of declaring an area as CRZ is that the Notification imposes various restrictions on the setting up and expansion of industries, operations or processes, etc., in such areas.

Classification of CRZs & Regulations
For the purpose of conserving and protecting the coastal areas and marine waters, the CRZ area is classified into various categories. Depending upon these categories, the development or construction activities therein are also regulated. These are explained below.

CRZ-I
Meaning

CRZ-I includes those areas that are ecologically sensitive and those which play a role in maintaining the integrity of the coast, such as mangroves, in case mangrove area is more than 1,000 sq mts., a buffer of 50 mts. along the mangroves shall also be provided, coral reefs, sand dunes, national parks, wildlife habitats, structures of archaeological importance, heritage sites, etc. It also includes the area between Low Tide Line and High Tide Line. Thus, CRZ-I are the very core areas which are the first point of protection of the coastal line.

Regulation of Construction
No new construction activities are permitted in CRZ-I. Certain exceptions are made for constructions/ industries of vital importance, such as Atomic Energy projects, construction of trans-harbour sea link, development of green field airport at Navi Mumbai, construction of dispensaries/ schools/ bridges/roads, etc., which are required for traditional inhabitants living there, etc.

CRZ-II

Meaning

The areas that have been developed up to or close to the shoreline. Developed area is defined as that area within the existing municipal limits/ urban areas which are substantially built-up and has been provided with drainage, approach roads and other infrastructural facilities, such as water supply and sewerage mains.

Regulation of Construction

Construction is permitted in CRZ-II subject to the following important restrictions:

(a) buildings are permitted only on the landward side of the existing/proposed road, or on the landward side (i.e., towards land) of existing authorised structures. These shall be subject to the existing local town and country planning regulations (such as the Development Control Regulations for Greater Mumbai and other BMC Regulations for buildings), including the existing FSI norms. However, no permission for construction of buildings will be given on the landward side of any new roads which are constructed on the seaward side of an existing road.

(b) reconstruction of authorised building is permitted subject to the existing FSI norms and without any change in present usage.

(c) construction involving more than 20,000 sq mts., built-up area in CRZ-II shall be considered by the Ministry in accordance with its Notification dated 14th September 2006 and in case of projects less than 20,000 sq mts. built-up area shall be approved by the concerned State/Union territory planning authorities in accordance with the 2011 Notification.

CRZ-III

Meaning
These include those areas that are relatively undisturbed and those do not belong to either CRZ-I or II which include coastal zone in the rural areas (developed and undeveloped) and also areas within municipal limits or in other legally designated urban areas, which are not substantially built-up.

Regulation of Construction The Notification provides for several regulations for CRZ-III. Some important regulations for CRZ-III include the following:

(a) NDZ: An area of up to 200 mts. from HTL on the landward side in case of seafront and 100 mts. along tidal influenced water bodies is to be earmarked as ‘No Development Zone’ (NDZ). The significance of NDZ is as follows:

— No construction is permitted within NDZ.

— Repairs or reconstruction of existing authorised structure not exceeding existing FSI/ plinth area/density is allowed.

— Construction/reconstruction of dwelling units of traditional coastal communities, fishermen is permitted, subject to certain restrictions.

— Certain key activities are permitted, such as agriculture, atomic energy generating power by non-conventional energy sources, construction of dispensaries/schools/roads, etc. which are required for the local inhabitants, etc.

(b) Area between 200 mts. to 500 mts. from HTL
— The following activities are permissible:

— Hotels/beach resorts for tourists or visitors subject to certain conditions.

— Notified ports.

— Foreshore facilities for desalination plants and associated facilities.

— Facilities for generating power by nonconventional energy sources.

— Construction of public utilities.

— Reconstruction or alteration of existing authorised building.

CRZ-IV

Meaning
The water area from the Low Tide Line to 12 nautical miles on the sea-ward side and the water area of the tidal influenced water body from the mouth of the water body at the sea up to the influence of tide which is measured as 5 parts per 1,000 during the driest season of the year.

Regulation of Construction
Activities impugning on the sea and tidal influenced water bodies are regulated except for traditional fishing and related activities undertaken by local communities which are subject, however, to certain conditions.

Other areas

Meaning
These include those areas which require special consideration for the purpose of protecting the critical coastal environment and difficulties faced by local communities, such as, the CRZ area falling within municipal limits of Greater Mumbai. This is a new feature of the 2011 Notifications and a welcome move. For the first time the unique nature of Mumbai’s coastlines and real estate problems have been recognised and addressed.

Regulation of Construction
CRZ areas of Greater Mumbai are further regulated as follows:

(i) CRZ-I areas
In CRZ-I areas of Mumbai the only activities which can be taken up are construction of roads, approach roads and missing link roads which are approved in the Developmental Control Regulations of Greater Mumbai. However, all mangrove areas should be notified and 5 times the number of mangroves destroyed/cut during the construction process should be replanted.

(ii) CRZ-II areas
In CRZ-II areas of Mumbai, the development can continue to be undertaken in accordance with the norms laid down in the Town and Country Planning Regulations as they existed on the date of issue of the Notification dated the 19th February, 1991.

(iii) Slum Redevelopment
One of the highlights of the CRZ 2011 includes the relaxations granted for slum redevelopment schemes. The features include:

To provide a safe and decent dwelling to the slum-dwellers, the State Government may implement slum redevelopment schemes.

The stake of the State Government should not be less than 51% in such redevelopment schemes which are in partnership with private sector.

The FSI for such schemes should be in accordance with the existing regulations. Thus, an FSI of up to 4 can be availed depending upon the facts. This is a welcome move.

All legally regularised tenants must be provided houses in situ or as per norms laid down by the State Government. Projects would be undertaken only after public consultation in which views of the tenants of such building would be obtained.

Such schemes would be audited by the Comptroller & Auditor General.

All redevelopment schemes would be subject to the Right to Information Act, 2005 in order to improve transparency.

By a very recent Circular, the SRA proposes to do away with the height restrictions imposed in CRZ II areas on buildings provided they are a part of a 33(10) or a 33(14) Scheme.

(iv) Redevelopment of dilapidated, cessed and unsafe buildings

The Notification also deals with redevelopment of old and dilapidated, cessed and unsafe buildings in the CRZ areas of Greater Mumbai. This again is a welcome move for several buildings along coastal lines, such as Marine Drive, Juhu, Chowpatty, etc. Such redevelopment can be done subject to the following conditions:

They shall be allowed to be taken up even with private developers.

The FSI shall be in accordance with prevailing norms.

Suitable accommodation must be provided to the original tenants during the course of redevelopment.

The Ministry may appoint Statutory Auditors empanelled with Comptroller & Auditor General to undertake performance and fiscal audit in respect of such redevelopment schemes.

Projects would be undertaken only after public consultation in which views of the tenants of such building would be obtained.

All redevelopment schemes would be subject to the Right to Information Act, 2005 in order to improve transparency.

(v) All open spaces, parks, gardens, playgrounds indicated in development plans within CRZ-II shall be categorised as no development zone.

(vi) Floor Space Index up to 15% shall be allowed only for construction of civic amenities, stadium and gymnasium meant for recreational or sports-related activities and residential or commercial use of such open spaces shall not be permissible.

Approvals

For all projects attracting the CRZ, 2011 Notification, an application for CRZ clearance must be made to the concerned State or the Union territory Coastal Zone Management Authority. It will make recommendations within a period of 60 days from the date of receipt of complete application to the Ministry or the State Environmental Impact Assessment Authority. The Ministry or the Authority shall consider such projects for clearance based on the recommendations of the concerned CZMA within a period of 60 days. The clearance accorded to the projects under the CRZ Notification shall be valid for the period of 5 years from the date of issue of the clearance for commencement of construction and operation. A procedure for post-clearance monitoring is also provided.

Enforcement

To implement the provisions of the CRZ 2011 Notification, powers prescribed under the Act are available to the Ministry, the Coastal Zone Manage-ment Authorities and the State Government.

Auditor’s duty

The Auditor should enquire of the auditee, in case the auditee is a builder who has constructed a building in coastal zones, whether the conditions of the Notification have been duly complied and whether necessary approvals have been obtained. Non-compliance with this could have serious repercussions for the builder. This also has very important repercussions for flat/office buyers in such a building. The Bombay High Court in the case of Sudhir M. Khandwala, Writ Petition No. 1077 of 2007 refused to stay the demolition of/regularise an unauthorised construction. Hence, a buyer of a premises in a building constructed in violation of the CRZ Regulations could lose his property. Thus, the Auditor can provide a value-added service by alerting his client of the repercussions of buying such a property. In such cases, he may advice his client to obtain a legal opinion.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

shailesh.kwebmaker

Port Trust Land

Introduction:

One of the largest landlords in the island city of Mumbai is the Board of Trustees of the Port of Mumbai or the Bombay Port Trust or the BPT as it is popularly known. BPT had let out large parcels of land (e.g., the Ballard Estate area of South Mumbai) on a rental basis. The area of land leased out by BPT is around 300 hectares. However, since the past few years, with real estate becoming a very scarce commodity in the city of Mumbai, there has been a spate of litigation between BPT as a landlord and the tenants on the other hand. In this scenario, it is important to understand the nature of the lease arrangement with BPT and the consequences of the same.

Nature of BPT:
The Bombay Port Trust was first constituted under the Bombay Port Trust Acts of 1873 and 1879. BPT is an Authority constituted for the administration, control and management of the port in Mumbai (which was and is a major port of India). Subsequently, a nationwide Act, called the Major Port Trusts Act, 1963 (‘the Act’) was enacted for all the major ports of India. This Act was made applicable to the Bombay Port Trust in the year 1975. Hence, now BPT is governed by the Major Port Trusts Act. The property owned by BPT absolutely vests in the Board by virtue of the provisions of the Act.

BPT is a State within the meaning of Article 12 of the Constitution of India and hence, it cannot act in an arbitrary or unjust manner. Its actions must be reasonable and always taken in public interest. This principle has been laid down by a host of Supreme Court decisions, such as, Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay, (1989) 3 SCC 293, Maneka Gandhi v. UOI, (1978) 1 SCC 248, etc.

Land leased out by BPT:
As discussed earlier, BPT is involved in several disputes where it wants tenants to vacate in cases where lease is expiring or has expired. A majority of the disputes pertain to: whether BPT is bound to renew leases which have expired since it is a State and hence, it must act in public interest. Further, whether or not BPT can increase the rent significantly also forms a part of this dispute.

The decision of the Bombay High Court in the case of Omprakash Tulsiram Aggarwal, 1993 Mh LJ 1725 is significant in this respect. In this case, the renewal of the lease was refused by BPT. The lessees filed a writ stating that such a refusal was an arbitrary and unilateral decision of BPT and was not keeping with the conduct expected from a State. The High Court dismissed the writ petition and held that since BPT genuinely required the land for its own use, as was evident from its correspondences and it had also passed a resolution to that effect, there were ample reasons for refusal to renew the lease. Further, the acquisition was just fair and reasonable and did not suffer from the vice of Article 14, i.e., an arbitrary and unjust action. This judgment was subsequently affirmed by the Apex Court in Kumari Shri Lekha Vidyarthi v. State of UP, AIR 1991 SC 537.

In the case of Jayantilal Dharamsey, 2001 (1) Bom CR 44 it was held that BPT cannot act capriciously and arbitrarily and would have to fix the lease rent in accordance with fairness and reasonableness. This was a very path-breaking decision and ultimately went to the Supreme Court.

The Supreme Court in the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214 had an occasion to consider Jayantilal’s decision and a bunch of other cases, all of which dealt with the issue of whether or not BPT can increase the rent significantly and terminate leases in the case of illegal sub-letting by lessees. This famous decision of the Supreme Court laid down the all-important compromise proposal in this respect. BPT proposed a compromise formula to tide over the litigation and the same was accepted by the Supreme Court with some modifications. The important principles laid down by this decision were:

(a) After 1-4-1994, revision in rents shall be @ 10% for non-residential uses and @ 8% for residential uses; Interest chargeable by the Board of Trustees of the Port of Mumbai in respect of arrears of rent for the period commencing 1-4-1994 up to the date of actual payment shall be calculated @ 6% per annum.

(b) In the case of expired leases, fresh lease on new terms shall be at the sole discretion of the Board. The grant of fresh leases may be considered taking into account restructuring requirements for the City’s Development Plan, BPT’s Master Plan and the Development Control Regulations.

(c) Where a fresh lease is granted, arrears may be recovered in the form of premium at the applicable letting rate for respective use with simple interest at 15% per annum from the date of expiry of lease till grant of fresh lease.

(d) In the case of expired leases without a renewal clause, additional premium may be recovered at 12 months’ rent at the applicable letting rate.

(e) In the case of subsisting leases, assignments and consequent grant of lease on new terms would be at the prevailing letting rate at the relevant time and in relation to use. Where the lessee is already paying rent at the prevailing letting rate, assignment would be permitted on a levy of revised rent at 25% over the applicable letting rate or on levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(f) Subletting, change of user, transfer, occupation through an irrevocable power of attorney and any other breaches may be regularised by levy of revised rent at the applicable letting rate at the time of such breach from the date of breach. Where the lessee/tenant is already paying rent at the prevailing letting rate, such regularisation be permitted on levy of revised rent at 25% over the applicable letting rate or a levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(g) The Bombay Port Trust is an instrumentality of State and hence an ‘authority’ within the meaning of Article 12 of the Constitution. It is amenable to writ jurisdiction of the Court. The consequence which follows is that in all its actions, it must be governed by Article 14 of the Constitution. It cannot afford to act with arbitrariness or capriciousness. It must act within the four corners of the statute which has created and governs it. All its actions must be for the public good, achieving the objects for which it exists, and accompanied by reason and not whim or caprice.

(h) In the field of contracts, the State and its instrumentalities ought to so design their activities as would ensure fair competition and non-discrimination. They can augment their resources but the object should be to serve the public cause and to do public good by resorting to fair and reasonable methods. The State and its instrumentalities, as the landlords, have the liberty of revising the rates of rent so as to compensate themselves against loss caused by inflationary tendencies. They can and rather must also save themselves from negative balances caused by the cost of maintenance, and payment of taxes and costs of administration. The State, as landlord, need not necessarily be a benevolent and good charitable samaritan. However, the State cannot be seen to be indulging in rack renting, profiteering and indulging in whimsical or unreasonable evictions or bargains.

(i) The ‘Compromise Proposals’ so modified shall bind the parties and all the lessees, even if not parties to the proceedings before the Supreme Court.

Consequent to the above Supreme Court decision, the Estate Department of BPT issued a Circular in November 2006 which laid down the following important provisions:

(a) It is obligatory on the part of lessees/tenants to obtain prior consent in writing of BPT for any assignment/transfer, subletting, under letting in any manner or parting with possession of the premises or any part thereof whether on leave and licence basis or otherwise.

(b) Further, BPT was not bound to accord its sanction to a proposal for the above breaches which take place without its prior consent and if they proceed any further with such breaches, they shall be doing so at their own risk, cost and consequences.

(c) It fixed 10-3-2004 as the cut-off date for the purpose of regularising past breaches, subletting, etc. Breaches committed after 10-3-2004 would attract application of revised rent/compensation prospectively i.e., from 1-9-2006 calculated based on 6% per annum return on the rates prescribed in the Stamp Duty Ready Reckoner for the year 2006 with 4% per annum increase every October, pro rata to the area of breach.

(d) It was also decided by the Board that in future, changes in lease terms like additional construction, change of user, etc. should be with prior approval.

(e) In case of subletting/assignment without prior approval, the Board reserves the right to resume possession and failure to obtain prior approval will attract, in addition to revised rent/compensation, a penalty of 12 months’ rent/compensation at the revised rates for every year of delay without prejudice to the Board’s rights and remedies including eviction and recovery of arrears, etc.

Even after the above-mentioned Supreme Court decision, several lessees are yet locked in a fierce battle with BPT, since not all issues have been resolved. A very famous club in Mumbai is currently locked in a fierce litigation with BPT which may threaten its very existence if BPT wins the ultimate battle. Its lease expired in 1990. BPT has been demanding possession of the land and premises constructed thereon. Several lessees of South Mumbai have filed an appeal in the City Civil Court which is pending. By virtue of this appeal, BPT’s order demanding possession has been stayed. It is also challenging the levy of rent from 2006 to 2010 on the grounds that it tantamount to an exorbitant enhancement of rent.

Applicability of other laws:

Another issue which arises is whether the provisions of the Maharashtra Rent Control Act, 1999 apply to land leased by BPT?

In the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214, the Court held that the issue as to the applicability of the Maharashtra Rent Control Act, 1999 to the Port of Mumbai and the property held by it is left open to be decided in appropriate proceedings.

Section 3(1) of this Act provides that it does not apply to any premises belonging to the Government or a local authority. Under the previous Rent Control Act of 1947, the definition of local authority was not given in the Act and hence, various decisions such as Ram Ugrah Singh, (1983) Mah LJ 815 had held that the BPT is a local author-ity. However, now Section 7(6) of the 1999 Rent Act expressly defines the term local authority in an exhaustive manner and does not include BPT within its definition. Hence, now BPT is not a local authority and accordingly, it is not exempt from the provisions of the Rent Act.

The Public Premises (Eviction of Unauthorised Occupants) Act, 1971 would also apply to property held by BPT — Ashoka Marketing Ltd. v. PNB, AIR 1991 SC 855.

Auditor’s duty:

The Auditor should enquire of the auditee, in case the auditee is dealing in property which is under lease from the BPT, whether the covenants of the lease deed, such as rent increases, renewal, etc. have been duly complied. Non-compliance with this could have serious repercussions for the buyer/lessee.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

shailesh.kwebmaker

Special Marriage Act

Introduction

The Special Marriage Act, 1954, as the name suggests is an Act to provide for a special mode of marriage. Any person in India can marry under this Act, irrespective of their religion or faith. They can also get married according to any religious ceremonies or customs which they prefer, but if they wish to be governered by the Act then they need to get their marriage registered under this Act. However, in addition to providing for a special form of marriage, this Act also changes certain conventional succession patterns. It provides a very important deviation from the generally understood testamentary and nontestamentary succession for people married under this Act. That is what makes this Act important.

Earlier, the Act also had provisions for registering the marriages of Indian citizens residing abroad. However, by virtue of the enactment of the Foreign Marriage Act, 1969, those provisions have been deleted from the Special Marriage Act.

Applicability of the Act

This Act applies to:

(a) Any person, irrespective of religion.

(b) Hindus, Buddhists, Jains, Sikhs, who get their marriage registered under the Act.

(d) Inter-caste marriages registered under the Act. For instance, a Hindu marrying a Muslim or a Parsi marrying a Jain. Conditions for Special Marriage A marriage can be registered under this Act irrespective of anything contrary contained in any other law relating to marriages.

The following conditions must be fulfilled:

(a) Neither party must have a living spouse. Thus, bigamy is not permissible.

(b) Each of the parties:(i) must be capable of giving a valid consent to the marriage and must be of sound mind. (ii) though capable of giving such valid consent, must not suffer from mental disorder which would render the person unfit for marriage and the protection of children. (iii) must not be subject to recurrent attacks of insanity.

(d) One of the important conditions for registering a marriage is that the parties must not be related to each other within degrees of prohibited relationship. The Act lays down a list of relatives in relation to a person who are treated as within degrees of prohibited relationship. For instance, a man and his mother’s sister’s daughter (i.e., his cousin sister) cannot get married. However, if a custom governing at least one of the parties permits a marriage between the degrees of prohibited relationship, then the marriage may be permissible. For instance, in some religions, a person is permitted to marry his/her cousin.
All the above conditions are cumulative.

Process of Special Marriage

Whoever intends to get his marriage solemnised under the Act, must first give a Notice to the appropriate Marriage Officer. The Marriage Officer shall record the Notice received by him and enter a copy of the same in the Marriage Notice Book maintained by him.

If any person has any objection to the marriage, then he can object only on grounds that one of the conditions (specified above) are not fulfilled.

The marriage can be solemnised after 30 days from the Notice. The Marriage Officer shall issue a Certificate of Marriage which is conclusive evidence that the marriage has been solemnised under the Act and that all formalities specified therein have been complied with.

Any marriage which has been performed by a ceremony in any other form, e.g., marriage between two Hindus or two Muslims, etc., may also be registered under the Act. Thus, already married couples can get their marriages registered under this Act. Once they get their marriage so registered, it would be deemed to be a marriage solemnised under the Act and all children born after the date of marriage ceremony shall be deemed to always have been legitimate children. The names of such children are also required to be entered into the Marriage Register Book. Effect of marriage on HUF Section 19 of the Act prescribes that any member of a Hindu Undivided Family who gets married under this Act automatically severs his ties with the HUF. Thus, if a Hindu, Buddhist, Sikh or Jain gets married under the Act, then 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.

However, this provision of section 19 should be read subject to section 21-A of the Act. This section provides that where the marriage solemnised under this Act takes place between a person of Hindu, Buddhist, Sikh or Jaina religion with a person who is also of Hindu, Buddhist, Sikh or Jain religion, then section 19 shall not apply. Thus, the severance from an HUF would take place only if a Hindu marries a non- Hindu.

Succession to property

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 Act overrides the provisions of the Indian Succession Act, 1925 with respect to its application to members of certain communities. 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. Thus, it removes the bar imposed by the Indian Succession Act, 1925, not only for the couple married under the Act, but also for the children born out of such wedlock.

Wills by Muslims

The biggest impact of section 21 is in the case of Muslims. The Muslim Law prevents a Muslim from bequeathing his whole property in a will and allows him to make a will only qua 1/3rd of his estate. He can bequeath more than 1/3rd of his property if his heirs give consent to the same. However, the impact of a Muslim getting married under this Act is that the Indian Succession Act would apply to all cases of testamentary succession (i.e., through will) or intestate succession (i.e., without will) of such a Muslim. Hence, by merely solemnising or registering an already conducted marriage under this Act, a Muslim couple can bequeath their entire property in accordance with their wishes and not be bound by their personal Muslim Law restriction of 1/3rd or property.

This view has been upheld by the Bombay High Court in the case of Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7. In this case, a Muslim couple got married as per Mohammedan Law. They once again got their marriage solemnised under the Act after a few years. On the death of the husband an issue arose amongst his heirs as to whether the succession should be as per Muslim Law? A single Judge of the Bombay High Court held that because the marriage of the deceased was registered under the Act, all succession would be as per the Indian Succession Act, 1925 and not as per the Muslim Law. It also held that such a person is entitled to bequeath his entire property and not just 1/3rd as per Muslim Law. This view was also held by the Bombay High Court in the case Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, RP No. 41 of 2010 (Bom). It held that intestate succession of a Muslim marrying under the Act would be governed by sections 31-40 of the Indian Succession Act, whereas his testate succession would be governed by sections 57-58 of the Indian Succession Act.

Does a will of a Muslim require a probate?

Another question before the High Court in Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7 was whether the will of such a Muslim requires a probate? It held that once the Indian Succession Act applies to a Muslim, then all the provisions of the Act would apply with equal force. Section 57 of this Act provides that any will by Hindus, Buddhists, Sikhs, Jains in the places within the local jurisdiction of the High Courts of Bombay, Calcutta and Madras requires a probate. However, since the Special Marriage Act removes all restrictions for people married under the Act, the High Court held that the will of a Muslim requires a probate.

However, in the case of Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, R.P. No. 41 of 2010 (Bom.), another Single Judge of the Bombay High Court has taken an exactly contrary view after considering the earlier judgment. The Court referred to section 58 of the Indian Succession Act which states that section 57 requiring a probate shall not apply to property of any Mohammedan. It also referred to section 213 of the Indian Succession Act which provides that an executor or a legatee cannot establish any right in a Court for which probate is not granted. However, section 213(2) exempts Muslims from this section. The Judge held that section 21 of the Special Marriage Act and sections 57, 58, 213(2) of the Indian Succession Act must be read together and reconciled. Since section 213(2) exempts Muslims from probates, there is no need for a Muslim to get a probate even if he is married under the Special Marriage Act.

Thus, there is a judicial controversy over whether or not a Muslim’s will needs a probate. However, since the second decision is later and has considered the earlier decision, reliance may be placed upon the same.

Role of a CA/Auditor

Normally, a CA in his capacity as an Auditor is not directly involved with wills and succession issues. Nevertheless, an Auditor can provide value added services to his clients if he is aware of the law in this respect. He can be of great assistance to his clients in cases of succession planning and estate planning.

shailesh.kwebmaker

Commodity Markets

Introduction

Strange as it may sound, the Indian commodity markets are older than the securities markets, however, very little is known about these markets to the common man. The various commodity markets in India clocked a turnover of over Rs.92 trillion for the period ended April to December 2011. Commodity markets have various components, such as bullion, metals, grains, energy, oil and oilseeds, petrochemicals, pulses, spices, plantation products, etc. and span over 100 commodities. In the recent past, gold and silver have given excellent returns and that is why now there is a sustained interest in the commodity markets. Let us take a bird’seye view of the regulatory aspect of this market, the types of contracts which can be executed, the tax treatment of these contracts, etc.

Forward Contracts (Regulation) Act

One more strange fact, for such a large market, there is only one statute — the Forward Contracts (Regulation) Act, 1952 (FCRA). As compared to this, the securities market has a plethora of regulations which one needs to deal with. Bills for amending the FCRA have lapsed twice. A third attempt is being made to amend the Act.

The FCRA regulates the forward contracts in commodities. As the name suggests, it does not apply to spot delivery contracts. It is somewhat similar in nature to Securities Contracts (Regulation) Act, 1956.

Forward Market Commission

The FCRA amongst other aspects, provides for the establishment of a regulator for the forward markets, known as the Forward Market Commission of India (FMC). The FMC has been established u/s.3 of the FCRA. The FMC is a statutory body and functions under the administrative control of the Ministry of Consumer Affairs, Food & Public Distribution, Department of Consumer Affairs, Government of India. Its role may be equated with that of the SEBI in the securities market, although, the FMC does not have as wide powers as SEBI. The Bill for amending the FCRA would give more powers to the FMC and make it an autonomous body, like the SEBI.

Types of contracts

Under the FCRA there can be two types of contracts in commodities:

(a) Ready Delivery Contracts — Contracts where delivery and payment must take place immediately or within a maximum period of 11 days. These are similar to the spot delivery contracts which one comes across under the SCRA. If a commodity contract is settled by cash or by an offsetting contract and as a result of that the actual tendering of goods is dispensed with, then it is not an Ready Delivery Contract. These contracts are outside the purview of the Forward Markets’ Commission. The Amendment Bill seeks to increase the duration from 11 to 30 days.

(b) Forward Contracts — These are contracts for the delivery of goods and are not a Ready Delivery Contract. The FMC regulates these Contracts. Commodity derivatives are also a type of Forward Contract. Thus, a contract which is settled by cash or by an offsetting contract and as a result the actual tendering of goods is dispensed with becomes a Forward Contract.

Forward Contracts can be of three types:

(a) Specific Delivery Contract — It is a Forward Contract which provides for the actual delivery of specific qualities of goods. The delivery must take place during a specified future period at a price fixed/to be fixed. Further, the names of the buyer and seller must be mentioned in the contract. The Amendment Bill proposes to add that such contracts must also be actually performed by actual delivery.

Specific Delivery Contracts cannot be settled by paying the difference in cash or by an offsetting contract. They can be executed on an off-market basis also. Specific delivery contracts are contracts entered into for actual transactions in the commodity and the terms of contract may be tailored to suit the needs of the parties as against the standardised terms found in futures contracts.

Specific Delivery Contracts, in turn, can be of two types — Non-Transferable (NTSDC) and Transferable (TSDC). Non-transferable are those contracts which are only between a defined buyer and a seller and cannot be transferred by either party, whereas ‘transferable contracts’ may be transferred from one person to another till the actual maturity of the contract or delivery date.

(b) Forward contracts other than specific delivery contracts are what are generally known as ‘Futures Contracts’, though the Act does not specifically define the term futures contracts. Such contracts can be performed either:

by delivery of goods and payment thereof or by entering into offsetting contracts and payment; OR

by cash settlement, i.e., receipt of amount based on the difference between the rate of entering into contract and the rate of offsetting contract.

Thus, the main difference between Specific Delivery Contracts and Futures is that while Specific Delivery Contracts must be performed by delivery, futures can be cash settled also. Futures contracts are usually standardised contracts where the quantity, quality, date of maturity, place of delivery are all standardised and the parties to the contract only decide on the price and the number of units to be traded. Futures contracts must necessarily be entered into through the Commodity Exchanges.

The Amendment Act proposes to add a third category — options in commodities. This would mean an agreement for the purchase or sale of a right to buy and/or sell goods in future and includes a put and call in goods. These must be entered into through the Commodity Exchanges.

Commodity exchanges

The FCRA also provides for recognised associations for the regulation and control of forward contracts or options in goods. These associations are popularly known as commodity exchanges.

Currently, permanent recognition has been granted to three national-level multi-commodity exchanges, Multi-commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), and National Multi-commodity Exchange of India Limited (NMCE) Ahmedabad. These national commodity exchanges have permission for conducting forward/futures trading activities in all commodities, to which section 15 of the FCRA is applicable.

Members of commodity exchanges are commodity brokers.

Trading in forward contracts

U/s.15 of the FCRA, forward contracts can be entered into only between members of, through members of or with members of a recognised commodity exchange. Futures trading can be conducted in any commodity subject to the approval/recognition of the Government of India. Further, it must be in accordance with the bye-laws of the commodity exchange. Any forward contract entered into in contravention of the byelaws is illegal.

Nothing contained in section 15 applies to Specific Delivery Contracts, whether transferable or non-transferable. However, the Central Government is empowered u/s.18(3) to notify such classes of Specific Delivery Contracts to which the provisions of section 15 would also apply.

Regulation of commodity brokers

Trade from India by commodity brokers on foreign commodity exchanges requires prior approval of FMC. Trading without the approval is illegal and persons entering into such contract are punishable under the Forward Contracts (Regulation) Act, 1952. The FMC has, in the past, suspended brokers found to be indulging in futures trading on online foreign commodity exchanges.

Commodity brokers cannot provide advisory services to clients for investment in commodities futures contract. Portfolio advisory services, portfolio management services and other services are not permissible in the Commodity Derivative Markets. The FMC has not formulated any guidelines for investment advisory services by any entity and hence, these activities are not permitted to the brokers.

Client Code Modification (CCM) facility is an important issue which the FMC strictly regulates. The CCM facility is permitted only for carrying out corrections of genuine punching errors during the specified time of the trading day. The penalty for CCM is 1% of the value of trade in respect of which the client code has been modified. The penalty is 2% of the value of trade in respect of which client code has been modified if it is more than 5% of the trading done by the Member during that day. A minimum penalty of Rs.25,000 is levied for client code modifications irrespective of the value of trade. Commodity Exchanges are however authorised to waive the above penalty in cases of genuine punching errors.

Trading in overseas commodities exchanges and setting up joint ventures/wholly-owned subsidiaries abroad for trading in overseas commodity exchanges is reckoned as financial services activity under the FEMA Regulations and requires prior clearance from the FMC. Any investment in a JV/WOS for such a purpose would have to comply with the requirements for overseas direct investment in a financial service as specified under Rule 7 r.w. Rule 6 of the FEMA Notification No. 120/2004.

FDI in commodity brokerages

Neither the Consolidated FDI Policy issued vide Circular 2/2011, nor the Regulations issued under the FEMA, 1999 contain any specific provision for foreign direct investment in a commodity brokerage. Hence, any FDI in a commodity brokerage would require prior FIPB approval. The FIPB has given approvals to several such FDI proposals.

However, it may be noted that the RBI does not permit foreign banks to invest in commodity brokerages, whether directly or indirectly. Hence, any proposal for FDI by a foreign bank in a commodity broker would not be permissible. It is for this reason that the takeovers of IL&FS Investmart by HSBC and Geojit Securities by BNPI were held up by the RBI till such time as the commodity broking arms were hived-off/restructured. FDI in commodity exchanges is allowed up to 49% (FDI & FII). Investment by Registered FIIs under the Portfolio Investment Scheme (PIS) is limited to 23% and investment under the FDI Scheme is limited to 26%.

Taxation of commodity contracts

Taxation of commodity derivative contracts is one of the issues facing investors and traders in commodities. The first question to be considered is whether the assessee is an investor or a trader and hence, whether his gain is taxable as capital gains or as business income. The various tests, judgments, controversies, etc., which one comes across while dealing with this issue in the case of securities would be applicable even to commodities.

Secondly, in the cases where they constitute a business, the question arises whether they constitute a speculative business. Section 43(5) of the Income-tax Act grants a specific exemption to derivatives traded on stock exchanges. However, there is no specific exemption for contracts traded on commodity exchanges. Hence, one would have to ascertain whether a commodity contract falls under any of the other exemptions specified u/s.43(5).

Further, the losses from speculative commodity businesses can only be set off against speculative commodity businesses. They cannot be set off against profits from delivery based commodity transactions or capital gains or profits from security derivatives transactions.

Stamp duty on contract notes

Stamp Duty on commodity transactions is a State subject and the duty incidence would depend upon the location of the broker’s office which issues the contract note. For instance, under the Bombay Stamp Act, 1958, the State of Maharashtra levies a duty @ 0.005% of the value of the contract for the purchase or sale of any commodity, such as cotton, bullion, spices, oil seeds, spices, etc. Similarly, any electronic or physical contract note issued by a commodity broker, whether delivery based or non-delivery based attracts a duty @ 0.005%.

Maharashtra levies one of the highest incidences of stamp duty on commodity broker notes. Earlier, such contracts were charged with minimum duty of Rs.100 per document.

Section 10B of the Bombay Stamp Act, provides that it is the responsibility of the commodity exchange to collect the stamp duty due on brokers’ notes by deducting the same from the brokers account at the time of settlement of such transactions.

Penalties under FCRA

Any violation of the FCRA is a criminal offence inviting imprisonment and/or a fine. The Bill proposes to make the penalties for violating the FCRA more stringent, for example, violation of some of the provisions would carry imprisonment up to one year and/or a fine ranging from Rs.25000 to Rs.25 lakh. The Bill also seeks to introduce penalties for insider trading similar to what is found under the SEBI Act.

Auditor’s responsibility

Just as a compliance audit of stock brokers requires a knowledge of the securities markets, an audit of commodity brokers requires knowledge of the commodity markets on the part of the auditor. This would include a knowledge of the various applicable Regulations, relevant Exchange Circulars, Compliance Forms, etc.

An auditor of a market intermediary should be well-versed with the important laws in this respect which affect the functioning and the existence of the entity. For instance, in case of the intermediaries, non-compliance with the regulations could result in cancellation of the registration certificate and this would affect the very substratum of the entity.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise as a result of improperly stamped or unregistered mortgage deeds. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

shailesh.kwebmaker

Hindu Adoption Act

Introduction

The Hindu Adoptions and
Maintenance Act, 1956 (‘the Act’) is not a commercial or corporate
legislation, but its importance in today’s business world is being felt
because of succession issues, family separations and family feuds
becoming the order of the day. With an increasing number of families
adopting children, the question often arises as to whether the adopted
child is entitled to succeed the father in the business, property, etc.
In several cases, questions, such as whether the adoption was valid,
what happens if the adopted father has subsequently a natural child,
etc., are raised. Hence, it becomes essential to examine this Act. This
is all the more true in a country such as India where a great number of
businesses are family owned or controlled.

Although a great deal
of the Hindu Law is based on customs and usages, certain portions have
been codified. The Act is one such instance of codified law. It would
hence, overrule any text, custom, usage of Hindu Law.

Application

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 is a 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.

(v)
Any child, legitimate or illegitimate, who has been abandoned both by
his father and mother or whose parentage is not known and who in either
case is brought up as Hindu, Buddhist, Jain or Sikh. This is a very
important clause which was added by the Amendment Act of 1945. The
reason for this Amendment was that only a Hindu can be adopted. As the
religion of an abandoned child or of a child whose parentage is not
known or cannot be ascertained, the explanation to section 2(1) of the
Act was amended to the effect that a child, legitimate or illegitimate
who has been abandoned by both of his parents or whose religion is not
known, but who in either case is brought up as a Hindu, will be a Hindu
by religion.

The Act does not apply to members of Scheduled
Tribes unless the Government so directs. Manner of making adoption Any
adoption by or to a Hindu must be made in accordance with the provisions
of the Act. It is interesting to note that in case the adoption is not
in accordance with the Act, then it shall be void. The consequences of a
void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and

(b) his rights in the family of his natural birth also subsist and continue.

Thus,
in a case of a void adoption, the adopted child would not be entitled
to any inheritance or succession benefits in his adopted family. The
pre-requisites of a valid adoption u/s.6 are as follows:

(a) the adopter is capable of and has a right of adopting under the Act;

(b) the adoptee is capable of being taken in adoption under the Act;

(d) all other conditions specified under the Act have been fulfilled.

Capacity of adopter

A male Hindu is capable of adopting a son or daughter:

(a) if he is of sound mind;

(b) if he is a major, i.e., he is above 18 years of age;

(c)
if he has a wife, he shall not adopt except with the consent of his
wife, unless she has renounced the world or ceased to be a Hindu or has
been declared to be of unsound mind. If he has more than one wife, then
the consent of all wives is required.

The wife’s consent must be
obtained before the adoption and not after it. The proviso mandates the
consent as a condition precedent to adoption and hence subsequent
consent cannot validate the adoption.

In Kashibai W/O Lachiram
v. Parwatibai W/O Lachiram 1995 SCC (6) 213, has held that the wording
is mandatory and an adoption without wife’s consent would therefore be
void.

Now a Hindu can adopt a son or a daughter. Under the old
law, adoption of a daughter was invalid except where it was customarily
accepted among certain parts of India.

A female Hindu is capable of adopting a son or daughter:

(a) if she is of sound mind;

(b) if she is a major, i.e., above 18 years of age;

(c)
if she either is not married or her husband is dead or has been
declared of unsound mind or has renounced the world or has ceased to be a
Hindu or her marriage has been dissolved.

Thus, a Hindu married
woman whose husband does not suffer from any of the disabilities
specified above would not be able to adopt a child on her own even with
her husband’s consent. This is a unique position and a departure from
the earlier position under the uncodified Hindu Law. This principle has
also been laid down by the Bombay High Court in the case of Dasharath
Ramachandra Khairnar v Pandu Khairnar, (1977) 79 Bom LR 426. The Court
held that elaborate provisions are made in the Act setting out
circumstances under which a wife could have a capacity to adopt and the
consent of the husband to enable the wife to adopt is not one of the
enabling circumstances under the provisions.

Capacity of adoptee

A person may be adopted if:

(a) he is a Hindu;

(b) he has not been already adopted;

(d)
he must be below 15 years of age, unless a custom or usage permits
persons above 15 years to be adopted. The above conditions equally apply
to females. One of the most relevant conditions to be borne in mind is
that the adoptee must be below 15 years of age.

Capacity of person giving in adoption

The person giving the child in adoption can do so if he fulfils the following conditions:

(a) Only the natural father or mother or the guardian of a child can give him in adoption.

(b) The natural guardian can give consent for adoption to any person including himself, under the following situations:

(i) the natural father and mother are dead, have renounced the world, abandoned the child, been declared of unsound mind, etc.;

(ii) the City Civil Court has granted permission for the same

(iii) before granting permission the Court will have to be satisfied about the welfare of the child and other factors.

Conditions for a valid adoption

The additional conditions for a valid adoption are as follows:

(i)
If the adoption is of a son/daughter, the adoptive father or mother by
whom the adoption is made must not have a Hindu son/daughter,
grandson/granddaughter or great grandson/ granddaughter (whether by
legitimate blood relationship or by adoption) living at the time of
adoption; (where there is a child, adoption cannot be done even with the
consent of the child.)

(ii) If the adoption is by a male and
the person to be adopted is a female, the adoptive father is at least 21
years older than the person adopted;

(iii) If the adoption is
by a female and the person to be adopted is a male, the adoptive mother
is at least 21 years older than the person to be adopted;

(iv) The same child may not be adopted simultaneously by two or more persons;

(v) The child to be adopted must be actually given and taken in adoption by the parents or guardians concerned or under their authority with intent to transfer the child from the family of its birth or in the case of an abandoned child or a child whose parentage is not known, from the place or family where it has been brought up, to the family of its adoption.

Effect of adoption

From the date of adoption the child will be considered to be the natural child of the adoptive family and all the ties with the original family are severed. The three exceptions to this Rule are:

(i) The child cannot marry any person whom he could not have married had he continued in the original family of his birth;

(ii) The adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family, subject to any obligations arising from such vesting of the estate; and

(iii) The adopted child shall not divest any persons in the adoptive family of any estate vested in that person prior to the date of adoption. For instance, a Hindu widow absolutely inherits property on her husband’s death. Thereafter, she adopts a son. He cannot challenge the alienation made by the widow on the grounds that now he has an interest in such property since the property had already vested in the widow and the adoption does not relate back — Joti v. Mankubai, AIR 1988 Bom. 348/ Banabai v. Wasudeo, (1980) 82 Bom. LR 388.

(iv) A valid adoption by a Hindu female operates as a valid adoption even by her husband. The principle has been laid down in Sawan Ram v Kala Wanti, 1967 AIR 1761 (SC). The Supreme Court held that “it is well-recognized that, after a female is married, she belongs to the family of her husband. The child adopted by her must also, therefore, belong to the same family. On adoption by a widow, therefore, the adopted son is to be deemed to be a member of the family of the deceased husband of the widow. ………… thus, itself makes it clear that, on adoption by a Hindu female who has ‘been married, the adopted son will, in effect, be the adopted son of her husband also.”

A valid adoption once made cannot be cancelled by the adoptive father or mother or any other person. Further, the adopted child also cannot renounce his adopted parents and return back to his natural family. If the adoption process has been properly followed, the consequences of the same cannot be undone and then the motive of the adoption has no relevance — Devgonda Patil v. Shamgonda Patil, AIR 1992 Bom. 189.

In the case of Chandan Bilasini v. Aftabuddin Khan, (1996) 7 SCC 13, the legal effects of an adoption have been well summarised:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family. As a consequence, when a widow adopts a child, the child not merely acquires an adoptive mother but also acquires other relationships in the adoptive family, unless there is anything to the contrary in the Hindu Adoptions and Maintenance Act.

This position is reinforced by section 14(4) which sets out that where a widow or an unmarried woman adopts a child, any husband whom she marries subsequently shall be deemed to be the step-father of the adopted child. In other words, the family relationship gets crystalised as at the date of adoption. The child will be deemed to be the child of the parent who adopts the child and the existing or deceased spouse of that parent (as the case may be), if any, will be considered the child’s father or mother. A spouse subsequently acquired by the adoptive parent becomes the step-parent of the adopted child. The adopted child, however, cannot divest any person of any property already vested in that person [section 12(c)].”

The Supreme Court in Smt. Sitabai v. Ramchandra, AIR 1970 SC 343, referred to the scheme of the Hindu Adoptions and Maintenance Act and held:

“………. the child adopted is tied with the relationship of sonship with the deceased husband of the widow. The other collateral relations of the husband would be connected with the child through that deceased husband of the widow. For instance, the husband’s brother would necessarily be the uncle of the adopted child. The daughter of the adoptive mother (and father) would necessarily be the sister of the adopted son, and in this way, the adopted son would become a member of the widow’s family, with the ties of relationship with the deceased husband of the widow as his adoptive father.”

The Act also empowers the adoptive parents to dispose of their property either by way of sale, gift, exchange, etc., or by way of a will. Thus, merely because they have made an adoption that by itself is no bar on them from disposing of their properties in any manner as they deem fit.

Adoption and other Acts

Under the Income-tax Act, 1961, the definition of a child expressly includes an adopted child. Hence, clubbing provisions applicable to a minor child would also apply to an adopted child. An interesting issue would arise u/s.56(2)(vii), viz. would a gift of money/ property received by an adopted child from his or her parents be exempt? Would an adopted child be a lineal descendant of an adoptive parent? The Andhra Pradesh High Court had an occasion to consider a similar issue in the context of the Estate Duty Act, 1953, in the case of Estate of Nuli Lakshminarayana, 116 ITR 739 (AP). The Court held that the expression ‘lineal descendant’ takes in an ‘adopted son’. It is submitted that the ratio of this decision should be extended to section 56(2)(vii) also.

Section 6 and Schedule IA to the Companies Act, 1956 define the term relatives. The Schedule states that the term ‘son’ includes a step-son. However, it is silent as to whether an adopted son is included. The Department of Company Affairs in a clarification given at a meeting with Chamber of Commerce has stated that on adoption a person cannot be regarded as a relative of the persons who are relatives in his natural family. A corollary to this should mean that an adopted son is a son for Schedule IA.

The Bombay Stamp Act, 1958 provides a concessional rate of stamp duty @ 2% in case of a gift to any lineal ascendant/descendant of the donor. Again the term ‘lineal ascendant/descendant’ has not been defined. It is submitted that reliance may be placed on the decision of the Andhra Pradesh High Court explained above for concessional duty in case of a gift to/by an adopted child.

The definition of the term ‘immediate relative’ in the SEBI (Issue of Capital & Disclosure Requirement) Regulations and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 state that the term includes the child of a person. However, it does not expressly state whether an adopted child is included. It is submitted that in the light of the above discussion, an adopted child should also be treated as an immediate relative of a person.

How can a CA help?

Normally, an Auditor/CA is not directly involved with succession issues. Nevertheless, he can provide a lot of value -added services to his clients if he is aware of the law in this respect. Disputes on inheritance impact the operations of a corporation even in case of listed companies, especially, where an adopted child is to become the successor to the business/properties. A CA can be of great assistance to his clients in cases of such family feuds and on succession planning.

shailesh.kwebmaker

Gaming or Gambling?

Introduction

“What’s in a name?” asks Shakespeare.

Apparently a lot, if you are considering whether a particular venture is a ‘gaming venture’ or a ‘gambling venture’. While the two terms sound similar, there is a world of a difference between the two. With India’s online gaming market growing by leaps and bounds, there is a keen interest in setting up gaming ventures and investing in/acquiring Indian gaming companies. Several venture funds/large corporations have invested in gaming ventures in India. For instance, recently Walt Disney Company has acquired 100% stake in Indiagames Ltd. by buying out 42% stake held by the promoters and others for around $ 80 million. Games2Win, one of India’s oldest gaming portals has raised over $ 11 million from various venture funds. Thus, to say that the interest in this sector is large would be an understatement.

In India, gaming is a permissible activity, but gambling is either prohibited or heavily regulated. There are several laws which are relevant when one considers the nature of a venture. This Article gives an overview of this interesting subject.

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.

(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 for public gambling in certain parts of India. It is not applicable in Maharashtra and other States which have repealed its application.

Bombay Prevention of Gambling Act, 1887 applies in Maharashtra and regulates gaming in the State.

Other State legislations: Acts of other States, such as the Delhi Public Gambling Act, 1955, Madras Gambling Act, etc. These Acts are more or less similar to the Public Gaming Act 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 a 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 in conducting lotteries.

The Prevention of Money Laundering Act, 2002 which requires maintenance of certain records by entities engaged in gambling. ?

States which expressly permit gambling:

Sikkim: The Sikkim Casino Games (Control and Tax) Rules, 2002 permit setting up of casinos in Sikkim.

The Sikkim Online Gaming (Regulation) Act, 2008 + Sikkim Online Gaming (Regulation) Rules, 2009 provide 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 allows casinos to be set up only at fivestar hotels or offshore vessels with the permission. That is the reason Goa has floating casinos or casinos at fivestar 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 the State of West Bengal, a game of poker is expressly excluded from the definition of gambling.

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 and all three 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 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 an imprisonment for a term up to 3 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 3 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 v. UOI, AIR 1957 SC 628, it was held that competitions which involve substantial skill are not gambling activities.

In State of AP v. K. Satyanarayana, 1968 AIR 825 (SC), the Court analysed whether a game of rummy was a game of skill. It held as follows:

Rummy was 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; and

Chance is a factor, but not the major factor.

Held, that rummy is not a game of chance, but a game of skill.

In Dr. K. R. Lakshmanan v. 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 skill and chance.

In a game of skill chance cannot be entirely eliminated, but it depends upon superior knowledge, training, attention, experience and adroitness of 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 character of the game.

In horse-racing the person betting is supposed to have full knowledge of horse, jockey, trainer, owner, turf, race system, etc.

Horses are given specialised training.

Books are printed giving details of the above which persons betting study.

Hence, betting on horse-racing is a game of skill since skill dominates over chance. In Bimalendu De v. UOI, AIR 2001 Cal. 30, Kaun Banega Crorepati aired on Star TV was held not to be a game of chance, but was held to be a game of skill. Elements of gambling, i.e., wagering and betting are missing from this game. Only a player’s skill is tested. He does not have to pay or put any stake in the hope of a prize.

In M. J. Sivani v. State of Kar, 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 a mixed game of skill or chance. For a commoner it is difficult to play a video game with skill. Hence, they are not games of mere 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.

Bombay Prevention of Gambling Act, 1887
This Act is similar to the Public Gambling Act in its operation, 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 punishment under this Act is imprisonment up to two years. Police officers have been given sub-stantial 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 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 come 1st, 2nd, 3rd in a race. The Court held that the game was one of skill, since filing up the names of the horses required specialised knowledge about the horses and some element of skill — Stoddart v. Sagar, (1895) 2 QB 474.

Prevention of Money Laundering Act, 2002

The PMLA covers any designated business or profession carrying on activities of playing games of chance for cash or kind. Such a business must maintain for 10 years a record of all transactions between it and the clients.

Further, it must verify and maintain the records of the identity of all its clients/customers.

FEMA/Foreign Direct Investment Policy

Remittance abroad out of lottery winnings, out of income from racing/ridding or for purchase of lottery tickets, sweepstakes is prohibited under the Foreign Exchange Management Act.

The FEMA Regulations (FEMA 20/2000-RB) and the Consolidated FDI Policy of 2011 issued vide Circular 2/2011, state that Foreign Direct Investment of any sort is prohibited in gambling and betting including casinos. Thus, FDI is not allowed in any gambling ventures, whether online or offline. Further, foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, management contract is prohibited for lottery businesses and betting/gambling activities.

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. 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.

Role of a CA
Looking at the raging controversy over gaming versus gambling, a CA should alert his clients about the potential dangers of setting up a gambling venture or a venture where there is no clarity over whether it falls under gambling or gaming. Similarly, if he is associated with a fund/investor investing in such a doubtful venture, he should red flag the transaction for his client’s notice. He should recommend that a well-reasoned legal opinion on this aspect should be obtained and only then the transaction should be proceeded with. The risks involved with getting into a gambling venture are very high and could even lead to the arrest/prosecution of the persons involved with it. The old adage of ‘better safe than sorry’ should be the mantra in such a case.

Finally, I have to say that the most surprising aspect has been the speed at which the folks in India adapt to Western practices. They learn fast, really, really fast.

— Sanjay Kumar

shailesh.kwebmaker

Maharashtra Housing (Regulation and Development) Act, 2012 (Part I)

Introduction

Sometime back, the Government of India introduced the draft of the Real Estate (Regulation of Development) Act (“RERA”).
While this is yet to become law, the Maharashtra Government has
introduced a Bill for passing Maharashtra Housing (Regulation and
Development) Act, 2012 (“MHRD”). This Bill was passed by both
Houses of the State in July 2012 and press reports indicate that the
Governor has given his oral assent. However, a formal Notification in
the Official Gazette is yet awaited. Once it is notified, the Bill would
become an Act. On coming into force, one important consequence that it
will have is that it would repeal the nearly 50-year old Maharashtra
Ownership Flats (Regulation of the Promotion of Construction, Sale,
Management and Transfer) Act, 1963 (MOFA).

The Preamble
states that the MOFA did not have an effective implementing arm as the
flat purchasers could only approach the Consumer Forums or Civil Courts.
It further provides that the Bill has been drafted to ensure full
disclosure by promoters, to ensure compliance of agreed terms and
conditions and to usher in transparency and discipline in the
transaction of flats and to put a check on abuses and malpractices.

Let
us examine this important piece of Legislation which is expected to
soon become the Law and also compare it with the existing provisions of
MOFA which it seeks to repeal, to understand whether the MHRD is vintage
wine packaged in a flashy new bottle or something more?

Non-applicability
The
MHRD does not apply to MHADA. Further, the Maharashtra Apartment
Ownership Act, 1970 is not repealed. Thus, condominium structures would
yet continue to be governed by the earlier law.

Housing Regulatory Authority and Appellate Tribunal

The
Bill proposes to introduce a radical change in the real estate
industry. For the first time, a Housing Regulatory Authority (HRA) would
be constituted to regulate, control and promote planned and healthy
development and construction, sale, transfer and management of
properties. Thus, just as the capital markets have a regulator in the
form of SEBI, the banking industry has RBI, the real estate sector would
also have an authority. It would be an autonomous body in the form of a
body corporate consisting of a Chairperson and Two or more Members.

The
Authority would have powers to ensure compliance of the obligations
cast upon builders under the Act, to make inquiries into compliance of
its Orders, etc. It has powers of a Civil Court and hence, it is a
quasi-judicial authority.

An additional feature is the
establishment of the Housing Appellate Tribunal, which would hear all
appeals against the Orders of the Authority. The Tribunal shall be a
three member bench to be headed by a sitting or retired judge of a High
Court. Thus, the Tribunal has been constituted on the lines of tribunals
under other Corporate Laws, such as the Securities Appellate Tribunal.

Both
these features are on the lines of the Central Act which would
constitute a Real Estate Regulatory Authority and a Real Estate
Appellate Tribunal.

One only hopes that the addition of two new authorities does not lead to more delays and latches in serving justice.

Promoter’s Obligations
The
obligations cast on a “promoter” of a project, i.e., the builder, are a
combination of those under MOFA in a new avatar and some additional
ones. A promoter has been defined to cover any person, firm, LLP, AOP or
any other body which constructs a block or a building of flats. In the
event that the builder and the person selling the flats are different,
then both of them are promoters. The decision of the Bombay High Court
in the case of Ramniklal Kotak v. Varsha Builders AIR 1992 Bom 62 is
relevant on this issue. A mere contractor of the builder would not come
within the definition of the term.

The definition of “flat” is
also relevant and it is defined as a separate and self-contained
premises which may be used for residence, office, show-room, shop,
godown, etc., and includes an apartment. The definition of the term flat
is similar to the one u/s. 2 of MOFA except that it does not include
the words “and includes a garage”. This is a fallout of the celebrated
decision of the Supreme Court in the case of Nahalchand Laloochand P Ltd
v Panchali Co-op. Hsg. Society (2010) 9 SCC 536 which held that the
promoter has no right to sell open or stilt parking spaces. A terrace
has been held not to be a flat. The premises contemplated by the term
“flat” refers to a structure which can be used for any of the purposes
specified in the definition, for example, residence, office, show room,
etc. – Association of Commerce House v Vishandas, 1981 Bom CR 716.

Let us Look at some Key Obligations of Promoter:

(a)
Registration of a Project – This is a new requirement cast on the
developer, which was not found under MOFA. Every developer must apply
for registration of his project with the HRA and for displaying it on
the HRA’s website. The HRA must register such project within a period of
seven days from application. Registration is required even for ongoing
projects where the Occupation Certificate has not been received. If a
Court declares that the title of the promoter to the land is invalid,
then the HRA can cancel the registration of the project which is built
on such land. If registration is cancelled, then the promoter is
prohibited from selling the flats constructed in such project.

Registration is not required in the following cases:

(i) When the land area to be developed does not exceed 250 sq. mtrs.

(ii) When the total number of flats to be developed is less than five.

(iii) When the promoter has received the OC before the provision came into force.

(iv)
Where the project is one of a renovation, repairs, reconstruction or
redevelopment project not involving a fresh allotment or marketing of
flats.

Once the project is registered, the promoter can upload
details on the HRA’s website. The features relating to a central
registry and a website are similar to the RERA. The monetary penalty for
not registering a project is Rs. 1,000 per day of default. In addition,
a promoter cannot issue any advertisement for a project or receive any
advance payment for the same, unless it is displayed on the HRA’s
website.

(b) Disclosures by the promoter – The promoter must
make full and true disclosure of several documents and information in
respect of the project, e.g., details of the entity developing the
project, consultants used, phase-wise time schedule for completion, type
of materials used, fixtures and fittings bifurcated between branded and
unbranded, possession date, nature of organisation to which conveyance
would be made, etc. One such requirement is obtaining a title
certificate to the land which should be certified by an advocate with a
minimum three years’ standing. While disclosures are a good move, it
must be ensured that it does not lead to undue red tape.

(c)
Agreement for Sale – Similar to the current provisions of section 4 of
MOFA, the promoter must execute an Agreement for Sale in the prescribed
form before accepting any advance payment/ deposit exceeding 20% of the
sale price. Once a promoter has executed an Agreement to Sell, he would
not mortgage or create any charge on the plot, building or apartment
without the previous consent of the allottee.

The Bombay High
Court’s decision u/s. 4 of MOFA in the case of Ramniklal Kotak v. Varsha
Builders, AIR 1992 Bom 62 is relevant in this respect :

“To prevent bogus sales being effected by a Promoter and to put a check to malpractices indulged in by the Promoters in regard to sales and transfer of flats, the Legislature has provided that the Promoter shall :

(i) not accept any sum or money as advance payment or deposit more than 20% of the sale price;

(ii) enter into a written agreement with each individual flat owner.”

The Bombay High Court in Association of Commerce House Block Owners v. Vishnidas Samaldas (1981) 83 Bom. L.R. 339 held that the provisions of section 4 are mandatory and not directory in nature. The ratio of the above-mentioned decisions would apply even under the provisions of the Bill.

The Agreement must also be registered. However, even if it is unregistered, the same would be admissible as evidence in a suit for specific performance or as evidence of part performance of a contract. A similar section is present under MOFA and was inserted to overrule the Bombay High Court’s decision in the case of Association of Commerce House Block Owners v. Vishnidas Samaldas that non-registered agreements are wholly invalid and void ab initio and create no rights between the parties.

(d) Responsibilities – If any flat buyer suffers a loss due to any false statement, then the promoter must compensate him. If the buyer withdraws, then he would be refunded the sum invested along with interest @ 15% p.a. Under MOFA, this is refundable with interest @ 9% p.a.

The promoter would have to take various specified safety measures for the builder. He is not allowed to give possession of the flats till the OC or Completion Certificate has been obtained. Interestingly, a majority of the builders in Mumbai do not obtain a Building Completion Certificate.

The promoter needs to adhere to the plans and project specifications which have been approved and which have been disclosed to the prospective flat allottees. Further, if any defect is brought to the promoter’s notice within three years from possession, then he is required to rectify the same wherever possible or offer such compensation to the flat allottees as the HRA may decide.

(e) Carpet Area Selling – The MOFA was specifically amended in 2008 to provide that one of the responsibilities of the promoter is to sell flats on the basis of the carpet area only. He could, however, separately charge for the common areas in proportion to the carpet area. The Statement of Objects and Reasons introducing this Amendment mentioned that flat purchasers are not understanding the difference between carpet, built-up, super built-up area and hence, the promoters must sell flats on carpet area alone.

While the Bill requires a promoter to disclose the carpet area and the Agreement for Sale should mention the extent of the carpet area, the amendment made in 2008 is nowhere to be found. The Agreement is required to mention the total price of the flat, but there is no reference in this clause to the carpet area pricing. MOFA also provided that the definition of carpet area for carpet area pricing included the balcony area of the flat. The Bill now defines carpet area for all purposes under the Bill to mean the net usable floor area within a flat or building in accordance with the Development Control Regulations.

Powers of Promoters

Section 12A of MOFA provides that the promoter cannot, without just and sufficient cause, cut off, with-hold, curtail or reduce essential supply or services enjoyed by a flat purchaser. Any person who contravenes the provision of this section shall on conviction be liable to imprisonment for a term of up to three months and/or fine. These include, water, electricity, lights in passages / stair-cases, lifts, conservancy or sanitary services, etc.

The Bill contains similar provisions with some differences. The responsibility of the promoter to provide these services has been made subject to the service provider providing the same. If the service provider does not provide the services, the promoter would not be responsible. This is a welcome change. However, an interesting addition has also been made.

If the flat purchaser fails to pay the maintenance charges to the promoter for a period of more than three months, then the promoter is entitled to, after giving a seven day notice period, cut-off or withhold such essential supply or service. The provision for three months imprisonment which currently exists in MOFA has also been laid to rest.

Accounts and Audit

One interesting and welcome new facet is the compulsory maintenance of building-wise separate bank accounts. The promoter must maintain a separate bank account of the sums taken by him as advance /deposit/towards the share capital for the formation of a cooperative society or a company/towards the outgoings/taxes. He must hold these sums for the purposes for which they were given and disburse them for those purposes.

A promoter who has registered under the Act must maintain accounts for various specific heads. The promoter must also get such accounts audited by a Chartered Accountant. The HRA can direct the promoter to produce all such books of account or other documents relating to a project or flat in case of a complaint against the promoter.

shailesh.kwebmaker

Leases

Introduction

A lease is one of the
oldest modes of enjoying immovable property. When one speaks about
leases, one often comes across terms, such as tenancy, licence, etc.
Some of these are synonyms while some have different meaning. Although
leases have been around since numerous years, there is yet a fair deal
of confusion surrounding them. Let us try and clear some of the myths
about leases.

Meaning

Section 105 of the Transfer
of Property Act, 1882 (‘the Act’) has defined the term ‘lease’ in
relation to an immovable property to mean:

(a) a transfer of a
right to enjoy such property — the person transferring the property is
called a lessor and the transferee is known as a lessee;

(b) made for a certain time. Expressly or impliedly or made in perpetuity;

(c)
in consideration of a price paid or promised or of money/share in
crops/service or any other thing of value to be rendered periodically or
on specified occasions to the transferor by the transferee who accepts
such terms. The price paid is known as premium and the money, share,
service or other thing to be rendered periodically or occasionally is
known as rent. The premium is also known as pagadi or salami.

As
opposed to a conveyance in which there is an absolute transfer of
ownership of immovable property, in the case of a lease there is only a
limited transfer of a right to enjoy the immovable property.

Once
the lessor grants a lease, he is left with two rights — right to
receive rent and a reversionary right. A reversionary right is the right
of the lessor to receive back the property once the tenure of the lease
expires. The lessor can transfer the reversionary rights. In an
interesting decision, the Supreme Court in the case of R. Kempraj v.
Barton Son & Co., (1969) 2 SCC 594 has held that even in the case of
a perpetual lease, the lessor has a reversionary right.

The
Supreme Court in A. R. Krishnamurthy, 176 ITR 417 (SC) has held that a
lease of land is a transfer of interest in the land and creates a right
in rem and there is a transfer of title in favour of the lessee though
the lessor has right of reversion after the period of the lease
terminates. The grant of a lease is a transfer of an asset. The Supreme
Court in the case of B. Arvind Kumar v. GOI, (2007) 5 SCC 745 has laid
down the essential elements of a lease of immovable property:

(a) There should be a transfer of a right to enjoy an immovable property;

(b) Such transfer may be for a certain term or in perpetuity;

(d)
The transfer should be a bilateral transaction, the transferee
accepting the terms of transfer. A lease agreement is like any other
agreement and can be oral also.

However, this would be subject to the provisions of section 107 of the Act explained later.

Tenure of lease

Unless
the lease provides otherwise a lease of immovable property, for any
purpose other than agricultural or manufacturing, shall be deemed to be a
lease from month to month, which is terminable on the part of either
the lessor or the lessee, by 15 days’ notice expiring within the end of a
month of the tenancy. Some leases contain a clause for renewal of the
lease on the same terms and conditions as the current lease except with
an increase in the rent. It should be noted that the renewal of a lease
is not automatic and it must be expressly so stated in the lease deed.

In
India, a perpetual lease is also valid — R. Kempraj v. Barton Son &
Co., (1969) 2 SCC 594. Whether a lease is a lease in perpetuity or a
monthto- month lease has been the subject-matter of great debate and is
relevant from a stamp duty perspective also (as explained below). Where
the lease deed does not specify any duration, but permits the lessee to
hold the land forever, subject to the right of the lessor to resume the
land by giving one month’s notice, there is no grant in perpetuity — B.
Arvind Kumar v. GOI, (2007) 5 SCC 745. Hence, it is important that the
lease deed clearly specifies the lease period.

Making of a lease

U/s.107
of the Act, a lease of a period for more than one year or a lease from
year to year must be made only by way of a registered instrument. Any
other lease can be made by way of a registered instrument or by an oral
instrument accompanied by delivery of possession. In cases where a
registered instrument is executed, both the lessor and the lessee must
execute the same.

Thus, section 107 makes it mandatory for any
lease of more than one year to be in the form of a written, registered
instrument. A corollary of a registered instrument is stamping. Failure
to create a lease of more than one year by way of a registered
instrument makes the lease deed inoperative and the Courts are disabled
from using the instrument as evidence — Anthony v. KC Ittoop & Sons,
(2000) 6 SCC 394/Bajaj Auto v. Behari Lal Kohli, (1989) (4 SCC
39/Shantabai v. State of Bombay, AIR 1958 SC 532. However, the Supreme
Court also laid down an important principle in the case of Anthony v. KC
Ittoop & Sons, (2000) 6 SCC 394 in the context of leases made by
non-registered instruments:

“. . . . . . What is mentioned in
the three paragraphs of the first part of section 107 of the TP Act are
only the different modes of how leases are created. The first paragraph
has been extracted above and it deals with the mode of creating the
particular kinds of leases mentioned therein. The third paragraph can be
read along with the above as it contains a condition to be complied
with if the parties choose to create a lease as per a registered
instrument mentioned therein. All other leases, if created, necessarily
fall within the ambit of the second paragraph. . . . . . . . . . . . .

Since
the lease could not fall within the first paragraph of section 107, it
could not have been for a period exceeding one year. The further
presumption is that the lease would fall within the ambit of residuary
second paragraph of section 107 of the TP Act. . . . . . .
Non-registration of the document had caused only two consequences. One
is that no lease exceeding one year was created. Second is that the
instrument became useless so far as creation of the lease is concerned.
Nonetheless the presumption that a lease not exceeding one year stood
created by conduct of parties remains un-rebutted. . . . . .”

Thus, even in cases where leases of more than one year are not registered, a lease of one year is created.

Stamp Duty

Article 36 of Schedule I to the Bombay Stamp Act provides for the stamp duty on a lease deed, sub-lease deed.

The
rate of duty is as shown in Table 1: Hence, whether or not a lease is a
perpetual lease becomes very important from a stamp duty perspective.
In the case of perpetual leases, the duty incidence would be at 4.5% of
the market value of the property based on the Stamp Duty Ready Reckoner.

Even a monthly tenancy would be treated as a perpetual lease
because no definite period is specified. In that case, stamp duty as on a
perpetual lease would be applicable — Collector of Stamps v. Laxmibai
Saheb, AIR 1948 Bom. 336; Santosh Pundalik Madankar v. Ramdas, 1985 Mah.
LJ 973.

If no definite term for lease is fixed and it is terminable by notice, it is a perpetual lease. Though a tenancy may be described as a monthly tenancy within the purview of the Transfer of Property Act, it does not follow that the document evidences a lease for any definite period for the purposes of stamp duty — Hidayat Mohindin v. Karamullah, AIR 1961 AP 1. Similar views have also been taken in the cases of Skinner v. Arunachalam, AIR 1939 Mad. (FB) 356, Mangal Puri v. Baldeo Puri, AIR 1938 All. 304.

Lease v. Licence
A leave and licence of an immovable property is different from a lease as a lease creates an interest in the property which the licence does not since it is only a personal non-transferable right. However, in many cases, a question may arise as to whether a transaction is one of a leave and licence or one of lease. This issue has witnessed a plethora of cases and controversies as the distinction between the two is very fine. Over a period of time the Supreme Court and various High Courts have laid down several tests for distinguishing a licence from a lease, but none of them are conclusive. Some of the important judgments on this issue are Qudrat Ullah v. Municipal Board, (1974) 1 SCC 202, Konchadda Ramamurthy v. Gopinath, (1968) 2 SCR 559, Associated Hotels of India Ltd. v. R.N. Kapoor, (1960) 1 SCR 368, Dunlop Rubber Co., AIR 1968 SC 175, Behari Lal v. Chotte, AIR 1963 All. 911, Mohan Sons & Co., 78 Bom. LR 195; Delta International v. Shyam Sunder Ganeriwalla, (1999) 4 SCC 545; ICICI, (1999) 5 SCC 708 (SC). A few tests laid down by these and several other cases are the intention of the parties, their conduct and circumstances surrounding the agreements, substance of the transaction, exclusive possession in case of a lease, creation of interest in the property in case of a lease, etc. Thus, this is an issue on which there is a lot of confusion and arbitariness and there is no litmus test to differentiate one from the other. It may also be noted that there is a thin distinction between lease and leave and licence, which has led to the wide-scale misconception among many people that a leave and licence can only be for 11 months. A lease which is of more than one year is to be compulsorily registered u/s.17(1)(d) of the Registration Act, 1908 and section 107 of the Transfer of Property Act, 1882. In the event that a licence was held to be a lease, people started making licences of 11 months so that registration would not be compulsory. This led to a general impression that leave and licence agreements can only be for a term of 11 months. In a leave and licence agreement, normally, there is no right given to the licencee to assign his or her rights, whereas in a lease agreement, the licencee subject to the approval of the licensor can assign and or transfer his or her rights.

Lease v. Tenancy

The terms lease and tenancy are synonyms and are often interchangeably used. However, quite often, it is believed that the two terms are different. In fact, even the Bombay Stamp Act, 1958, till some years ago (incorrectly) believed the two to be different and provided two separate Articles under Schedule I — one for transfer of tenancy and one for transfer of a lease. The definition of a lease u/s.105 of the Act would encompass a tenancy also. Generally, tenancy refers to a duration of a month-to-month lease while a lease refers to a longer duration. However, this is only a commercial distinction and has no legal basis.

The Bombay Stamp Act has now removed the distinction between a tenancy and a lease. The stamp duty in the case of a transfer of tenancy and transfer of a lease is now the same, i.e., the same as rate specified for a conveyance under Article 25 ~ 3, 4 or 5% depending upon the location of the immovable property. The duty is leviable on the fair market value of the property as computed under the Stamp Duty Ready Reckoner.

Transfer of reversionary rights

If the landlord/lessor transfers the reversionary rights to the tenant/lessee who has taken the property on lease, then the lessee becomes the full owner of the property. The stamp duty on a transfer of a lease is the same rate as on a conveyance on the fair market value of the property computed as per the Stamp Duty Ready Reckoner. However, in case of a transfer of reversionary rights of a property by the lessor to the lessee, there is a concessional basis of valuation of the property. The value is computed at 112 times the monthly lease rent paid by the tenant and not as per the Ready Reckoner. Thus, the duty in an urban area would be @ 5% of 112 times the monthly rent of the property. This benefit is available only if the tenant is able to prove that he has been in occupation of the property for at least five years. Further, this benefit is not available in case of properties taken on leave and licence.

Doctrine of merger

When a lessee of a property acquires the reversionary rights from the lessor, the Doctrine of Merger applies and the lesser estate (the lease) merges into the larger estate (reversionary rights) — Dr. D. A. Irani, 234 ITR 850 (Bom.). The Court held that once a lessee purchases the leased property from the lessor, the lease is extinguished as the same person cannot be both the landlord and tenant at the same time. There is a drowning or sinking of the inferior right into the superior right. This principle is also recognised under the Transfer of Property Act which specifically provides for the determination of the lease in case the interests of the lessor and the lessee vest in the same person at the same time. In such a case, the period of holding of the asset would be counted from the date on which the reversionary rights were acquired. The fact that the assessee was a lessee earlier for several years would be of no consequence in determining whether or not the gain was a short-term capital gain.

Transfer of lease and section 50C

Decisions of the Income-tax Tribunal have held that a transfer of a tenancy does not attract the provisions of section 50C of the Income-tax Act — Kishori Sharad Gaitonde, AIT 2010 200 ITAT (Mum.); Atul G. Puranik, 132 ITD 499 (Mum.); Munsons Textiles, ITA No. 6320/M/2010; Tejinder Singh (2012) 19 taxmann.
com 4 (Kol.).

Auditor’s duty

The Auditor should enquire of the auditee whether it has complied with the aforesaid provisions in respect of any lease agreements executed into by it. In case the Auditor comes across a lease transaction which does not comply with any provisions of the above Acts, then he will have to consider whether appropriate disclosures should be made in the Notes to Accounts or whether the non-compliance is so material so as to warrant a qualification in his report. He may insist upon a legal opinion to support any claim which the auditee is making. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’ and ‘diligence’.

shailesh.kwebmaker

Bombay Money-Lenders Act

Introduction
When one hears the term “money-lenders” what is the first image which comes to mind? In most cases, one would associate them with rural moneylenders giving loans at exorbitant rates of interest to poor farmers. While this is one important facet of the term, it would come as a surprise to many that even someone advancing interest-bearing loans to friends and relatives may come within the purview of this term under various State Money-lending laws, if it is the business of the lender to lend on interest. For instance, the State of Maharashtra has enacted the Bombay Money-Lenders Act, 1946 for the regulation and control of transactions of moneylending within the State. Let us consider some of the important aspects of this Act.

Applicability
Section 5 is the main operative section of the Act. It provides that no money-lender can carry out the business of money-lending without a licence for the same. Further, the business must only be carried out in the area for which he has been granted a licence and in accordance with the terms and conditions of such licence. Thus, any business of money-lending without a licence is prohibited by the Act. In order to constitute an offence under the Act, the money-lender must carry on business in an area outside of what has been permitted by his licence – Bhavarlal Pruthviraj Jain v State of Maharashtra, 191 Bom CR 878.

A money lender has been defined to mean any individual, HUF, company, AOP, etc., who carries on the business of money-lending in the State of Maharashtra. However, banks, any financial/other institution notified by the State Government are excluded from the definition of a money-lender.

One of the important restrictions under the Act is the maximum rate of interest which a lender is entitled to charge. This rate is notified from time to time by the State Government. Currently, the maximum rate of interest for loans to any person other than an agriculturist is 18% p.a. in case of secured loans, whereas it is 20% in the case of unsecured loans.

Business of Money-lending
The next question which becomes relevant is that what constitutes a business of money-lending under the Act? The Act defines it 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. Thus, two important facets are relevant – (a) there must be advancing of loans; and (b) such advancing must constitute a business.

What constitutes a business has not been defined and hence, useful reference may be made to various decisions under the Income-tax on what constitutes a business. The Supreme Court in the case of Distributors Baroda P. Ltd., 83 ITR 237 (SC) has held that when the Legislature speaks of the business of holding of investments, it refers to a real, substantial and systematic or organised course of activity of investment carried on by the assessee for a set purpose, such as earning profits. If the investments are only made for a collateral purpose, then it cannot be considered as the business of the assessee. A similar reasoning may be applied to the activity of giving loans. Of course, it goes without saying that whether or not a lending constitutes a business, would be driven more by the facts and circumstances of each case. However, some of the relevant factors would be the quantum of loans, frequency and number of transactions, type of borrowers, rate of interest charged, security demanded, organisational set-up of lender, etc.

In the case of Gajanan v. Seth Brindaban AIR 1970 SC 2007, the Apex Court considered as to when could a person be considered to be a money-lender:

“The word ‘regular’ shows that the plaintiff must have been in the habit of advancing loans to persons as a matter of regular business. If only an isolated act of money-lending is shown to the court it is impossible to state that it constitutes a regular course of business. It is an act of business, but not necessarily an act done in the regular course of business……….

………….on its plain reading only prohibits the carrying on of the business of money-lending in any district without holding a valid registration certificate in respect of that district. It does not prohibit and, therefore, does not invalidate an isolated transaction of lending money. Such an isolated transaction seems to us to be outside the rigour of the prohibition.”

What is a Loan?
Advancing of a loan is the prime requirement for a money-lender. Hence, let us examine what constitutes a loan? The Act defines it to mean an advance at interest.

The term interest has been defined under the Act to include, any sum, in excess of the principal paid or payable by a money-lender in consideration of or otherwise in respect of a loan. However, interest does not include any sum lawfully charged by a money-lender for or on account of costs, charges, expenses under this Act / any other Law.

The following transactions are excluded from the definition of the term loan and hence, dealing in them would not constitute a business of moneylending for the lender:

(a) A deposit of money in any Bank or in a Company or a Co-operative Society. Thus, a Company accepting Public Deposits under s.58A of the Companies Act or under the NBFC Directions for Public Deposits would not be covered by the definition of loan.
(b) A loan to or by or a deposit with a Society registered under the Societies Registration Act
(c) Loan advanced by Government or by any local authority
(d) A loan advanced to a Government servant from a fund
(e) A loan advanced by a co-operative society
(f) Advance made to a subscriber or a depositor in a Provident Fund from the amount standing to his credit in the fund
(g) A loan to or by an Insurance Company
(h) A loan to or by or deposit with anybody incorporated by any law for the time being in force in the State
(i) An advance of a sum exceeding Rs 3,000 made on the basis of a hundi
(j) An advance made bonafide by any person carrying on any business not having the primary object of lending money. However, such an advance must be made in the regular course of his business. Whether or not an advance has been made bonafide in the regular course of business is a question of fact. (k) An advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note. This is the most important exception.

Hence, every loan is not covered by the provisions of the Act, since an advance of more than Rs 3,000 made on the basis of a negotiable instrument other than a Promissory Note is excluded – Rajesh Varma v Aminexs Holdings, 2008 (3) Mah. L.J. 460. A negotiable instrument means one defined under the Negotiable Instruments Act, 1881. This Act defines a negotiable instrument to mean “a promissory note, bill of exchange or cheque payable either to order or to bearer.” However, a Promissory Note is expressly excluded. Hence, only if the loan is given on the basis of a cheque or a bill of exchange it would be out of the purview of the Act.

Accordingly, any advance of more than Rs 3,000 made on the basis of a post-dated cheque as a security is out of the purview of this Act – Nandram Kaniram v N.B. Raahtekar, 1994 (1) Bom CR 28; Sitaram Laxminarayan Rathi v Sitaram Kashiram Koli, 1984 (2) Bom CR 92.

Consequences of Not Holding Licence

One of the important consequences of carrying on the business of money-lending without a valid licence is laid down in section 10. According to this section, no Court would pass a decree in favour of a person not holding a valid licence for any suit under this Act. Thus, a suit for recovery of dues by such a person is liable to be dismissed. Even a suit for winding up of a borrower company u/s. 433 of the Companies Act, 1956 would be barred in case the lender is in violation of the Bombay Money-Lenders Act. This principle has been laid down by the Bombay High Court in the case of Marine Container Services (India) P Ltd v Rushabh Precision Bearings Ltd., 106 Comp. Cases 108 (Bom) which held as follows:

“I find no difficulty in so also construing section 434(1)(c) to hold that a petition for winding up u/s 433(e), r.w.s. 434(1)(a), would lie only if the debt was legally recoverable. The fact that the present is a company petition and under the Bombay Money-Lenders’ Act, no relief will be granted if the suit is filed would also make the debt unenforceable under the Act. It is no doubt true that a company petition is not a petition for recovery of dues from a company. Nevertheless, to wind up a company u/s 434(1) (a), the amount must be a debt which is legally recoverable. If the recovery itself is barred u/s 10 of the Bombay Money-Lenders’, Act, I am of the opinion, therefore, that in such a case the petition filed on the ground that the company is unable to pay such a debt, would also not be maintainable.”

If a money-lender who does not have a valid licence is in possession of the property of a loan debtor as a security, then the same can be requisitioned and delivered to the loan-debtor.

Several decisions have held that if a valid licence is not held by the money-lender, then the loan ceases to be a legally enforceable debt u/s. 138 of the Negotiable Instruments Act, 1881. Hence, if the debtor pays a cheque to such a lender which subsequently bounces, then the lender is not entitled to file a criminal suit for the cheque bouncing u/s 138 – Mulchand Ramji Saiya v Premji Ratanshi Gangar, Cr. A. No. 5397 of 2010 (Bom); Nanda Dharam Nandanwar v Nandkishor Talakram Thaokar, 2010 ALL MR (Cri) 733; Anil Baburao Kataria v Pursuhottam Prabhakar Kawane, 2010 ALL MR (Cri) 802.

Further, the Act prescribes a penalty for carrying on the business of money-lending without a valid licence. For the first offence, the punishment is a term of up to one year and/or a fine of Rs. 1,500. For every subsequent offence, the penalty is a term of at least two years.

Does the Law apply to NBFCs?

Banks have been expressly exempted. However, there is no clarity on whether or not the Act applies to NBFCs. Since money-lending is a State subject, different States and their High Courts have taken divergent views. One of the biggest bones of contention is that the State laws establish maximum rates of interest that can be charged by a money-lender whereas, the RBI has not established a ceiling on the rate of interest that can be charged by an NBFC. Some States such as Karnataka have specifically exempted certain NBFCs from the provisions of the Money Lenders Act, while there is a blanket exemption for all NBFCs in Rajasthan.

In Sundaram Finance Ltd, Special Civil Application No. 13163 of 2008 (Order dated 13th January 2010) and in Radhey Estate Developers v Mehta Integrated Finance Co Ltd, Special Civil Application No. 66 of 2010 (Order dated 26 April 2011) the Gujarat High Court ruled that the Bombay Money Lenders Act, as applicable to the State of Gujarat, does not apply to NBFCs which are regulated by the RBI.

However, the Kerala High Court has consistently been taking a view that even NBFCs are covered by the State money lending Act – Link Hire-Purchase and Leasing Co. (Pvt.) Ltd v State of Kerala, 103 Comp. Cas 941 (Ker).

Muthoot Finance Ltd has filed a Special Leave Petition (SLP. No. 14386/2010 on September 07, 2010) before the Supreme Court challenging the order of the High Court of Kerala approving the Order of the Government of Kerala notifying that provisions of the Kerala Money Lenders Act, 1958 which regulated and controlled money lending business in the state of Kerala, was applicable to NBFCs. The matter is currently pending before the Supreme Court.

Auditor’s duty

The Auditor should enquire of the auditee, whether it has complied with the aforesaid provisions in respect of any money-lending transactions executed into by it. In case the Auditor comes across a transaction which does not comply with any provisions of the above Acts, then he will have to consider whether appropriate disclosures should be made in the Notes to Accounts or whether the non-compliance is so material so as to warrant a qualification in his report.

He may insist upon a legal opinion to support any claim which the auditee is making. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is to exercise of ‘due care’ and ‘diligence’.

shailesh.kwebmaker

AGRICULTURAL LAND LAWS: MALCHA, 1961

Introduction: In the previous four articles, we examined the Maharashtra Land Revenue Code, 1966 and the Bombay Tenancy and Agricultural Lands Act, 1948. We continue our study of laws pertaining to Agricultural Lands in the State of Maharashtra by examining a very important Act which imposes a ceiling on Agricultural Land — the Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961 (‘MALCHA’).

This article gives a bird’s-eye view of the MALCHA (also ‘the Act’). This Act is relevant to companies since it lays down the ceiling/maximum limit on the holding of agricultural land in the State of Maharashtra. The Act also provides that the excess land can be acquired by the Government and distributed. The idea behind the Act is to ensure equality of agrarian land since agricultural is the main form of livelihood for the rural India. The Act is a part of the Government’s efforts to create social justice.

The Act applies to the whole of the State of Maharashtra.

Family Unit: U/s.4 of the Act the ceiling on the holding of agricultural lands is per ‘Family Unit’. This is a very 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 v. Smt. Banabai and Anr., (1986) 4 SCC 281.

His minor sons

His minor unmarried daughters

If his spouse is dead, then the minor sons and minor unmarried daughters from that spouse.

The definition of the term is exhaustive and hence, only the classes of relatives defined would be covered. 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 for a person. This is the reason why the simplest form of planning involves transferring land to one’s married daughter so as to exclude it from the ceiling limits. Since a daughter is a relative u/s.56(2)(vii) of the Income-tax Act, the transaction is out of the purview of that Section. Similarly, a daughter is a relative under the Bombay Stamp Act, 1958 and hence, a gift to one’s married daughter attracts a concessional stamp duty @ 2% instead of the standard rate of 5%. However, as in the case of any planning, commercial considerations must take precedence over tax concessions.

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.

Even in case of a joint family where a father and his sons and possibly are living and working together, the ceiling would be separate for each major male and his immediate family. For instance, in a joint family where there are two brothers and each of them has two major sons, there would be six separate ceilings and not one consolidated ceiling for the family even though they are joint in residence and business.

A very interesting scenario arises in the case of testate/intestate succession. For instance, there is a person who is holding land up to the maximum limit permissible. His major son is also independently holding another piece of land up to the maximum limit permissible. The father dies and his sole legal heir is his son. On his death, the land becomes that of the son. Can the son contend that since he has received the land by inheritance, the ceiling should not apply to the second land received by him? The Supreme Court had an occasion to consider this issue in the case of State of Maharashtra v. Annapurnabai and Others, AIR 1985 SC 1403. The facts were that the declarant died pending determination of excess ceiling area. A contention was raised that on his death the proceedings stand abated and that therefore, the authorities have no jurisdiction to proceed further with the determination of the excess land under the Act. The Supreme Court held that until the proceedings are completed, there is no abatement and the excess ceiling land has to be computed pursuant to the declaration under the provisions of the Land Ceiling Act and that therefore, the Government continues to have jurisdiction to determine the excess land. It held that the heirs and legal representatives of a deceased holder cannot be treated as independent tenure holders for fixing ceiling. Therefore, each heir would not be treated as independent tenure holders for fixing the ceiling.

Similarly, the Supreme Court in Bhikoba Shankar Dhumal v. Mohan Lal Punchand Tathed, 1982 SCR (3) 218 held that the persons on whom his ‘holding’ devolves on his death would be liable to surrender the surplus land as on the appointed day, because the liability attached to the holding of the deceased would not come to an end on his death. The heirs of the deceased cannot be permitted to contend to the contrary and allowed to get more land by way of inheritance than what they would have got if the death of the person had taken place after the publication of the Notification u/s. 21.

Where the family unit consists of more than five members, the unit would be entitled to hold land in excess of the ceiling area to the extent of 1/5th of the ceiling area for each member in excess of five members. However, the total holding of the family cannot exceed twice the ceiling area.

It may be noted that under the Bombay Tenancy and Agricultural Lands Act, 1948, land is said to be cultivated personally if a land is cultivated by the labour of one’s family members, i.e., spouse, children or siblings in case of a joint family. A joint family under that Act 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. Thus, the definition of family is different under different laws.

Ceiling area: No person or family unit can hold land in excess of ceiling area. Any excess is deemed to be surplus land. The Ceiling Area is fixed u/s.5 r.w. First Schedule to the Act. The ceiling varies depending upon the class of the land in question. The five classes of land and their respective ceilings are as given in Table-1:

Ceiling area:

No person or family unit can hold land in excess of ceiling area. Any excess is deemed to be sur-plus land. The Ceiling Area is fixed u/s.5 r.w. First Schedule to the Act. The ceiling varies depending upon the class of the land in question. The five classes of land and their respective ceilings are as given in Table-1:

No.

Class of land

Ceiling

(in acres)

Land with assured water supply for

irrigation and capable of yielding at

least 2 crops/year

Land (other than land falling in class

3) with no assured water supply for

irrigation and capable of yielding only

1 crop/year

Land irrigated seasonally by flow irriga-

tion from any source constructed or

maintained by the State Government

or Zilla Parishad or from any natural

source of water with unassured water

supply, i.e., where supply is given under

temporary water sanctions or those

which are dependent upon the avail-

ability of water in the storage

Dry crop land (land other than the

above 3 classes of land) in Bombay,

Thana, Kolaba, Ratnagiri, etc., which is

under paddy cultivation for continuous

period of three years from 2nd Octo-

ber 1972, to 2nd October 1975

Dry crop land other than the

above 4 classes of land

Various classes of land and respective ceilings

The above ceilings are mutually exclusive. Hence, a person can, at the same point of time, hold 54 acres of dry crop land as well as 18 acres of a land with an assured water supply.

The principle is better the irrigation and crop yielding capabilities of a land, the lower the ceiling and vice versa. Land which is totally unfit for cultivation is not to be included while computing the above ceilings. Thus, it becomes very important to ascer-tain the irrigation source of a particular land. For instance, in one case which I have come across the land holder was granted permission by a Collector to operate an electric water pump for irrigation at his own responsibility. The question arose that since the Collector’s permission was required for the pump, could it be said that the land was a Class 3 land and hence, the land was subject to a ceiling of 36 acres or was it a dry crop land and hence, subject to a ceiling of 54 acres. It is essential to note that it is not every case of a sanction which attracts a 36 acre ceiling. Only if the water sanctions are temporary or are linked to the quantity of water availability, the land becomes a Class 3 land. Hence, in this case, the ceiling was 54 acres and not 36 acres.

Restriction on transfer:

Any person holding surplus land cannot transfer the same. Transfer for this purpose means:

Sale

Gift

Mortgage with possession

Exchange

Lease

Assignment for maintenance

Surrender of tenancy

Similarly, no person or family unit can acquire land by transfer in excess of the ceiling area. If any person transfers any surplus land, then in computing the ceiling limit of that person, the land transferred would also be considered and the excess would be deemed to be excess land even though he may be divested of its possession. This is true even if after the transfer the transferor’s land holding is lower than the permissible ceiling.

In Kewal Keshari Patil v. State of Mah., 1966 Mah LJ 94 it was held that a Will is not a transfer. When will was executed, it is not a transaction which is contravening the Act.

Surplus land:

If any person is in possession of surplus land in excess of the ceiling area, then he must, within a period of one month from the date of possessing the excess land, furnish a return to the Collector. The Collector would then determine the surplus land by such person or family unit. The Collector can do so even suo moto without a person filing a return. The Collector can acquire the surplus land by determining the compensation in the manner laid down in the Act. While determining the compensation, the Collector would give a notice to interested persons to submit their claims for compensation.

Significance of agricultural land laws:

Over the past few months, we have analysed three laws dealing with agricultural lands. Laws dealing with agricultural land are very important since they provide for acquisition of surplus land by the State Government in case of violation of the laws. Further, in case of acquisition of agricultural land, the buyer of the land should ensure that he is getting a valid title.

An auditor basically conducts audit under the provisions of a statute. His report is also according to the requirements of the relevant statute, e.g., report under Section 227 of the Companies Act, 1956. An auditor is not an investigator and hence, does not make roving enquiries. Hence, in case the auditor comes across documents dealing with agricultural land, he may consider whether or not the auditee should obtain an opinion on the legality of its title.

By broadening his peripheral knowledge, the auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’ and ‘diligence’.

shailesh.kwebmaker

Repayment of Deposits

Introduction

One of the most important and easy sources of raising funds for companies and non-banking financial companies has been public deposits. As per statistics from the RBI, as on March 2010, the aggregate public deposits of the NBFC sector were Rs. 17,247 crore. Add to this the amount raised by companies as public deposits u/s. 58A of the Companies Act, 1956, deposits being accepted by unincorporated entities, and you would have an amount which would be mind boggling. However, since it is very easy to raise these deposits, a very large number of cases of defaults and frauds are also associated with public deposits. Various Central and State Legislations have been enacted to curb the default in repayment of deposits. Some of these Legislations appear to be entrenching each other’s territories and hence, have invited close scrutiny from the Supreme Court and various High Courts. The Supreme Court’s decision in the case of Sahara India Real Estate Corp. v SEBI, C.A. No. 9813 of 2011, Order Dated 31st August, 2012, is an example of Courts taking the matter of investor repayment very seriously. Although that case was not in relation to public deposits, it does show us the importance the Courts place on these matters. Let us look at some of the important and controversial issues connected with repayment of deposits which the Courts have had an occasion to consider.

Laws Governing Raising of Deposits by Companies

Deposits generally mean any deposit of money with a company, subject to exclusions mentioned expressly. What does and does not constitute a deposit can be a subject matter of discussion by itself. However, it would suffice to say that the scope of the term is very large. Deposits can be raised by two types of companies:

(a) Non-banking Financial Companies; and

(b) Companies other than NBFCs

Anup P. Shah Chartered Accountant laws and Business The raising of deposits by NBFCs is governed by Chapter III B of the Reserve Bank of India Act, 1934 (“the RBI Act”). Pursuant to this Act, the RBI has notified the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998; Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 and the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977.

In the case of Companies which are not NBFCs (also known as NBNFCs), the raising of public deposits is governed by s/s. 58A to 58AAA of the Companies Act,1956 read with the Companies (Acceptance of Deposits) Rules, 1975. These Laws lay down the meaning of the term deposit as well as various conditions subject to which public deposits can be raised by companies or NBFCs.

Repayment of Deposits by NBFCs S/s.

45Q and 45QQA of the RBI Act provide that every deposit accepted by a NBFC shall be repaid in accordance with the terms and conditions of the deposit. In case the NBFC fails to so repay the deposit, then the Company Law Board is empowered, either suo moto or an application, to order repayment or reschedule the terms and conditions of repayment. The provisions of these sections override all other laws. In case the NBFC fails to comply with the CLB’s Order, then the RBI can launch prosecution in respect of the same. Any person in default is liable to be punished with imprisonment for a term of up to three years and a fine of at least Rs. 50 for every day of noncompliance.

In the case of Piyush Rastogi v Moulik Finance and Resorts Ltd., 88 SCL 104 (All), it was held that RBI had power, jurisdiction and authority to file a criminal complaint against default/contravention made in respect of deposits’ repayment by the company and its directors and, therefore, submission of petitioner that initiation of criminal proceedings was illegal and without any jurisdiction was wholly erroneous. In the case of RBI v Integrated Finance Co. Ltd., 145 Comp. Cases 87 (Mad), the Court held that the repayment of a deposit contemplated under the RBI Act was repayment in cash and not in kind. It further held that the jurisdiction of the CLB to order repayment could not be usurped by any other Court. The CLB has held that there are no fetters on the powers of CLB under the RBI Act and in a particular case, the CLB may order repayment of deposits in modification of the parameters fixed by the RBI – B. Bharathi v Rockland Leasing Ltd., 95 Comp. Cases 471 (CLB).

Repayment by Other Companies

If a company, other than an NBFC, accepts deposits in violation of the Companies (Acceptance of Deposits) Rules, 1975 made u/s. 58A of the Companies Act, 1956, then the same shall be repaid within 30 days. The CLB may, u/s. 58A(9) order the repayment or rescheduling of the repayment of the deposits by companies other than NBFCs. Failure to comply with the CLB’s order may result in an imprisonment of three years and a fine of at least Rs. 500 for every day of non-compliance. Further, in case of defaults in repayment of deposits of small depositors (deposit of Rs. 20,000 or less in a financial year), the company is required to intimate the CLB. The validity of section 58A has been upheld by the Supreme Court in the case of Delhi Cloth & General Mills Co Ltd v UOI, (1983) 4 SCC 166.

Deposits by Individuals, Firms, AOPs

The RBI Act prohibits any individual, firm, AOP, etc., from accepting deposits if that person’s business is that of financing/non-banking financial activities/ receiving deposits/any lending, etc. However, loans raised from certain relatives, partner’s capital, etc., are allowed. The penalty for violation of this provision is punishable with imprisonment for a term of upto two years and/or with a fine higher than Rs. 2,000 or upto twice the deposit received by that person.

The validity of these provisions has been upheld in Kanta Mehta v UOI, 62 Comp. Cases 769 (Delhi) which was affirmed by the Supreme Court in T. Velayudhan Achari v UOI, (1993) 2 SCC 582. The Supreme Court has also held that the provisions of this section are applicable to money-lenders, being individuals/firms, registered under State Moneylending Acts, e.g., the Bombay Money-lending Act, 1946 and the State Laws cannot override the RBI Act – Kerala Small Financiers’ Association v UOI, 116 Comp. Cases 641 (SC). Very recently, the RBI has clamped down on certain sole proprietary firms of the promoters of some large NBFCs, which were raising deposits in violation of this provision.

Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act)

In addition to the above two Central Acts, various States, such as, Maharashtra, Gujarat, Bihar, Tamil Nadu, Andhra Pradesh, etc., have enacted Depositor Protection Acts. One such Act is the MPID Act of 1999 applicable in the State of Maharashtra. MPID is an Act to protect the interest of depositors of Financial Establishments and applies to “deposits” raised by a Financial Establishment. Section 014 of this Act provides that this Act overrides all other laws. Section 2(c) of the MPID Act defines the expression “deposit” to include any receipt of money or acceptance of any valuable commodity by any Financial Establishment to be returned after a specified period or otherwise, either in cash or in kind or in the form of a specified service with or without any benefit in the form of interest, bonus, profit or in any other form. Thus, the definition of the term is much wider than the definition found under the Companies Act or the RBI Act. The definition expressly excludes the following:

(i) Amounts raised by way of share capital, debenture, bond, other instruments in accordance with SEBI Regulations. Thus, the public issue of securities is excluded.

(ii) Partners’ capital in a firm.

(iii) Amounts received from a bank.

(iv) Any amount received from specified Public Financial Institutions.

(v)    Amounts received in the ordinary course of business by way of, –
(a)    security deposit,
(b)    dealership deposit,
(c)    earnest money,
(d)    advance against order for goods or services;

(vi) Any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in the State. Thus, money received from a money-lender registered under the Bombay Money-lending Act, 1946 is not a deposit.

(vii) Any amount received by way of subscriptions in respect of a Chit.

A “Financial Establishment” is defined to mean any person accepting deposit under any scheme or arrangement or in any other manner. It does not include a Government company or a bank. The term is very wide and covers within its purview, individuals, firms, NBFCs, companies, etc., which receive deposits.

Section 3 of the MPID Act provides that if any Financial Establishment fraudulently defaults in repayment of a deposit on maturity, then every person, including the promoter, partner, director, any other person, employee, etc., responsible for the management or conducting the business/affairs of the Financial Establishment shall be punished. The penalty is a term of upto six years and fine of upto Rs. 1 lakh. In addition, the Financial Establishment shall be liable for a fine of up to Rs. 1 lakh. The provisions of the MPID Act do not overrule the Criminal Procedure Code and all provisions of arrest, bail, etc., provided in the Code would have to be followed – Uday Mohanlal Acharya v State, (2001) 5 SCC 453.

Section 4 provides an additional recourse to the aggrieved depositor. If the State Government is satisfied that there is a default, it may order attachment of the Financial Establishment’s properties. Only property belonging to the defaulter can be attached. Property taken onleave and licence by the defaulter is not his property and cannot be attached – Chimanlal Modi v State, 2004 (2) Bom. CR. (Cri) 866.

Validity of State Depositor Protection Acts

The validity of the MPID and other similar State Depositor Protection Acts have been the subject matter of great debate. The moot point has been that, when there are Central Statutes in the form of the Companies Act and the RBI Act, how can a State Statute legislate on the very same issue? A Full Bench of the Bombay High Court in the case of Vijay C Puljal v State, 128 Comp. Cases 196 (Bom) (FB), had an occasion to consider this issue in detail. Striking down the validity of the MPID Act as being ultra vires, the Bombay High Court held as follows:

(i) The constitutional validity of s. 58A of the Companies Act, 1956 has been upheld by the Supreme Court. It has also held that the Parliament has legislative competence to enact Sections 58A, 58AA and 58AAA of the Companies Act, 1956.

(ii) The validity of the provisions of the RBI Act and the legislative competence of Parliament to enact Chapter III-C of this Act were upheld by the Supreme Court.

(iv) The legislation enacted by the MPID Act directly conflicted with the provisions contained in the Central Legislation. The MPID Act has created an offence in respect of the same subject matter by providing different punishments;

(v) The law enacted by the MPID Act is, in pith and substance, referable to legislative heads contained in the Central Acts. Hence, the State Legislature has enacted a law which it was not competent to enact.

However, the Supreme Court in the case of K.K. Baskaran v State, (2011) 3 SCC 793 has overruled the aforesaid Bombay High Court decision. Although this was a case in relation to the Tamil Nadu Depositors Act, the Supreme Court expressly overruled the decision in the case of Vijay Puljal. The Madras High Court had upheld the validity of the TN Act, and the case before the Supreme Court was in challenge to this Order. The Apex Court took a socialistic view of the situation and upheld all Depositor Protection Acts. Some excerpts from its judgment are as follows:

“18. Learned counsel for the appellant relied on the Full Bench decision of the Bombay High Court in Vijay C. Punjal’s case (supra) in support of his contention that the Tamil Nadu Act, like the Maharasthra Act, was unconstitutional being beyond the legislative competence of the State Legislature. We do not agree.

19. We have carefully perused the judgment of the Full Bench of the Bombay High Court in Vijay’s case (supra) and we respectfully disagree with the view taken by the Bombay High Court.

……………..

22. We are of the opinion that the impugned Tamil Nadu Act enacted by the State Legislature is not in pith and substance referable to the legislative heads contained in List I of the Seventh Schedule to the Constitution though there may be some overlapping. In our opinion, in pith and substance the said Act comes under the entries in List II (the State List) of the Seventh Schedule.

23. It often happens that a legislation overlaps both Lists I as well as List II of the Seventh Schedule. In such circumstances, the doctrine of pith and substance is applied. We are of the opinion that in pith and substance the impugned State Act is referable to Entries 1, 30 and 31 of List II of the Seventh Schedule and not Entries 43, 44 and 45 of List I of the Seventh Schedule.

24. It is well-settled that incidental trenching in exercise of ancillary powers into a forbidden legislative territory is permissible.

…………

38. The Court should interpret the constitutional provisions against the social setting of the country and not in the abstract. The Court must take into consideration the economic realities and aspirations of the people and must further the social interest which is the purpose of legislation.
…………….

39. We fail to see how there is any violation of Article 14, 19(1)(g) or 21 of the Constitution. The Act is a salutary measure to remedy a great social evil. A systematic conspiracy was effected by certain fraudulent financial establishments which not only committed fraud on the depositor, but also siphoned off or diverted the depositor’s funds mala fide.

……………..

44. We are of the opinion that there is no merit in this petition. The impugned Tamil Nadu Act is constitutionally valid. In fact, it is a salutary mea-sure which was long overdue to deal with these scamsters who have been thriving like locusts in the country.”

Directors’ Duty

Directors of a company/entity accepting public deposits should be extra cautious, because the consequences are quite stringent in nature. In case of any doubt over whether the company is in violation of any Central/State Deposit Law, they should immediately obtain expert advice. Courts, generally, have a sympathetic attitude towards depositors and hence, deposit acceptors should be wary of any non-compliance on their part. The old adage of “better safe than sorry” would work best and hence, they should consider setting a system of checks and balances in place beforehand.

shailesh.kwebmaker

SME Sector : Legal Overview

1. Introduction :

1.1 The Small and Medium Enterprise (‘SME’) sector is the growth engine of the Indian economy. This sector is the fulcrum based on which the Indian economy would leapfrog into the next orbit. It also represents one of the largest employers in the country. As per some estimates, there are more than 12 million SMEs in the country, manufacturing over 8,000 different products and contributing about 9% of the GDP. Further, they also have a 35% share in Indian exports.

1.2 However, inspite of these statistics, one must also bear in mind that the business mortality rate is also the highest amongst this sector. Hence, it is important that they get adequate support from the Government. Recognising their importance, the Government has enacted various legal provisions to safeguard them. This Article examines the different laws/provisions which deal with the SME sector.

2. MSME Act :

2.1 The most important step taken was the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’). The Act was enacted recognising the need for a comprehensive Act to provide an appropriate legal framework to facilitate the growth and development of the SME sector and to enhance their competitiveness. This Act was officially notified in the Gazette on 18th July 2006.

2.2 The Act applies to Micro, Small and Medium Enterprises. Before understanding these three definitions, let us understand the meaning of an ‘enterprise’. It means :

an industrial undertaking/business concern/other establishment by any other name,

which is engaged in the manufacture or production of goods pertaining to an industry specified in the Industries (Development and Regulations) Act; or

which is engaged in providing or rendering any service.

Thus, it can be a manufacturer SME or a service-sector SME. A third type of an SME would not be covered. For instance, would a kirana store (a small-time grocer) be covered under this definition ? In a sector where a vast percentage of the businesses are small-time traders, one wonders why the Act did not think of covering them. There is no definition of the terms service, manufacture and production. Further, the manufacturing activity should only be of those goods which are specified in the First Schedule to the IDRA Act. It is quite strange, that the Act sought to restrict manufacturing only to a limited type of goods and did not think it fit to enlarge the canvass to cover all types of production activity.

However, the legal form of the enterprise is not relevant, i.e., it could be a sole proprietorship, partnership, LLP, company, HUF, society, AOP, any other legal entity, etc.

2.3 Under the MSME Act, the Central Government has, vide Notification dated 29th September 2006, classified enterprises as given in table below :

In calculating the investment in plant and machinery, the Government has notified certain items which should be excluded. Further, in the case of imported machinery, items such as, import duty, shipping charges, customs clearance charges and VAT should be taken into account.

2.4 There is a requirement of filing with certain designated authorities, a Memorandum known as “Entrepreneur’s Memorandum” as given below.

2.5 Where any supplier, which is a micro or a small enterprise and has filed the Memorandum, has supplied goods/rendered service to any buyer, then the buyer must make payment to him within the time agreed upon between them. The maximum duration for payment must be within 45 days from the day of acceptance. If the buyer does not pay as per this schedule, then he is liable to pay compound interest with monthly rests at thrice the bank rate notified by the RBI. Thus, the defaulter has perforce to pay interest for the period of delay at 3 times the bank rate of interest notified, from time to time, by RBI (which is presently 6% and three times thereof will be 18% p.a.) compounded with monthly rests, notwithstanding any condition to the contrary in the contract between the ‘buyer’ and the ‘supplier’. Medium enterprises are not eligible for this protection.

2.6 Disclosure in accounts:

2.6.1 S. 22 of the MSME Act requires every buyer, who is required to get his accounts audited under any law, to furnish the following information in his annual accounts:

a) The principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of the accounting year.

b) The amount of interest paid by the buyer in terms of S. 18, along with the amounts of the payment made to the supplier beyond the appointed day during each accounting year.

c) The amount of interest due and payable for the period of delay in making payment (which has been made but beyond the appointed day during the year) but without adding the interest specified under this Act.

d) The amount of interest accrued and remaining unpaid at the end of each accounting year.

e) The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure u/ s.23 of the Act. This clause uses the words small enterprise. Does this mean that payments to a micro enterprise are not covered ‘by this clause?

The penalty for non-compliance is a fine which shall not be less than Rs. 10,000.

3. Schedule VI of Companies Act:

3.1 Schedule VI to the Companies Act, 1956 was also amended by Notification No. GSR 719(E)dated
16-11-2007. Part I dealing with the format of the Balance Sheet requires the following information to be provided under the heading ‘Sundry Creditors’ :

a) total outstanding dues of micro enterprises and small enterprises; and

b) total outstanding dues of creditors other than micro enterprises and small enterprises

3.2 Further, the Schedule also requires the following information (which is also required u/s.22 of the MSME Act) to be disclosed under the Notes to Accounts of the Company:

a) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;

b) the amount of interest paid by the buyer in terms of S. 16 of the Micro, Small and Medium Enterprises Development Act, 2006, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;

c) the amount of interest due and payable for the period of delay in making payment (which has been made but beyond the appointed day dur-ing the year) but without adding the interest specified under the Micro, Small and Medium Enterprises Development Act, 2006;

(d) the amount of interest accrued and remaining unpaid at the end of each accounting year; and

(e) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure u/s.23 of the Micro, Small and Medium Enterprises Development Act, 2006.

3.3 Saral Schedule VI:

3.3.1 The Ministry of Corporate Affairs has issued two drafts of revised Schedule VI for comments, namely Saral Schedule VI for Small and Medium Companies (SMCs) and other for Non Small and Medium Companies. ‘Small and Medium Sized Companies’ (SMCs) are defined in Rule 2(f) of Companies (Accounting Standards) Rules, 2006. SMCs are defined to mean a company which fulfills and satisfies the conditions mentioned here-under as at the end of the relevant reporting period:

i) whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

ii) which is not a bank, financial institution or an insurance c0mpany;

iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding reporting period;

iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding reporting period; and

v) which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

3.3.2 The proposed ‘Saral Schedule VI’ to the Companies Act, 1956has been proposed to take care of the following needs:

a) make it simple and user friendly for SMCs

b) have minimum disclosure requirements

c) ensure that the accounts have compatibility and convergence with IFRS

d) users needs are limited

4. Income-tax Act :

4.1 5.23 amends the Income-tax Act to provide that the amount of interest payable or paid by any buyer in accordance with the provisions of the Act, would not be allowed as a deduction for computing its income. Thus, in addition to the penal interest payable by the buyer, he will also have to bear the liability to income-tax thereon, as such interest on delayed payments to MSEs (whether already paid or remaining accrued due and payable) will be added to the taxable income of the buyer and subjected to income-tax, year after year, until it is finally paid to the affected supplier. Therefore, the only way for the buyers to avoid such interest and income-tax liability is to pay promptly the supplier’s bills.

4.2 In pursuance of the provisions of the MSMED Act, the CBDT has notified instructions to all assessing officers, vide their Instruction No. 12/2006 dated 14-12-2006, thereby directing them to implement:

a) The provisions u/s.22 of the said Act, which require the aforesaid disclosures, would enable the assessing officers to ascertain the correct amount of disallowance on account of interest payment or paid by the buyer, and

b) S. 23 of said Act lays down that the amount of interest payable or paid by any buyer under or in accordance with the provisions of MSME Act shall not be allowed as deduction in the computation of income.

4.3 Recently, Appendix II, in Form No. 3CD was amended by Notification No. 36/2009, dated 13-4-2009. A new item # 17A has been inserted, which requires the disclosure of the amount of interest inadmissible u/ s.23 of the Micro, Small and Medium Enterprises Development Act, 2006. Thus, by the amendment a duty is now cast also on the auditors of the (buyers) asses sees to reporting of any interest payable to such suppliers and the con-sequential disallowance of the same.

5. Role of CAs:
5.1 Chartered Accountants should bear in mind the requirements under the above laws while auditing the accounts of companies which have dealings with SMEs or which are SMEs themselves (once the Saral Schedule VI) is notified.

Nirav Shah

Real Estate Laws: Recent Developments-I

LawsI. Introduction

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.

II. Collector’s NOC

2.1 Some years ago, the collector woke up from slumber and
started demanding that sale of all apartments /offices situated in buildings
constructed on land leased by the collector, should be done only after obtaining
a prior ‘No Objection Certificate’ from him. It went without saying that this
NOC was given only after payment of the ‘Collector’s Charges’ which were based
on the area of the property transferred. Thus, an NOC was required for
transferring a flat on any of the collector’s lands, e.g., at Nariman Point,
Cuffe Parade, etc., and this was proving to be a hurdle for several property
transactions.

2.2 A few months ago, the Revenue and Forest Department
issued a circular which simplified the process of conveyance of immoveable
properties in the state. It stated that it is possible to register a property
without waiting for a no-objection certificate from the various authorities,
e.g., the collector, etc.

2.3 However, the collector’s circular was still valid and
subsisting. A recent Bombay High Court decision in the case of Mr. Aspi Chinoy v
State of Maharashtra, Writ Petition No. 713 of 2001, has quashed the impugned
circular of the collector. The court held that the state government does not
have the right to ask the petitioner to seek its prior approval before entering
into the transaction. Therefore, it does not have any power to demand any
premium before transferring the flat. The petition is allowed. Hence, no
permission, either of the state government or of the collector, is necessary. In
this case, the petitioner had paid the premium which had been demanded.
Accordingly, the amount of the premium was refunded with interest at the rate of
8% per annum from the date of deposit till refund, and payment was to be made
within a period of two weeks from the date of disposal of the writ petition.
This is a very good decision by the Bombay High Court. The court order does not
specify what happens to other flat owners who also have paid such premium; would
their premiums, collected by the collector, also be refunded?

III. Redevelopment of Housing Societies

3.1 A single judge of the Bombay High Court, in a very recent
decision delivered on 5th December, 2009, in the case of Acknur Constructions P
Ltd v Sweety Rajendra Agarwal & Others, Suit 1404 of 2009, held that even if one
member of a co-operative housing society objects to a redevelopment, then the
redevelopment would be stalled. In this case, a majority of the flat owners had
assented to the redevelopment but a small minority had objected to the same.
Actually, four out of its twelve members had objected to the development on
grounds that the redevelopment was not in the society’s interest. The developer
went to court seeking a stay on the objections of the minority and permission to
continue with the redevelopment work.

3.2 The High Court refused to permit the developer to
continue with the work. According to the court, the builder had failed to make
out a prima facie case that he could remove members or that the agreement was
binding on all members. Further, the developer has no higher right than that of
the society. It held that the activity should not compromise the rights of the
members and must always safeguard the existence of the society. It held that it
was difficult to contend that a minority in number cannot obstruct the
implementation of the development agreement. It also held that the co-operative
society movement is a socio-economic and moral movement to fulfill the
constitutional aim of distribution of wealth and is not a profit-making
activity.

3.3 In a subsequent decision of the larger bench (which
included the Chief Justice) of the Bombay High Court, in the case of Girish
Mulchand Mehta v Mahesh M Mehta, Appeal No 338 of 2009, delivered on 10th
December, 2009, the Bombay High Court has taken an exactly contrary view.

In this case, the court held that the general body of the
society is supreme and had taken a conscious decision to redevelop the building.
The general body of the society thus has also resolved to appoint the developer.
The members of the society were bound by the said decisions. The general body of
the society has approved the terms and conditions of the development agreement
by an overwhelming majority. Merely because the terms and conditions of the
development agreement are not acceptable to the appellants, who were a minority
(only two out of twelve members), that by itself cannot be the basis for not
abiding by the decision of the overwhelming majority of the general body of the
society. It further laid down a principle that that once a person becomes a
member of the cooperative society, he loses his individuality with the society
and he has no independent rights except those given to him by the statute and
bye-laws. The member has to speak through the society or rather the society
alone can act and speaks for him qua the rights and duties of the society as a
body. It is not open to the court to sit over the said wisdom of the general
body as an appellate authority. Merely because some a minority of members
disapprove of the decision, cannot be the basis to negate the decision of the
general body, unless it is shown that the decision was obtained by fraud or
misrepresentation or was opposed to some statutory prohibition. In this case,
the general body had taken a decision after due deliberations for over five
years to redevelop its property. Even with regard to the appointment of the
Respondent No.1 as the developer, the decision had been taken by the general
body of the society after examining the relative merits of the proposals
received from the developers and interviewing them. Thus, the court upheld the
majority’s verdict.

3.3 It is being respectfully submitted that the single judge’s decision needs a rethink and that the larger bench’s decision is more rational. Can one individual hold the entire society to ransom? If yes, then what is the meaning of a majority? What if one cankerous individual refuses in the hope of making some extra personal gains? Does not the principle of the socio-economic movement also require that col-lective good should be placed over individual gains and losses?

IV. Demolition of Illegal Construction

4.1 A very important decision was rendered by the Bombay High Court in the case of a writ petition filed by Sudhir M. Khandwala, Writ Petition No 1077 of 2007. The case pertained to the demolition of illegally constructed build-ings and the petition was filed by flat owners seeking respite from the BMC’s orders. The High Court refused to stay the demolition and refused to regularise the unauthorized construction.

4.2 The Division Bench held that while consider-ing such matters, not only the interests of the petitioners but also of those residing in the nearby areas should be taken into account. The court came down harshly on the petitioners and held that “….if they purchase flats without

bothering to make enquiries and seeking details of the construction, then they are themselves to blame. If they are carried away by the brochure and the public advertisements and do not make such inquiries they cannot turn around and seek assistance of the courts.”

4.3 The court further held that every application for regularisation is to be viewed on a case-to-case basis and that there is no blanket rule that allows all applications to automatically accepted and approved. Essential supplies like power, water and infrastructure are scarce and unauthorized construction adds to the burden on these facilities. Hence, the BMC can refuse to regularize a particular application. The court upheld the demolition order for 17 out of 24 floors.

4.4 This decision is a wake-up call for all flat buyers. It is very important for buyers to check whether or not the title documents of the building and various permissions are in order. A reputed solicitor’s certificate would be helpful. Further, while dealing with buildings constructed on forest land, CRZ land, etc., the buyers should be extra cautious.

Registration Fees

5.1 The Maharashtra State Government has issued a notification a few weeks ago which states that the Rs. 30,000 cap on registration fees has been removed. Registration fees in the state were 1% of the fair market value of the property or Rs. 30,000, whichever was lower. Thus, even if the registration fees were coming to Rs. 1,00,000, they would be capped at Rs. 30,000. Accordingly, now, the combined amount of the stamp duty and registration fees would be 6% (5% + 1%) of the fair market value. The FMV would be computed as per the Stamp Duty Ready Reckoner. The state government had earlier issued a similar notification which was subsequently withdrawn.

5.2 Such a move by the government would act as a dampener to flat purchasers. Registration is a service by the government and not a tax. It is unfortunate that the government is us-ing registration of documents as a means of increasing the state’s revenue.

VI. Information about Tenants

6.1 The Thane police has made it mandatory for owners of a home, club, hotel, hospital, etc., to give information about foreign nationals residing in their premises.

6.2 The owner of such premises is required to intimate the nearest police station about any foreigner arriving at their premises within 24 hours of their arrival. The police has issued this notification under Section 144 of the Criminal Procedure Code which empowers the issuance of such orders in urgent cases of nuisance or apprehended danger. Failure to do so may entail prosecution of the owners.

VII. Eviction of Tenant from Commercial Premises

7.1 The Supreme Court, in the case of Ashok Kumar vs. Ved Prakash (CA 8417 of 2009), has held that a tenant can be evicted from not only residential premises but also commercial premises to meet the bona fide requirements of the landlord for self-occupation. This was a case under S.13 of the Haryana Urban (Control of Rent and Eviction) Act, 1973. S.13 of this Act is as hereunder:

“Eviction of tenants-

1) A tenant in possession of a building or rented land shall not be evicted therefrom except in accordance with the provisions of this section.

2) A landlord may apply to the controller for an order directing the tenant to put the landlord in possession-

    b) in case of residential building, if-

    i) he requires it for own occupation, is not occupying another residential building in the urban area concerned and has not vacated such building without sufficient cause after the commencement of 1949 Act in the said urban area.”

7.2   In this case, the two courts had ordered eviction of the tenant/appellant from a shop constructed on the ground floor at a plot in Gurgaon district in Haryana.

However, the tenant challenged the eviction and the judgments of the two courts on the ground that under Section 13 of the Haryana Urban (Control of Rent and Eviction) Act, 1973, a tenant can be evicted only from residential premises.

7.3 The Supreme Court held that there cannot be any discrimination vis-a-vis residential and non-residential premises for evicting a tenant, as otherwise it would be a violation of Article 14 (equality before law) of the Constitution.

It dismissed the appeal filed by the tenant challenging the eviction order passed by the Rent Controller and affirmed by Punjab and Haryana High Court.

The apex court held that if the landlord is able to prove his bona fide needs, the tenant can be evicted not only from residential premises but also commercial premises.

This judgment would have far reaching con-sequences in all the states which have Rent Control Acts since almost all of them contain provisions similar to S.13 of this Act. S.16(1) of the Maharashtra Rent Control Act, 1999 provides that a landlord may recover possession if the premises are reasonably and bona fide required by the landlord for occupation by himself. The wordings used in this section are much broader than those under S.13 of the Haryana Act. Further, the definition of the word ‘premises’ in S.7 means ‘any building’. Hence, under the Maharashtra Act, a land-lord could have recovered possession even of a commercial property. The position has now become clearer by virtue of the Supreme Court’s decision.

Nirav Shah

Agricultural Land Laws – I : MLRC, 1966

Laws and Business

1. Introduction :

Land laws are a species in themselves. Even within land laws,
laws relating to agricultural land can be classified as a separate class. One
comes across numerous terms and concepts while dealing with agricultural land,
e.g., NA Land, Land Ceiling, Land used for bona fide industrial use, etc. It is
quite common for agricultural land to be converted into non-agricultural land
and being used for industrial purposes or being used for real estate
development. However, it is very important that the correct process is followed
while dealing with agricultural land or else there is a risk of land being
acquired by the Government. Several real estate developers have suffered because
the correct process was not followed. Through a series of articles over the next
few months, I propose to explain the important concepts under some of the key
laws relating to agricultural land.

Agricultural land in Maharashtra is governed by several Acts,
the prominent amongst them being the following :

(a) Maharashtra Land Revenue Code, 1966 applicable to the
State of Maharashtra.

(b) Bombay Tenancy and Agricultural Lands Act, 1948 —
applicable to the Bombay Area of the State of Maharashtra and State of
Gujarat, i.e., the whole of Maharashtra and Gujarat except Marathwada (Latur,
Nanded, Aurangabad) and Vidarbha (Nagpur, Akola, etc.) regions.

(c) Maharashtra Agricultural Lands (Ceiling on Holdings)
Act, 1961.

In this Article, we will look at the Maharashtra Land
Revenue Code, 1966 (‘Code’) which deals with the law relating to
agricultural land and land revenue in the State. Land revenue is an important
source of revenue for State Governments.

2. Revenue areas and officers :

2.1 For ease of administration, the Government has u/s.4 of
the Code divided the State into various revenue areas.

2.2 Under the Act, the State is divided into divisions,
e.g., the city of Mumbai along with its suburbs constitutes one division.
Similarly, there is the Aurangabad Division, Pune Division, Nagpur Division,
etc.

Each division consists of one or more districts,
including the City of Mumbai. Each district may consist of one or more
sub-divisions.

Each sub-division may consist of one or more
talukas.

Each taluka consists of certain villages. A
village includes a town or city and all land belonging to a village, town or a
city.

A group of villages in a taluka constitutes a saza.
The saza may consist of up to eight and in some cases 15 villages. It is a
function of administrative convenience, population, etc.

2.3 Accordingly, the Government has created the following
revenue areas :

(a) Divisions

(b) Districts

(c) Sub-Divisions

(d) Talukas

(e) Sazas

(f) Revenue Circles

2.4 Based on the revenue areas, the Government has created a
hierarchy of various revenue officers for the administration of various matters,
for the assessment and collection of land revenue, for conducting surveys,
maintaining accounts, records, etc. The hierarchy of officers is as follows :

Divisional Commissioner/Additional/Assistant Divisional Commissioner.

District Collector/Additional/Deputy Collector which are appointed for
each district and who is in charge of the revenue administration of a
district.

Taluka Tahsildar/Naib-Tahsildar/Additional Tahsildar in charge of each
taluka and who is the chief officer entrusted with the revenue administration
of a taluka.

Circle Officers/Inspectors for each Circle

Talathis for each saza

Kotwals for each village or group of villages

The Code lays down the powers and functions of each type of
revenue officer.

3. Title of lands :

3.1 U/s.20, all public property, e.g., roads, bridges, etc.,
and land which is not the property of persons legally capable of holding
property is declared to be the property of the State Government and
vests in it. Hence, any land which, under law, is not owned by any person, who
under law can own such property, would be the subject-matter of this Section.
The Collector is empowered to deal with and dispose of all such land in any
manner as he deems fit, subject to the Commissioner’s orders. Thus, any land
held by a person who, by virtue of any statute is capable of holding property in
its own name, e.g., by companies, major individuals, etc., would be excluded
from the operation of this Section. Thus, any land which is not the property of
others would vest in the State Government.

3.2 The Collector may by issuing a notice and following the
due process claim any property by or on behalf of the Government. This order is
subject to one appeal and revision under the Code.

4. Types of land and holders :

4.1 Land can be classified into two types :

(a) Alienated — means that which is revenue-free and
is owned by any person. Thus, no revenue is payable to the Government. This
would include land such as imans and watans.

(b) Unalienated — land other than alienated land.
This is the regular land which is subject to land revenue assessment.

4.2 The land holders can be classified as given in Table
below.

5. Land records:
5.1 One of the important provisions dealt with by the Code is the maintenance of the Land Records in respect of various lands.

Table 1: Types of land holders

Type

Govt. Lessee

Tenant

Holder

Occupant

Meaning

Unalienated
land leased by

Lessee
of land includes

Person
holding

the Collector to any person

a mortgagee of tenant’s

alienated land

unalienated land and

on such terms as deemed fit

rights with possession,

excludes a tenant or

by the Collector

but not a lessee holding

a Government lessee

directly under the State

Government

Classes

Could
be classified

—

Occupants
are

as Class III

further divided into

Class I and Class

II depending upon

since when they are

holding the land

or the restrictions

placed upon their

holding

Whether-

Under
general law, a lease

No
express provision.

Yes,
since he is an

Yes,
S. 36 of the

Heritable

is inheritable. However, if

However, in Shriman-

absolute holder

Code provides for

the terms and conditions

tibai Nargude v. Bhimrao

the same

provide otherwise, then

Nargude, 2009 (1) Bom

the same would prevail

CR 265 it was held that it

is inheritable

5.2 Record of rights:

For every village a record of rights would be maintained which would contain the following particulars:
(a)    Names of all persons who are holders, occupants, owners, tenants, owners, mortagees of the land or assignees of the rent or revenue from it
(b)    Names of all Government lessees or tenants
(c)    Nature and extent of respective interest of such persons and the conditions or liabilities, if any
(d)    Revenue or rent payable by such persons

Thus, all rights, interests and liabilities qua a piece of land are recorded in one document. These records are maintained by the Talathi of each village.

5.3 If any person acquires any right by virtue of succession, survivorship, inheritance, purchase, partition, mortgage, gift, lease, etc., in any land, then he must give a notice of the same to the Talathi within three months of such event.

The Talathi would then enter such changes in a Register of Mutations which would alter the original record of rights.

5.4 Any person buying land especially in a rural or semi-urban area would be well advised to do a thorough title search by checking the Record of Rights, Register of Mutations, etc., which would show whether or not the land in question is an agricultural land, who is the owner, what important developments have taken place in respect of the land, etc.

5.5 In the next Article we shall look at the process for converting an agricultural land into a non-agricultural land.

Nirav Shah

Understanding Term Sheets

1. Introduction :

1.1 Open a newspaper and you would read about some or the other Private Equity (PE) funding or venture capital investment. PE funding is no longer restricted to unlisted or start-up companies, but even listed, well-established companies get funded by large PEs (e.g., the recent investment in Nagarjuna Construction) or even taken over by PEs (e.g., the acquisition of Gokaldas Exports by Blackstone Fund). The starting point of all such PE fundings, whether large or small, is a Term Sheet.

1.2 A ‘Term Sheet’ records the understanding arrived at between the Company, the Promoters and the PE, on the key decision areas for PE making the investment. A Term Sheet summarises the principal terms and conditions for proposed investment in the Company. It is subject to applicable regulatory requirements, satisfactory completion of due diligence and definitive documentation, and is not intended to be and is not an exhaustive description of the agreement, arrangement or understanding between the parties relating to the matters set out herein. It is succeeded by a due diligence (operational, legal and financial) and then by a Shareholders’ and/or Share Subscription Agreement. Ultimately, the provisions of the Shareholders’ Agreement are incorporated in the Articles of Association of the Company.

1.3 This Article analyses a standard Private Equity ‘Term Sheet’. However, it is clarified that this Term Sheet is by no means exhaustive and there can be several other clauses.

Nirav Shah

Real Estate Laws : Recent Developments

Law and Business

1. Introduction :

The last few months have witnessed a hectic activity on the
real estate front. Several important laws have been amended or enacted and
several crucial decisions have been rendered by the Supreme Court and the Bombay
High Court. Some of these amendments are good and some of these are not so good.
These amendments would have a major bearing on the way immovable property
transactions are carried out in the State of Maharashtra. This Article presents
an overview of these important enactments and cases.

2. MOFA : Deemed conveyance :

2.1 The Maharashtra Ownership Flat Act, 1963 (‘MOFA’) was
recently amended to provide that builders/developers must compulsorily make a
conveyance of the property to the co-operative housing society within a
stipulated period. If they fail to do so within the stipulated time, then the
designated competent authority, i.e., the District Deputy Registrar can
take action against the builder.

2.2 One of the important provisions of the amendment is that
the designated competent authority i.e., the District Deputy Registrar,
can take action against the builder for non-compliance. He can issue an
automatic conveyance (Unilateral Deemed Conveyance), whereby the rights will be
transferred to the society. As per the amendment, the punishment for a builder,
who fails to transfer the plot to the housing society, would be imprisonment for
a term from 6-12 months or a fine of Rs.10,000 to Rs.50,000 or both. He could
also be debarred from any construction project for five years.

2.3 However, certain grey areas remain in the amendment. The
law allows both the competent authority as well as the sub-registrar to issue
show-cause notices to the builder for not having executed conveyance. This
dichotomy of authorities may unnecessarily complicate matters and delay the
proceedings.

A sub-registrar can after giving the promoter a hearing come
to a conclusion contrary to the competent authority and thus refuse to register
the unilateral deemed conveyance. What happens next is unresolved.

2.4 The new law requires the competent authority to dispose
of all cases in six months, but strangely, it does not provide for the time
period within which the sub-registrar must issue the conveyance.

2.5 While it is a welcome step, as with all laws the proof of
the pudding lies in its successful implementation.

3. Registration process simplified :

3.1 A recent Circular of the Revenue and Forest Department
has simplified the process of registering conveyance of immoveable properties in
the State. Now, it is possible to register a property without waiting for a
no-objection certificate from the various authorities, e.g., Collector,
etc.

3.2 This Circular has its genesis in a Supreme Court decision
which has declared Section 22A of the Registration Act, 1908 as
unconstitutional. Section 22A casts an obligation to obtain ‘No Objection’
Certificates from various authorities such as the Collector, etc., to whom the
land belonged before registering a property. The Court also directed that no
registrar or sub-registrar of assurances could refuse registration under any
notifications issued under the provision.

3.3 Thus, now an NOC would not be required for transferring a
flat on collector’s land, e.g., in Nariman Point, Cuffe Parade. This
would speed up the registration process and would lead to greater voluntary
registration of property. This would automatically improve the title to the
property.

3.4 Another effect is that flat buyers requiring home loans
had to get their documents registered before availing the loan. Such buyers were
unable to obtain loans since registration was held up for want of NOCs. Now they
can avail of a loan as registration no longer requires an NOC.

In most cases the NOCs were time-consuming and sometimes led
to cancellation of the deal. This was especially true in the case of
transactions on Collector’s land, in areas like Nariman Point, etc. Other
permissions required were N.A. (Non-Agricultural) Permissions, BMC, etc.

3.5 Besides a speedier registration, one can also look
forward to less bureaucracy, fewer touts and reduced corruption in the
registration process. Such amendments are not only good for the real estate
sector, but good for administration. We often criticise the Government for old
outdated laws, this time kudos to the Government as it eliminates a
‘bottleneck’.

4. Buildings on forest land :

4.1 The Bombay High Court in a recent decision has held that
all development on more than 1,000 acres of land in the certain suburbs of
Mumbai is illegal, since the development was on forest land.

Over 125,000 flats spread over 120 acres are affected by the
Court’s decision. Both the existing developments and under-construction projects
would be affected by this Order. An SLP against the same is expected soon.

4.2 This case was moved by an NGO, Bombay Environmental
Action Group (BEAG), to protect the forest lands encroached upon by the
builders. Most of the disputed flats are in areas Kandivali, Borivali, Ghatkoper,
Bhandup, Mulund, Thane, etc. A Division Bench of Chief Justice Swatanter Kumar
and Justice S. C. Dharmadhikari dismissed about 19 petitions filed by the
builders.

4.3 The Government is now proposing to regularise all such
houses built on illegal lands by levying a one-time penalty. In the meanwhile,
the Registrar has a blacklist of survey numbers which fall within the illegally
developed areas. Registration of any transaction under these survey numbers is
being rejected. The sub-regsitrar’s offices have displayed all these blacklisted
survey numbers. Thus, a lot of flat owners and buyers are being inconvenienced
by this order. As a result, natural corollary property rates in the blacklisted
areas have crashed. The Forest Department is deciding upon its next course of
action, i.e., whether or not it should demolish these illegal
constructions.

4.4 The proposed action of the Government will bring relief to the affected persons.

5. Use of extra FSI by builders:

5.1 A recent Bombay High Court Order has held that builders will no longer need the consent of existing flat owners if they have extra FSI on a plot and are planning to have additional buildings or structures if the new construction has all the necessary approvals from the municipal authorities. The consent of the flat owners would be needed only if the new construction results in alterations to the existing building or the construction as described in the flat purchase agreement executed between the flat buyer and builder.

5.2 This order was passed by Justice A. M.’ Khanwilkar of the Bombay High Court in the case of Mehani Builders v. Jamuna Darshan Co-operative Housing Society Ltd. The society was objecting to the additional construction carried out by the builder by using extra FSI. The Court delivered its judgment under the Maharashtra Ownership of Flat Act (MOFA) 1963.

5.3 As per the judgment, the agreement should-very clearly mention the potential FSI utilisation. Further, developers must now construct their buildings in accordance to the plans and specifications and in accordance with the agreement entered into-by both parties and they should spell out how they propose to use any extra FSI.

5.4 Now construction of additional buildings is permissible so long as it is under the scheme or projects of development in the layout and subject to the relevant building rules or byelaws or development control rules. This is an order which would promote greater transparency in property transactions.

5.5 The Government should also incorporate this order also whilst regularsing development on forest land.

Nirav Shah

Arbitration & Other Laws

Laws and Business

Introduction :

An arbitration is always a fall out of disputes. Disputes
occur for various reasons and under various laws. Hence, while dealing with an
arbitration, one needs to keep in mind the provisions of the other laws. They
more often than not, would have a bearing upon the arbitration proceedings or
the award or the validity of the same. One must always remember that an
arbitration is not an island by itself. It draws on and feeds on other laws.

2. Arbitration &
Company Law :

One of the foremost questions which arises is the necessity
for a company to have an arbitration clause in its memorandum of association. It
is not an object of a company to refer matters to Arbitration but it is a power.
Hence, it is not necessary for a company to have an arbitration clause in its
memorandum of association, but it is definitely advisable.

The next question which arises is who can refer a matter for
arbitration on behalf of a company. A variety of persons can refer a dispute to
arbitration :

Board of Directors

Managing Director

Any Committee/Executive specifically authorised by the Board to do so

Any Power of Attorney holder of the Company.

However, this would be subject to any express provisions on
this aspect in of memorandum and articles of association.

2.3 Disputes which are typical to a company and which can be
referred to ‘arbitration’ may include those arising on account of :

Oppression & Mismanagement

Shareholders’/Joint Venture Agreement

Share Subscription Agreement

Agreements with VCs/Private Equity

Oppression & Mismanagement :

S. 397 and S. 398 of the Companies Act provide for a petition to the Company
Law Board in all cases of oppression of minority by majority and mismanagement
of the affairs of the company by the majority. The question that arises, is can
the agreement between parties provide that the same would be referred to
arbitration ?

S. 8 and S. 45 of the Arbitration and Conciliation Act, 1996
provide that a judicial authority before which an action is brought in a matter
which is the subject of an arbitration agreement shall, if a party so applies
not later than when submitting his first statement on the substance of the
dispute, refer the parties to arbitration. Further, notwithstanding anything
contained in the Code of Civil Procedure, 1908, a judicial authority, when
seized of an action in a matter in respect of which the parties have made an
agreement, shall, at the request of one of the parties or any person claiming
through or under him, refer the parties to arbitration, unless it finds that the
said agreement is null and void, inoperative or incapable of being performed.
The CLB has exclusive jurisdiction for all matters u/s.397 and u/s.398 but that
does not preclude reference to arbitration. Thus, S. 8 and S. 45 are mandatory
provisions and if the petition matters are within the scope of the arbitration
agreement, then the CLB is bound to refer the issues to arbitration.

However, the CLB cannot order a reference to arbitration
unless a party to the proceedings applies for the same — EIH Ltd. v. Mashobra
Resort, 119 Comp. Cases 993 (CLB). If the oppression petition is contested by
the parties on merits without reference to arbitration, then the CLB would not
grant any stay against the petition — Suresh Jain v. Hindustan Ferro, 96 Comp.
Cases 507 (CLB).

The CLB will decide all matters of oppression and
mismanagement even which are outside the scope of the arbitration agreement —
Khandwala Securities Ltd. v. Kowa Spinning Ltd., 97 Comp. Cases 632 (CLB).

Joint venture/Shareholders’ agreement :

JV/shareholders’ agreements provide for the ‘Management and
Conduct of Business’ of a Company. A usual clause found in such agreements is
that all disputes would be referred to arbitration. A question which arises is
that can the company also be made a party to the arbitration along with the JV
partners/shareholders ?

Articles of association are the regulations which bind a
company and its shareholders. Only if the provisions of arbitration are
incorporated in the articles of association, can the company be made a party to
such proceedings :

Shanti Prasad v. Kalinga Tubes, (1965) 35 Comp. Cases 351 (SC)

V. B. Rangaraj v. V. B. Gopalkrishnan, (1992) 73 Comp. Cases 201 (SC)

B. K. Shah v. Magotteaux Int., 111 Comp. Cases 220 (CLB)

A transfer of shares pursuant to an arbitration award is not
a case of a transfer, but it is a transmission of shares by operation of law.
Thus, it falls under the second proviso to S. 108 of the Companies Act and does
not require a transfer form for the company to register the transfer of shares.
The transfer in such a case is not based upon the volition of the parties, but
by operation of law — Dinesh Nagindas Shah v. Pankaj Aluminium Industries P.
Ltd., 102 SCL 161 (Bom.).

A Single Judge of the Bombay High Court in the case of Western Maharashtra Development Corporation v. Bajaj Auto Ltd., reported in (2010) 154 Comp. Cases 593 (Bom.), had ruled that an Arbitration Tribunal had no jurisdiction to give an award on the basis of a Shareholders’ Agreement containing restrictive clauses in the SHA. This was because the SHA itself was invalid, since the articles of a public company could not contain clauses restricting the transfer of shares and it was contrary to S. 108 of the Companies Act, 1956. Hence, the arbitration agreement which was founded on the SHA was void. The Arbitrator had ignored the express provision of S. 108 and lost sight of the very concept of free transferability of shares of a public limited company. Hence, his award was set aside. Very recently, a two-Member Bench of the Bombay High Court, in the case of Messer Holdings Ltd. v. Shyam Ruia and Others, (Appeal No. 855 of 2003) has overruled this decision of the Single Judge of the Bombay High Court. Hence, as the position now stands, an arbitration award dealing with restrictive clauses in a public limited company would be valid. This is a very important judgment since almost all PE/VC/ JV agreements as well as shareholders’ agreements contain such clauses. Thus, if any dispute arises on these clauses, the parties can apply for arbitration.

Winding-up petitions :

Can a petition for winding-up of a company u/s.433 of the Companies Act be referred to arbitration? Various decisions have held that an arbitration clause does not oust jurisdiction of a Court for winding-up petitions. Only disputes are referable to arbitration. A petition for winding-up is not an ‘action’. The power to order a winding-up is only under the Companies Act and only with the High Court. The Supreme Court in the case of Haryana Telecom v. Sterlite Industries Ltd., 97 Comp. Cases 683 (SC), has held that a claim in a petition for winding-up is not for money. Hence, no reference to arbitration can be made for winding-up of a company. Further, arbitration proceedings are not a bar to winding-up petitions — ABG Heavy Ind. v. Hindustan Shipyard, (2001) 105 Comp. Cases 413 (Bom.).

In Hewlett Packard v. BPL Net Com, (2002) 110 Comp. Cases 575 (Kar.), the Court held that if there is an arbitration clause in an agreement, the Court can yet entertain a winding-up petition as per its discretion. There is no automatic stay on winding-up merely because the subject-matter of dispute carries an arbitration clause. An arbitration agreement is binding on a company even after a winding-up petition. The legal status of the company continues till the company is dissolved. The only change is that instead of the Board of Directors the Liquidator steps into its shoes :

Goetze India v. Pure Drinks, (1999) 3 Comp. LJ. 68 & (1994) 80 Comp. Cases 363 (P&H)

Maruti Ltd. v. B. G. Shirke & Co., (1981) 51 Comp. Cases 11 (P&H)

446 of the Companies Act provides that once an order for winding-up is made, no suit/legal proceeding can be initiated against the company unless permission of Court is taken. Proceedings would also include ‘arbitration proceedings’. Thus, the leave of the Court would be required to commence arbitration proceedings against such a company — British India Corp. v. S.S. & T. Machinery, (2001) 106 Comp. Cases 467 (Kar.). The Court can declare an arbitration/ award to be null if done without its permission. Permission of the Court ordering winding-up is a must. Even a third party can plead that arbitration is null if no Court permission was obtained — Vasantha Ramanan v. Official Liquidator, (2003) 114 Comp. Cases 747 (Mad.).

VC/Private Equity Agreement :

These agreements always provide for a Deadlock Resolution between the Management Team and Venture Capital Funds. The usual clause provides that :

The disputes would be first resolved through friendly consultations.

If the disputes are yet not resolved, then arbitration would be the exclusive means of resolving any dispute.

Arbitration and HUF :

A question which arises is that who has power to refer to arbitration on behalf of an HUF? The father/ manager/karta has power to refer disputes relating to joint family property to arbitration, provided reference is for the benefit of the family — Shantilal v. Munshilal, (1932) 56 AIR 595 (Bom). Other members of the HUF are bound by the reference and the award made thereon — Balaji v. Nana, (1903) 27 Bom 287.

An agreement between HUF members to appoint arbitrators for partition amounts to a severance of the joint status of the HUF from the date of the agreement — Kashinathsa v. Narsingsa, AIR 1961 SC 1077.

An arbitration award is liable to ‘stamp duty’ of Rs.100 under the Bombay Stamp Act, 1958. An award is defined as a decision in writing of an Arbitrator/ Umpire made on reference for submitting differences, not being an award directing a partition.

However, if it is an instrument of partition, then the duty is different. An instrument of partition includes an award by an a arbitrator directing a partition. The duty on the same is levied @ 2% on the market value of the separated share of the property. Thus, the value on which stamp duty is levied is the total market value of the property less the largest share partitioned. If all shares are equal, then deduct any one share.

Arbitration and registration :

Earlier there was a controversy on whether an ‘arbitration award’ needed to be registered under the Registration Act, 1908. However, the Supreme Court’s decisions in Sardar Singh v. Smt. Krishna Devi, AIR 1955 SC 491, Kashinathsa v. Narsingsa, AIR 1961 SC 1077, M. Chelamayya v. M. Venkatratanam, AIR 1972 SC 1121 have clarified the position as follows :

a) If the award creates right, title and interest in immovable property, then registration is compulsory.

b) If it is a mere declaration of a pre-existing rights or reference to past partition and not creating right in praesenti — then ‘no registration’ is required.

c) An ‘unregistered award’ which affects or purports to affect right, title or interest in any immovable property is inadmissible as evidence.

d) However, an unregistered award is a valid award and not a waste paper. It creates rights and obligations between the parties.

In Akbarali v. Mumtaz Hussain, AIR 1987 Bom. 39 it was held that if a right is claimed under the award or is to be enforced by way of a suit, then registration of the award is a must. In Harendra Mehta v. Mukesh Mehta, (1999) 97 Comp. Case 265 (SC), it was held that foreign awards need not be registered.

In Satish Kumar v. Surinder Kaur, AIR 1970 SC 833, the Court held that if the award affects the partition of immovable property, then it requires registration.

Conclusion:

Whether a CA appears as a representative of one of the parties as an advisor, as an arbitrator, as a valuer or as an expert, he must always bear in mind the interplay of other laws on the award. A slip-up on any one law may render the award ineffective/ unenforceable. One is reminded of Humbert Wolfe’s golden quote :

“Making innumerable statutes, men
Merely confuse what God achieved in ten ! !”

Nirav Shah

Stamp duty on conveyances — Across India

Nirav Shah

PROBATES

Laws and Business

I.
Meaning :

“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 means the copy of the
will certified by the seal of a Court. 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 or otherwise 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
will. Thus, a probate is granted by a Court only when a will is in place, while
a succession certificate is granted only if a will has not been made.

II.
Necessity :

According to the Indian
Succession 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 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. Thus, for
Hindus, Sikhs, Jains and Buddhists who are/whose immovable properties are
situated outside the territories of West Bengal or the Presidency Towns of
Madras and Bombay, a probate is not required. It also applies to Parsis who
are/whose immovable properties are situated within limits of the High Courts of
Calcutta, Madras and Bombay. However, absence of a probate does not debar
the executor from dealing with the estate.

III.
Procedure :

3.1 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 would invite
objections, if any, from the relatives of the deceased.

3.2 The Court would also
place a public notice in a newspaper for public comments. The petitioner would
also have to 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. U/s.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.

3.3 On being satisfied that
the will is indeed genuine, the Court would grant a probate (a specimen of the
probate is given in the Act) under its seal. The probate would be granted in
favour of the executor/s named under the will. The Supreme Court has held in the
cases of Lalitaben Jayantilal Popat v. Pragnaben J. Kataria, (2008) 15
SCC 365 and Syed Askari Hadi Ali v. 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 said will by proving absence of
suspicious circumstances surrounding the 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. Laxman v T. Padmini, (2009) 1 SCC 354.

It may be noted that a 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 such time as the actual legal
heir is given the estate of the deceased.

IV.
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 will. Once a caveat has been filed,
the Courts would hear the aggrieved party and he would have to prove that he
would have a share in the estate of the testator if he had died intestate.

V.
Why does one need a probate ?

5.1 One of the
questions which 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. It is the final word on whether the
will is genuine or it has been obtained by fraud, coercion, etc.

5.2 Some of the reasons why
a probate is 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 transmission of shares.

© Similarly, some
co-operative housing societies insist on a probate for transmission of a flat.

(d) The Registrar of
Sub-Assurances would insist on a probate usually for registration of immovable
properties.

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/law suits from the other heirs of the deceased.

VI. Special factors:

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

a) For obtaining a probate, the applicable court fee stamp would be payable as per the rates prescribed in different states. For instance, for obtaining 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:

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

c) If there are more than one executors, 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 amount 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 property within the jurisdiction of the judge where the application is moved.

vii) It must be verified by at least one of the witnesses to the will. It must be signed and verified by the petitioner and his lawyer.

VII. Succession certificate:
A succession certificate is a certificate granted by a High Court in respect of any debt due to the deceased or securities owned by him. In case the deceased died living behind a will, which only empowered the beneficiaries to collect his debts and securities, then the courts would grant a succession certificate instead of a probate. It merely empowers the grantee to collect the debts owed to the deceased.

VIII. Chartered Accountant/Auditor’s Duty:

Normally, a CA in his capacity as an Auditor is not directly involved with wills and succession issues. Nevertheless, a CA can provide a lot of value added services to his clients if he is aware of the law in this respect. He can be of great assistance to his clients in cases of succession planning and estate planning. It is an area where he can assist his client and avoid unnecessary litigation amongst heirs. CAs in today’s environment, in addition to being business and financial consultants, are also family advisors.

Nirav Shah

DOMESTIC ARBITRATION

Laws and Business1.
Introduction :

1.1 Arbitration is one of
the oldest dispute resolution systems across the world. Even in India,
arbitration has been in existence from ancient times. Considering the time it
takes in India for a Court case to be resolved, the importance of arbitration
has increased manifold in the last few years. Almost all types of civil disputes
can be subjected to arbitration, such as disputes in relation to joint ventures,
infrastructure projects, concession agreements with the Government, property
matters, etc.

1.2 The Arbitration and
Conciliation Act, 1996 (‘the Act’) totally revamped the law in relation to
arbitrations in India. The Act replaces the Arbitration Act, 1940. Let us
examine the process in relation to an arbitration under the 1996 Act.

1.3 An arbitration means any
arbitration whether or not administered by permanent arbitral institution.

1.4 This Article gives a
bird’s-eye view of some of the important features of ‘arbitration’.

2.
Arbitration Agreement :

2.1 An Arbitration Agreement
means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a
defined legal relationship, whether contractual or not. An arbitration agreement
should be in writing and signed by both the parties. There is no prescribed form
for the same. It could also be by way of an exchange of letters, telex,
telegram, etc. The reference in a ‘contract document’ containing an arbitration
clause constitutes an arbitration agreement as that arbitration clause is part
of the contract.

2.2 The Arbitration
Agreement is the starting point by which parties refer disputes to arbitration.
Since it is an agreement, the provisions of the Indian Contract Act, 1872 must
also be borne in mind. Thus, provisions, such as capacity of parties to
contract, agreements opposed to public policy, etc., should be considered.

2.3 Salient features of an
Arbitration Agreement :

(a) The intention for
reference to arbitration must be clear and unambiguous.

(b) It should mention :

(i) the place/venue of
arbitration

(ii) the law which would
be followed

(iii) the procedure for
appointing
arbitrators

(iv) the language in
which the arbitration proceedings will be conducted

Full freedom is accorded to
the parties in selecting the above features. In addition, the agreement may also
lay down the procedure for conducting arbitration proceedings, use of experts,
etc.

2.4 An arbitration agreement
is not discharged by the death of one of the parties and his legal
representatives would step into the shoes of the deceased party.

2.5 The arbitration
agreement may also provide that arbitration would be the only dispute resolution
mechanism and none of the parties will approach any Court for resolving the
dispute.

3.
Arbitrators :

3.1 The parties can decide
on the number of arbitrators to be appointed, provided that the number of
arbitrators is not an even number. Thus, they could be 1, 3, 5, etc. If the
agreement is silent, then the Act provides for a sole arbitrator. Usually, an
arbitral tribunal consist of 3 arbitrators with each party appointing one
arbitrator and the two appointed arbitrators jointly appointing the third
arbitrator, who is known as the presiding arbitrator.

3.2 There is no
specification as to who can be appointed as an arbitrator. However, it is
preferable that he should be a man of commerce, law, or having expertise in the
field of dispute resolution and he should be someone who is perceived to be fair
and impartial to all parties. Usually, advocates, chartered accountants,
chartered engineers, bankers, and retired judges, etc. are appointed as
arbitrators.

3.3 If there is a failure to
appoint arbitrators, then the Chief Justice of the High Court has powers to
appoint an arbitrator under the Act.

3.4 Before accepting
appointment, the arbitrator must disclose to the parties any matters which are
likely to give rise to justifiable doubts about his independence or
impartiality. Similarly, the appointment of an arbitrator may be challenged on
grounds that there are circumstances which give rise to justifiable doubts about
his independence or impartiality. A challenge can also be made on grounds that
he does not possess the qualifications agreed to by the parties.

4.
Procedure of arbitration :

4.1 The arbitration tribunal
is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act,
1872. The parties are, and failing them the tribunal, is free to determine the
procedure to be followed. In the absence of defined or agreed procedure.

4.2 The arbitral tribunal
would issue notice of hearing to the parties.

4.3 The parties would make their written and/ or oral submissions. The parties must submit their statement of claim and defence. They can also rely on various documents and evidence in support of their claims and defence. They may also rely on and submit expert testimony if so permitted by the tribunal or agreed upon by the parties. The other party may file rebuttal submissions against the expert testimony.

4.4 The arbitrator is bound to observe the principles of natural justice whilst conducting the proceedings. He must give an equal opportunity of being heard to both parties.

4.5 The arbitrator may also prescribe certain deposit for the costs of arbitration which both parties have to pay.

5. Award:

5.1 The award shall be in writing, state its date and place of making. It must be signed by the arbitrator.

5.2 The reasons on the basis of which award was passed, shall be recorded unless the parties agree otherwise. The sum awarded may include ‘interest’ if the claimant is entitled to interest either under the agreement or the arbitration agreement.

5.3 It must provide for the costs and which party would bear them. Costs would include costs relating to fees and expenses of the arbitrators and witnesses, legal fees, administration and other costs in connection with the arbitration proceedings.

5.4 A signed copy of the award must be delivered to each party. Within 30 days from the receipt of an award by a party, the party may request the arbitration tribunal to correct any errors in the award.

5.5 The arbitrator can also make an interim arbitral award.

5.6 The award is final and binding on the parties and it can be enforced under the Code of Civil Procedure, 1908 in the same manner as if it is a decree of the Court. However, this is subject to award not being be challenged and set aside by the Court.

6. Setting aside of an award:

6.1 The Court would set aside an award in the following cases:

   a. The party was under some incapacity.
   b. The arbitration agreement is invalid.
   c. The party was not given proper notice of hearing or was unable to present its case.
   d. The award deals with a dispute not contemplated by the agreement or contains matters beyond the scope of the agreement.
   e. The award is in conflict with the public policy.
   f. The composition of arbitral tribunal was not in accordance with the arbitration agreement.

6.2 An application for setting aside the award may be made to the Court u/s.34 of the Act. It must be made within 3 months from the receipt of the award. The Court may grant an additional 30 days in some circumstances.

7. Role of CAs:

7.1 CAs can play a very important role in arbitration proceedings of their clients. They can make submissions on behalf of their clients or appear as an expert and give testimony on subjects, such as valuation, accounting, etc., or can even preside as an arbitrator. They can get empanelled with Chambers of Commerce, such as IMC, CII, etc., as arbitrators. Considering the slow pace of court litigation, CAs should advise their clients to strongly consider arbitration as a dispute resolution mechanism. They could also advise the clients whilst reviewing contracts during the course of audit to have an ‘arbitration agreement’ unless an arbitration clause is already included in the contract.

Nirav Shah

Legal compliance — Directors’ responsibility — Part 2

Laws and Business

Last month we examined the various laws under which a company
can be liable and thus, the directors can also be held responsible. Let us now
examine situations in which directors can be held responsible and the safeguards
they can take.

1. What is the meaning of the terms

‘Connivance, Neglect and Consent’ ?

Since the terms ‘connivance’, ‘neglect’ and ‘consent’ are
very important and often find mention in various statutes while defining
directors’ responsibilities, it is very essential to understand their meaning.
These words are defined by various judicial decisions and dictionaries as
follows :

1.1 Connivance :

(a) “A figurative expression, meaning voluntary blindness to some present act or conduct, to something going on before the eyes, and is inapplicable to anything past or future; an agreement or consent, directly or indirectly given that something unlawful shall be done by another; consent; passive consent; voluntary oversight

To constitute ‘connivance’ something more than mere negligence is necessary. Pothi Gollari v. Ghanni Modal, AIR 1963 Ori 60″.

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

(b) “The secret or indirect consent or permission of one person to the commission of an unlawful or criminal act by another. A winking at; voluntary blindness; an intentional failure to discover or prevent the wrong; forbearance or passive consent. Pierce v. Crisp, 260 Ky. 519, 86 S.W. 2nd 293, 296.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

(c) “The Act of conniving — to encourage or assent to a wrong by silence or feigned ignorance; knowledge of a wrongful or criminal act during its occurrence”

(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

(d) “Secretly allow a wrongdoing”

(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

(e) “Pretended ignorance or secret encouragement of wrongdoing; knowledge or encouragement of a wrongdoing without participation in it; avoid noticing something wrong; give aid to wrongdoing by not telling of it;”

(The World Book Dictionary, World Book, Inc.)

1.2 Neglect :

(a) “May mean to omit, fail or forbear to do a thing that can be done or that is required to be done, but it may also import an absence of care or attention in the doing or omission of a given act. And it may mean a designed refusal, indifference or unwillingness to perform one’s duty. In Re. Perkins, 234 Mo. App. 716, 117 S.W. 2d 686, 692.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

(b) “A failure to do what is required; omission, forbearance to do anything that can be done or that requires to be done; the omission to do or perform some work, duty or act; the omission or disregard of some duty; the omission from carelessness to do something that can be done and that ought to be done; negligence. Neglect to do a thing means to omit to do a duty which the party is able to do. King v. Burrell, 12A.&E.468.468.

The word ‘neglect’ is wide enough to cover erosion of the kind indulged in by the petitioner. (It certainly cannot mean that a person on whom a notice has been served can only be prosecuted if he fails to give any reply at all and that any sort of reply to the notice, however inadequate or evasive, is sufficient to avert the prosecution for failure to comply with the terms of the notice.) Pirthi Raj v. The State, AIR 1958 Pun 396, 397.

To disregard; to pay little or no attention to; to fail to perform, render, discharge (a duty) to take (a precaution).

The word ‘neglect’ means ‘gross neglect’, wilful, intentional, culpable or flagrant disregard of duties. Baburao Vishwanath Mathpati v. State, AIR 1996 Bom 227, 231 (DB), Maharashtra Municipal Councils Act Act”

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

(c) “To neglect doing is the omission to do some duty which the party is able to do (per Patterson J. King v. Burrell, 12A & E, 468)”

(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)

(d) “To disregard; ignore; To fail to give proper attention to or to take proper care of; Habitual want of attention or care”

(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

(e) “Fail to give proper care or attention to; fail to do something”

(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

(f) “To give too little care or attention to”

(The World Book Dictionary, World Book, Inc.)

1.3 Consent :

(a) “(In the Contract Act) Two or more persons are said to consent when they agree upon the same thing in the same sense.”

‘Consent’ is an act of reason, accompanied with deliberation, the mind weighing, as in a balance, the good and evil on each side. Where a consent is given substantially, the Court does not look very minutely into the form in which it is given” (Per Stirling, J., Re Smith, 59 LJ Ch 284.)

“You cannot consent to a thing unless you have knowledge of it” Jessel, M.R., Ex parte Ford; In Re Caughey, (1876) LR 1 CD 528.

‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo : Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.

‘Consent’ must imply a knowledge of the necessary facts and materials which leads to the consent, consent cannot be given in the abstract or in vacuo: Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw, AIR 1953 Bom 285.

Consent and assent. ‘Consent’ in law means an affirmative, positive act and ‘assent’ means passivity or inaction: S. Raghbir Singh Sandhawalla v. The Commissioner of Income-tax, AIR 1958 Pun 250, 252.

Connivance is also consent in the legal sense. ‘To consent’ means according to the Concise Oxford Dictionary, ‘to acquiesce’ or ‘to agree’ To connive’ at a thing means, to wink at it. The word’ connive’ is only used in connection with a thing which is, unlawful or immoral which one ought to oppose. It implies knowledge and lack of opposition where there is a duty to oppose. Sheopat Singh v. Narishchandra, AIR 1958 Raj 324, 332. [Representation of the People Act, 1951, S. 100].”

(The Law Lexicon, P. Ramanatha Aiyar, 2nd Edition, Wadhwa & Co.)

a) “Consent. A concurrence of wills. Voluntarily yielding the will to the proposition of another; acquiescence or compliance therewith. Agreement; approval; permission; the act or result of coming into harmony or accord. Consent is an act of reason, accompanied with deliberation, the mind weighing as in a balance the good or evil on each side. It means voluntary agreement by a person in the possession and exercise of sufficient mental capacity to make an intelligent choice to do something proposed by another. It supposes a physical power to act, a moral power of acting, and a serious, determined, and free use of these powers. Consent is implied in every agreement. It is an act unclouded by fraud, duress, or sometimes even mistake.”

(Black’s Law Dictionary, 6th Edition, West Publishing Co.)

c) “Consent is an act of reason, accompanied by deliberation, the mind weighing, as in balance, the good and evil on each side.”
(Stroud’s Judicial Dictionary, 5th Edition, Sweet & Maxwell Ltd.)

d) “A voluntary yielding to what is proposed or desired by another; acquiescence; Agreement in opinion or sentiment”
(Webster’s Collegiate Dictionary, 2002 Edition, Trident Press Int.)

e) “Permission; agree to do something”
(The Concise Oxford Dictionary, 10th Edition, Oxford University Press)

2. Supreme Court decision:

2.1 The Supreme Court has passed a landmark decision under the Negotiable Instruments Act in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, 2005 8 SCC 89. 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.

2.2 In this case, the Court was posed with important questions regarding the criminal liability of directors of a company in case of dishonour of a cheque issued by such company. Ultimately the Supreme Court answered the queries posed to it as under:

(a) It is necessary to specifically aver in a complaint under the Negotiable Instruments Act that at the time the offence was committed, the person accused was in-charge of and responsible for the conduct of business of the company. This averment is an essential requirement of the Negotiable Instruments Act and has to be made in a complaint. Without this averment being made in a complaint, the requirements cannot be said to be satisfied.

(b) Merely being a director of a company is not sufficient to make the person liable under the Negotiable Instruments Act. A director in a company cannot be deemed to be in-charge of and responsible to the company for conduct of its business. The requirement of the Negotiable Instruments Act 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) A Managing Director or a Joint Managing Director would be in-charge of the company and responsible to the company for conduct of its business. Holders of such positions in a company become liable under the Negotiable Instruments Act. Merely by virtue of being a Managing Director or Joint Managing Director, these persons are in-charge of and responsible for the conduct of business of the company. Therefore, they get covered under the Negotiable Instruments Act. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the dishonour and will be covered.

3. What can Directors do to safeguard their interests?

3.1 The vexed question which thus arises is, what can Directors do to safeguard their interests and ensure that they are not made personally liable for any defaults by the company?

3.2 One of the first things which the Board of Directors must ensure is that the company has a system for compliance with all the applicable laws. The company must have a written Compliance Manual enlisting all the laws applicable to it, which it must comply with and also who from the company is responsible for ensuring compliance with the same.

Further, the laws must be bifurcated into those which are critical to the survival of the company and those which although are not so crucial must be complied with. For instance, compliance with Food & Drug Administration Law is paramount for a pharmaceutical company. Similarly, compliance with the SEBI Merchant Banker Regulations .are critical for the existence of a merchant banker. Any serious lapse in such laws may result in the company’s registration being suspended or even permanently cancelled. There have been several recent instances where certificates of SEBI intermediaries have been suspended for not complying with the Code of Conduct or the conditions of registration.

The Manual may contain the important provisions with a reference to the relevant sections, rules, notifications, circulars, important case laws, etc., so that the user can refer to the same. It may be segregated into various sections, for instance, Corporate laws, SEBI Regulations, etc. It should be updated on a regular basis, so that the users do not refer to outdated material. The Referencer published by the BCAS is a very good starting point for preparing a Compliance Manual.

The optimum utility of the Manual would be if it is prepared by an outsider, i.e., not someone from within the company. A CA or a lawyer can be entrusted with this assignment. This is necessary because in several transactions there is a cross-influence of laws. For instance, in case of a loan given by a company to a related entity, the provisions of the Companies Act (e.g., S. 295), the Income-tax Act [e.g., S. 2(22)(e)], FEMA (if the recipient is a non-resident), etc. would have to be considered. In such situations, it is better if an independent professional prepares a comprehensive Manual. There must also be certain Red Flag Transactions, i.e., before such transactions are to be entered into, the Company Secretary or the Legal head must be consulted. A list of the Red Flag Transactions should also be circulated to the Head of the Accounts, so that his department should not process such transactions without receiving the prior approval of the legal department. A classic example of a Red Flag Transaction would be an inter-company investment within the group. In several cases it is observed that the listed company funds the private limited companies within the group by way of loans or investment. In all such cases, the concurrence of the legal department should be obtained before executing the transaction. Thus, the Accounts department should not write a cheque or pass an entry till it has been cleared by the legal cell.

3.3 The company must appoint a compliance officer to ensure compliance with various applicable laws and regulations. He must be a person who is well-versed with the legal and commercial fields, say, a Chartered Accountant, a Lawyer, a Company Secretary, etc. At every Board Meeting, the Compliance Officer should be asked to table a Compliance Certificate certifying compliance with all laws. This should also be preferably signed by the Managing Director and/ or the Whole-Time Directors and must be backed up with supporting certificates from various departmental heads who are responsible for compliance with individual laws. For instance, the Head of Administration can be asked to certify compliance with the Shops and Establishments Act; similarly, the Factory Head can be asked to certify compliance with pollution/ effluent control regulations, etc. This way the Directors can demonstrate that they have not failed in their duty of setting up a competent system for ensuring legal compliance. Whenever in doubt, the company should not hesitate to obtain an opinion from an appropriate CA or a lawyer. It is better to be cautious than to act in haste and make everyone repent at leisure.

In addition to the Compliance Certificate, the CEO / MD and the various Departmental Heads along with the Legal Head/Company Secretary must be asked to table an Action Taken Report at each Board meeting. This Report must list down regulatory lapses, problems, issues which had arisen at the last meeting and the action taken by the company on the same. Quite often what happens is that niggling issues are swept under the rug and they come to the fore only once they have blossomed into full-fledged calamities. In this way, the Independent Directors can keep a track of the problems as they arise and the actions taken by the company and thereby nip a problem in the bud.

3.4 Another aspect which a good compliance system must have is a mechanism which provides for “what to do in case a default arises ?” Quite often, a small problem snowballs into a major crisis. Hence, if violations and lapses are tackled at an initial stage itself, then there might not be major problems at a later stage. The Compliance Officer and/or the Managing Director or some other Executive Director must be informed about all such compliance lapses and this must be followed up with immediate corrective action and expert professional aid.

Item 15 of Annexure-IA to Cl.49 of the Stock Exchange Listing Agreement, which provides for items which must be placed before the Board of Directors includes, “Non-compliance of any regulatory, statutory nature”.

3.5 It may be a good move to seek expert certifications on all important compliance matters, e.g., a periodic certificate from an outside consultant on matters of pollution control. Several listed companies have started obtaining certificates from practising company secretaries on compliances with various corporate laws. This is a step in the right direction and needs to be beefed-up with similar certificates in other areas of compliance.

3.6 Other important areas which the Directors need to monitor are of protecting and preserving the title of the company’s assets. Especially at the time of acquisition of assets, such as immovable properties, they should ensure the obtaining of a title search, proper conveyance/ adequate documentation, payment of appropriate stamp duty, registration, if required, etc. Similarly, the protection of intellectual capital of the company in the form of patents, copyrights, trademarks, designs, etc. is very essential. Proper steps must be taken in this regard to ensure that these IPRs are valid and subsisting. To ensure preservation of assets, the Directors must ensure that there is an appropriate system which addresses issues, such as payment of taxes, compliance with conditions of lease deeds, adequate insurance, etc.

3.7 Independent Directors have a vital role to play in ensuring that the company complies with all applicable laws. In case of defaults, they may be saddled with penalties and prosecutions for offences which they have never committed or were never even aware about. Hence, they should at every Board Meeting ask intelligent questions about the state of the company’s legal department, the compliance policies and procedures. If they feel that the company is taking a wrong view on certain issues or has wrongly interpreted certain provisions, they may insist upon a second opinion.

4. Epilogue:

4.1 To conclude, it must be remembered that compliance with laws and regulations is a journey and not a destination. It is more a question of a mindset which must percolate through the organisation right from the top, i.e., the Board of Directors all the way down to the lowest rank and file. Once the company imbibes a compliance culture, it would become second nature to the executives. Several companies have an attitude that they would tackle the problem only if and when it arises. Such a shortsighted fire-fighting approach is detrimental to the interests of all the stakeholders in the long run. It may yield some results in the short term, but once the law of averages catches up, there would be serious trouble. Hence, the top management must instill a ‘zero-tolerance’ attitude within the organisation towards legal lapses.

4.2 One can only wish that just as companies strive for prestigious Quality Certifications, such as ISO: 9001, ISO: 9002, etc., they would also strive for similar standards in the field of Regulatory Compliance.

4.3 It must also be reckoned that one of the tenets of ‘Corporate governance’ is to conduct business according to the laws of the land – hence to do this awareness of applicable laws is essential. An attempt has been made in this write-up to bring awareness of the consequences of non-compliance. It is also clarified that the list of laws applicable given here in above is not exhaustive and the directors must obtain from the management the list of applicable laws and record the same in the minutes. This list should be annually reviewed in view of the fact that new laws are being enacted and existing laws amended on a continuous basis at times without realising economic and social consequences.

Nirav Shah

Penalties and prosecution under the Companies Act

Nirav Shah

Development Control Regulations

Laws and Business

1. Introduction :

1.1 The erstwhile Press Note 2 of 2005 and para 5.23 of the
current Circular 1 of 2010 on Foreign Direct Investment issued by the Ministry
of Commerce are some of the most contentious Press Notes. S. 80-IB(10) of the
Income-tax Act, 1961 has given rise to some of the most interesting issues.
Article 25 of Schedule I to the Bombay Stamp Act, 1958 witnesses the maximum
debate. What do all these laws have in common ? They all deal with Real
Estate ! ! If there was a competition for the one sector in India which is
regulated by the maximum laws, then Real Estate would win hands down. It is
regulated by several laws, both Central and State and often there is no
co-ordination of definitions used under one law with those under another law.
This leads to confusion, ambiguity and litigation.

1.2 The Development Control Regulations for Greater Bombay,
1991 (‘the DC Regulations’) are one of the several laws which impact real
estate development in Maharashtra. These Regulations have been framed under the
Maharashtra Regional and Town Planning Act, 1966 (‘the MRTP Act’). As the
name suggests, these Regulations are applicable only for the city and suburbs of
Mumbai. The MRTP Act provides for the town planning and the development of land
for public purposes within the State of Maharashtra.

1.3 The importance of these Regulations stems from the fact
that they define several terms which are not defined elsewhere under other laws,
but are nevertheless used under those laws. Thus, the definitions under these
Regulations could serve as a guide in dealing with complexities under those
laws. This Article examines some of the key provisions of the DC Regulations.

2. Important definitions :

2.1 The DC Regulations lay down some important definitions
which one often comes across when dealing with real estate.

2.2 Building — A building means a structure
constructed with any materials for any purpose. The definition also includes a
part of a building. This is the most important definition since a good part of
the DC Regulations revolve around the construction of buildings. Thus, the term
‘building’ includes, those used for residential, office, educational, etc.,
purposes. A high-rise building is defined to mean a building which has a height
of 24 meters or more above the surrounding ground level.

2.3 Built-up area — It means the area covered
by a building on all floors including the cantilevered portion, if any. A
cantilever in common parlance means a projecting structure, such as a beam, that
is supported at one end and carries a load at the other end or along its length,
e.g., a beam supporting a balcony. Areas specifically excluded are not
counted for built-up area calculations.

2.3.1 Some of the exclusions from the definition of built-up
area are :

(a) Basement area which may be used for parking, storage, bank deposits, housing equipment used for servicing the building, electric sub-station, etc. The basement area cannot exceed the lower of twice the plinth area of the building or the plot area.

(b) Covered parking spaces as specified in the DC Regulations.

(d) Areas for recreational open spaces such as elevated/underground water reservoirs, electric sub-stations, pump houses, pavilions, gymnasiums, club houses, other sports and recreation facilities, swimming pools, etc.

(e) Certain types of features permitted in open spaces, such as sanitary blocks, covered parking spaces, pump room, meter room, water tank, dustbins, plant nursery, etc.

(f) Area covered by certain types of stair-case rooms, lift rooms, passages, etc.

2.3.2 The definition of this term is useful not only under
the DC Regulations, but also under the Stamp Act. Stamp duty on a conveyance is
payable on the built-up area of the property transferred. As per the Stamp Duty
Ready Reckoner if the built-up area is unascertainable it is presumed to be 20%
more than the carpet area.

2.3.3 For the purposes of FDI in real estate, the minimum
built-up area must be 50,000 sq. mts. The issue which arises here is that what
is the meaning of the term ‘built up area’ ? The DIPP Circular does not
define this term. One of the conditions under the Circular is that the project
shall conform to the norms and standards, including land use requirements and
provision of community amenities and common facilities, as laid down in the
applicable building control regulations, bye-laws, rules, and other regulations
of the State Government/Municipal/Local Body concerned. Hence, it stands to
reason that the definition of this term should be understood in the context of
which it is approved by the Municipal/Local Authority which sanctions the
building plans. E.g., land development in the city of Mumbai is regulated
by the Development Control Regulations of 1991. Thus, if the DC Regulations
treat something as a part of the built-up area, then it stands to reason that
the same should be so counted even for the purposes of reckoning whether the
project is FDI compliant.

2.4 Carpet area — This is the net usable floor
area within a building excluding area covered by walls. It also excludes any
area specifically excluded from computation of the floor space index. The
Maharashtra Ownership of Flats Act, 1963 requires every Flat Ownership Agreement
and every advertisement for the project to mention the carpet area of the flat
sold.

2.5 FSI — The term FSI means Floor Space Index.
FSI has been defined under the Regulations to mean the quotient of the ratio of
the combined gross floor area of all floors in a building to the total area of
the plot. However, the areas which are specifically exempted under the
Regulations are excluded from the computation of the FSI. Thus, FSI would be
computed as under :

Total Covered Area on all floors

Total Plot Area

Hence, the FSI quotient denotes the total constructed area
which is possible on a given plot of land. For instance, if the area of a plot
of land is 100 sq. mts. and the prevailing FSI quotient for that area is 1.33,
then the total possible constructed area on that plot would be 1,330 sq. mts.
The FSI computation and the permissible FSI varies depending upon the location
of the plot, the nature of intended use, etc. For instance, additional FSI is
allowed for Slum Rehabilitation Projects, redevelopment of cessed buildings,
hotels, etc.

2.6 Plinth — One often comes across this term in the real estate sector. It means the portion of the structure between the surface of the surrounding ground and the surface of the floor immediately above the ground. Plinth area on the other hand means the built-up covered area measured at the floor level of the basement or any other storey.

2.7 Plot means a parcel or piece of land which is enclosed by definite boundaries.

Construction process:

3.1 In a variety of laws, such as S. 80-IB(10), Circular 1/2010 issued by the DIPP, etc., one comes across terms like the commencement of the project, completion of the project, obtaining of all statutory approvals, etc. Hence, it becomes important to understand the process involved in constructing a project, what steps are involved and what approvals are required.

3.2 Given below is a brief description of the processes and the approvals/certificates required for projects in Mumbai:
a) Plan submission: The initial plan is submitted to?the?BMC?to?obtain a No Objection Certificate or approval based on guidelines laid down under the DC Regulations. A notice is to be given to the BMC along with a host of prescribed documents, such as the title documents, site plans, layout plan, building plan, etc.

b) Intimation of disapproval: This permission is an in-principle approval with respect to the plans submitted subject to conditions set out in the plans. The Intimation of Disapproval or IOD is worded in a very unique fashion. It gives an impression that the development has not been approved. However, actually it means that the development would be approved if the objections specified therein are addressed. Following compliance with these conditions, a Commencement Certificate is granted at various stages set out in the conditions. The IOD allows the developer to vacate and rehabilitate existing tenants and demolish existing structures. The developer is required to submit drawings of the proposed building for a project, together with details of the plot survey and survey drawings to the concerned planning authority.

c) Commencement certificate: The CC is required to commence work. The builder submits various documents as evidence of compliance of the conditions set out in the plans delivered with respect to intimation of disapproval at the time of applying for this certificate. Examples of such documents include no objection certificates from relevant authorities for cutting trees, from the Airport Authority of India for height clearance with respect to airport distance, structural design and drawings submissions and temporary structure permissions. Further, approvals for parking layout and a soil investigation report, for example, are also required to be in place at the time this application is made for obtaining a commencement certificate up to the plinth level. The CC is valid for 4 years, but needs to be renewed every year.

d) Further/full commencement certificate: This certificate is an endorsement with respect to the commencement certificate. This endorsement to undertake construction above the plinth level for which there are formal inspections by the officials of the BMC. It may be obtained either in phases or at one time for the entire project.

e) Building Completion/Occupancy certificate: The Occupancy Certificate or OC is granted on the completion of the project and is required for occupants to move into their respective apartments. Some of the documents required to obtain this approval are?: a Structural Completion Certificate, a Lift Completion Certificate, a No Objection from the Fire Department and a Storm Water Drain Compliance Certificate. On receipt of these documents, the BMC inspects the work and issues a Certificate of Acceptance of the Completion of the Work. Once this Certificate is received, the builder submits the Development Completion Certificate along with the completion plan to the BMC. If the BMC is satisfied that there is no deviation from the sanctioned plans, then it grants an OC within 21 days or it may refuse to grant the OC. There are a good number of buildings in Mumbai where even though all flats are sold, the OC has not been obtained. The grant of the OC signifies the completion of the project.

f) Permanent electricity and water connection: This certificate is obtained after the occupancy certificate has been awarded.

Consequences of violation:

4.1 In cases of DC Regulation violations, i.e., where the constructed area exceeds the maximum FSI permissible under the Regulations and/or allowed under the DRC, the BMC has power to demolish the illegal construction. It can also recover the costs of such demolition from the accused. In addition, a penalty for unauthorised development/use of a property otherwise than for the purpose it was planned may be imposed in the form of an imprisonment and a fine.

4.2 A very famous case in this respect is that of Pratibha Co-operative Housing Society Ltd. where the Society violated the FSI laws by constructing an unauthorised additional area of up to 24,000 sq.ft, equivalent to 8 additional areas. Ultimately, the matter went to the Supreme Court which upheld the demolition of the illegally constructed floors. While concluding the Supreme Court observed that “this case should be a pointer to all the builders that making of unauthorised construction never pays and is against the interest of society at large”.

4.3 Recently, an important decision was rendered by the Bombay High Court in the case of a writ petition filed by Sudhir M. Khandwala, writ petition No. 1077 of 2007. The case pertained to the demolition of illegally constructed Gaurav Gagan building and the petition was filed by the flat owners seeking re-spite from the BMC’s Orders. The High Court refused to stay the demolition and refused to regularise the unauthorised construction.

Nirav Shah

Dissolution of a Partnership Firm : SC Decision

I. Introduction

1.1 The Indian Partnership Act, 1932 (‘the Act’) provides for registration of partnership firms with the Registrar of Firms. Registration under the Act is voluntary and not compulsory as in England. However, u/s. 69 of the Act, in the case of firms which are unregistered, the partners of the firm cannot file any suit in a Court. Thus, this is a disability for all unregistered firms.

1.2 In spite of the above disability, the partner of an unregistered firm is entitled to sue for dissolution of the firm. This position was amended in the State of Maharashtra by the introduction of S.69(2A) and S.69(3)(a). Hence, partners of an unregistered firm in the State of Maharashtra, could not even sue for the dissolution of the firm or for realisation of the property of a dissolved firm.

1.3 This amendment in Maharashtra caused a great deal of hurdles for partners of unregistered firms and was challenged as being unconstitutional. The Bombay High Court upheld the validity of this amendment. Recently, the Supreme Court, in the case of V. Subramaniam v. Rajesh Raghuvendra Rao, Civil Appeal No. 7438 of 2000 decided on 20th March, 2009, had an occasion to consider the Constitutional validity of this important amendment. This article analyses this important judgment and the principles laid down therein.

II. Existing Legal Position

2.1 S.69 of the Act provides as under :

“69. Effect of non-registration — (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

(2) No suits to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

(3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect —

(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm; or

(b) the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909 (3 of 1909), or the Provincial Insolvency Act, 1920 (5 of 1920), to realise the property of an insolvent partner.”

2.2 The Maharashtra Amendment Act of 1984 inserted sub-section 2A in s.69 with effect from 1st January, 1985 which read as follows :

“(2-A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of a dissolved firm or to realise the property of a dissolved firm.”

It also replaced the aforesaid clause (a) of subs-section 3 of S.69 of the Act and the amended S.69(3) read as follows :

“(3) The provisions of sub-sections (1), (2) and (2-A) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect —

(a) the firms constituted for a duration up to six months or with a capital up to two thousand rupees; or”

2.3 The net effect of the amendments in the State of Maharashtra were as follows :

(a) A partner in an unregistered partnership firm could not file a suit for :

(i) dissolution of the firm; or

(ii) accounts of a dissolved firm; or

(iii) realising the properties of a dissolved firm.

(b) The only exception when he could do so was where the firm was only 6 months old or its capital was up to Rs. 2,000 only.

Thus, a partnership firm could come into existence without being registered, but it could not go out of existence (dissolved) since it was not registered.

III. Principles laid down by the SC

3.1 The Bombay High Court had upheld the validity of the above provision which prevented a partner of an unregistered firm from suing for dissolution. Aggrieved by this decision, the appellant, V. Subramaniam, preferred an appeal before the Supreme Court. The Supreme Court laid down various important principles in its judgment.

3.2 Firm not a separate legal entity

The Court observed that unlike in the case of a company, a firm is not a separate legal entity and it does not have a personality distinct from its partners. The registration of a firm also does not give it the status of an artificial juridical person. The partners are the real owners of the firm’s property. The property belongs to the partners. This position is distinct from that in the case of a company.

3.3 Constitutional validity

3.3.1 The Supreme Court held that Art. 300A of the Constitution states that no person shall be deprived of his property except by authority of law. Sub-section 2A deprived a partner from his share in the property of the firm and that too without any compensation. The Court observed the various ways in which deprivation of property can take place by :

(a) Destruction of property as held in Chiranjit Lal Chowdhuri vs. UOI, AIR
1951 SC 41.

b) Confiscation of property as held in Ananda Behera vs. State of Orissa, AIR 1956 SC 17.

c) Revocation of a proprietary right granted by a ‘private proprietor’ as held in Virendra Singh vs. State of U.P., AIR 1954 SC 447.

d) Seizure of goods as held in Wazir Chand vs. State of H.P., AIR 1954SC 415 or seizure of immovable property as held in Virendra Singh vs. State of U.P., AIR 1954 SC 447.

e) By assumption of control of a business in exercise of the ‘police power’ of a State as per the decision in Virendra Singh vs. State of U.P.

f) A municipal authority, which, under statutory powers, pulls down dangerous premises as per the decision in Nathubhai Dhulaji vs. Municipal Corporation, AIR 1959 Born. 332.

g) An insolvent being divested of his property as per the decision in Vajrapuri Naidu, N. vs. New Theatres, Carnatic Talkies Ltd., 1959(2) MLJ 469.

3.3.2 The Court also held that the amendment was violative of Art.14 of the Constitution which guarantees the right to equality. Under the present law, partners of an unregistered firm were placed on an unequal footing vis-a-vis partners of a registered firm. Further, the amendment was ultra vires Art, 19(1)(g) which guaranteed all persons the right to practise any profession or trade. The State was empowered to reasonable restrictions on this right. However, a reasonable restriction meant that the limitation should not be arbitrary or unjust or excessive. A proper balance should be struck between the restriction and the fundamental right of freedom granted by Art. 19. A law is invalid if it is arbitrary and of excessive nature and goes beyond what is in public interest as held by the Supreme Court in Maneka Gandhi vs. UOI, AIR 1978 SC 597.

3.3.3 The Court observed that the amendments were crippling in nature. It would have the effect that the partnership cannot be put to an end by filing a suit for dissolution. It may happen that a dishonest partner who was in control of the business or if he is stronger than the rest, can deprive the other partners of their dues from the firm. This would be extremely unjust and unfair. The Court observed that the Section created a situation, where businessmen will be very reluctant to enter into unregistered firms since they would not be able to dissolve the firm and get back the money which they have got in the firm.

IV. Conclusion

The Court ultimately held that the amendment was ultra vires of Art. 14, 19(1)(g) and 300A of the Constitution and hence, it was struck down as being unconstitutional. Accordingly, the Act in Maharashtra should now be read as if it does not contain sub-section (2A) and the revised clause (a). Thus, a partner of an unregistered firm can now sue for dissolution or for accounts or for property of such a firm.

Nirav Shah

AGRICULTURAL LAND LAWS : BTALA, 1948

Laws and Business

(In this Article, we continue with our study of the
Bombay Tenancy and Agricultural Lands Act, 1948 (‘Act’) which deals with
certain aspects of the law relating to agricultural lands in the State of
Maharashtra.)

Transfers to non-agriculturists :

U/s.63 of the Act, any transfer, i.e., sale, gift,
exchange, lease, mortgage with possession of agricultural land in favour of any
non-agriculturist is 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 wishes to buy agricultural land in Maharashtra, then
section 63 would apply. An important exception to the provisions of section 63
would be in the case of succession to agricultural land by a non-agriculturist.
Thus, if the legal heirs of an agriculturist are non-agriculturists or if the
legatees under his will are non-agriculturists, even then the succession/bequest
in their favour would be valid. In law, succession to property cannot lie in a
vacuum and the BTALA would not override succession laws [refer Ghanshyambhai
v. State of Gujarat, (1999) 2 Guj. LR 1061].

Similarly, any transfer in favour of an agriculturist of any
land exceeding the ceilings fixed under the Maharashtra Agricultural Lands
(Ceiling on Holdings) Act, 1961 (which we would be examining in subsequent
Articles) is not valid unless it is in accordance with the provisions of the
Act.

The above transfers can be done with the prior permission of
the Collector, subject to such conditions as he deems fit. However, he would not
grant such a permission if the buyer is a non-agriculturist and his income from
other sources is more than Rs.5,000 per year.

Some of the conditions under which the Collector would grant
permission for the transfer of an agricultural land are as follows :

(i) the land is required for non-agricultural purposes; or

(ii) the land is required for the benefit of an
industrial/commercial/educational/charitable undertaking; or

(iii) the land is being sold in execution of a decree of a
Civil Court for arrears of land revenue; or

(iv) the land is being gifted by way of a trust or
otherwise bona fide by the owner in favour of his family member.

Once the permission has been granted by the Collector it must
be acted upon within one year, unless extended by the Collector up to a maximum
period of five years.

If a 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 such an Order is passed 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, the
Mamlatdar would determine the reasonable price of the land and grant the land on
a new tenure on payment of occupancy price equal to the reasonable price so
determined. The reasonable price would not be lower than 20 times the land
assessment and not more than 200 times the land assessment. Further, it would
include, the value of any structures, wells, permanent fixtures, etc., on the
land.

Transfer of land to non-agriculturists for bona fide
industrial use :

U/s.63-1A of the Act, transfer of land in favour of a
non-agriculturist without the Collector’s permission is permissible in the
following two cases :

(i) it is for a bona fide industrial use; or

(ii) it is for a special township project.

The other conditions for the above are that :

(a) the Development Control Regulations permits such an
industrial use; or

(b) the land is located within an industrial zone under
any plan prepared under the Maharashtra Regional & Town Planning Act, 1966
or any other applicable similar law; or

In case the total area of the land so proposed to be used
exceeds 10 hectares/25 acres, then the prior permission of the Development
Commissioner (Industries) would be required. Thus, if the purchaser of the
agricultural land is a company which desires to undertake a special township
project and it wants Foreign Direct Investment (FDI) for the same, then it would
have to ensure that the size of the plot is 25 acres or more. In such a case, it
would need the prior approval of the Development Commissioner of Industries for
first acquiring such an agricultural land.

The purchaser of the land for the above purposes must put it
to the industrial use within 15 years from the date of purchase or else the
seller has the right to repurchase the land at the price at which he sold it.
Till 2004, the limit was five years and it was extended to 15 years by the
Maharashtra Tenancy and Agricultural Laws (Amendment) Act, 2004. If the
purchaser was holding the land in 2004 and had failed to put it to use within
five years of purchase, then he can put it to industrial use within the
remaining period out of 15 years, subject to payment of certain non-agricultural
tax.

Bona fide industrial use :

Agricultural land can be purchased without approval if it is
for a bona fide industrial use which has been defined under the Act to
mean the following :

activity of manufacturing,

processing of goods,

handicrafts,

activity of industrial business or enterprise,

tourism activity within notified tourist places/hill stations,

construction of industrial building

construction of industrial buildings used for manufacturing process or power projects or ancillary industrial use, such as R&D, godown, canteens, providing housing to workers of industry,

establishment of an industrial estate/co-operative industrial estate/service industry/ cottage industry units.

Special township project:

Agricultural land can also be purchased without the approval of the Collector if it is for constructing a special township project as per the Rules framed under the Maharashtra Regional and Town Planning Act, 1966. Although, in such cases apart from the permission of the Collector, special township projects require a host of other regulatory clearances, as high as 30- 35 approvals. Some of the key requirements for a special township project are as follows:

It should be an integrated township

The minimum area to be developed must be 100 acres for which norms and standards are to be followed as per the local byelaws. If there are no such local byelaws, then a minimum of 2,000 dwelling units for 10,000 people must be developed. The housing component must constitute at least 60% of the total area.

The township must provide for a school, shopping, community centres, medical services, etc. Around 20% of the area must be designated for recreational spaces and an additional 5% for amenities.

The developer must provide for basic infrastructure and public utilities. There must be a water provision of 140 litres per person.

Construction and real estate development other than what is specified above is not covered. Thus, the Collector’s permission would be required for the same.

A special township project is eligible for various sops and benefits under the Maharashtra Housing Policy. Some of the benefits are as follows:

Non-agricultural permission is automatic.

Government land falling under the township area shall be leased out to the developer at the current market rate.

The condition that only agriculturists will be eligible to buy agricultural land is not applicable within the special township area.

There is no ceiling limit for holding agricultural land by the developer of such special township project.

Floating FSI is available within the township. Thus, the unused FSI of one plot can be used anywhere in the whole project.

A stamp duty concession is available compared to the prevailing rate.

It is partially exempted from payment of scrutiny fee while processing the development proposal.

It is eligible for a 50% concession in payment of development charges.

In addition, special township projects are also eligible for external commercial borrowings under the FEMA Regulations.

Significance of Act:

This Act is very important to industry at large since it lays down the circumstances under which company/non-agriculturist can buy agricultural land. The management of companies dealing with or in agricultural land would be well advised to pay heed to the provisions of this Act or else they face the risk of losing the land altogether.

Nirav Shah

Limitation period for economic offences

Laws and Business

1. Introduction :

The Code of Criminal Procedure, 1973, (‘the Code’) provides
for the method and manner in which criminal cases, prosecutions, etc. would be
tried in the Courts. The Code also provides for the limitation period after
which the Courts would not entertain any prosecutions in respect of certain
offences (including economic offences) under various Acts. The Code also
provides for certain exceptions to these provisions, i.e., cases in which
the period of limitation does not apply. These provisions are very important,
especially, in light of the fact that recently, the Department of Company
Affairs, the SEBI, etc., have started launching prosecutions on a large scale.
This Article examines these provisions.

2. Limitation Period for certain Offences :

2.1 Under the provisions of Chapter XXXVI of the Code, the
period of limitation in respect of taking action under various enactments has
been provided. The object of enunciating a bar on prosecutions was explained by
the Apex Court in its decision in the case of State of Punjab v. Sarwan
Singh, AIR 1981 SC 722. The Supreme Court held that the object in putting a
time limitation on prosecution is clearly to prevent parties from filing of
vexatious and belated prosecutions.

2.2 Definitions :

2.2.1 S. 467 provides that the ‘period of limitation’
means the period specified in S. 468 for taking cognizance of an offence.

2.2.2 Although S. 190 provides that a Magistrate of the first
class would take cognizance of any offence on receipt of a complaint of facts or
a report from the Police, the Code does not define the term anywhere. The term
‘cognizance’ may be defined to mean the judicial recognition or the
judicial notice of any cause of action. According to the Supreme Court in the
case of Darshan Singh, cognizance takes place at a point when a
Magistrate first takes judicial notice of an offence.

2.3 Specified periods :

S. 468 provides the periods of limitation after the expiry of
which a Court shall not take cognizance of an offence. These periods are :

(a) 6 months, if the offence is punishable with fine only,
e.g., S. 299 of the Companies Act, specifies a fine of up to Rs.50,000.

(b) 1 year, if the offence is punishable with imprisonment
for a term not exceeding 1 year, e.g., S. 292A of the Companies Act
specifies a term of up to 1 year for failure to constitute an Audit Committee.

(c) 3 years, if the offence is punishable with imprisonment
for a term exceeding one year, but not exceeding 3 years, e.g., S. 77A
of the Companies Act specifies a term of up to 2 years for buying back of
securities otherwise than in the manner prescribed u/s.77A.

When two or more offences are tried together, the period of
limitation shall be determined with reference to offence for which punishment is
more severe or where the punishment is most severe. It may be noted that no
provision has been made in case of offences punishable with more than 3 years.
Thus, S. 468 would not apply to such cases of offences.

2.4 Inapplicability of S. 468 :

The above limitation period specified in S. 468 has been made
inapplicable to certain economic offences by the Economic Offences
(Inapplicability of Limitation) Act, 1974. Any offence under an Act or any
provisions thereof, specified in the Schedule to this Act is not affected by the
period of limitation specified in S. 468. Some of the important Acts specified
in the Schedule are as under :

(a) The Income-Tax Act, 1961

(b) The Interest Tax Act, 1974

(d) The Central Sales Tax Act, 1956

(e) The Central Excises and Salt Act, 1944 (now known as
the Central Excise Act, 1944)

(f) The Customs Act, 1962

(g) The Foreign Exchange Regulation Act, 1973 (it may be
noted that the Schedule has not been amended to include the Foreign Exchange
Management Act, 1999). S. 49(3) of the FEMA provided for a limitation period
of 2 years from the date of its commencement for any Court/officer to take
cognizance of an offence committed under FERA. This period expired on 1st May
2002.

(h) The Capital Issues (Control) Act, 1947 (it may be noted
that the Schedule has not been amended to include the Securities & Exchange
Board of India Act, 1992)

(i) The Indian Stamp Act, 1899

(j) The Industries (Development and Regulation) Act, 1951

2.5 Maharashtra State Amendments :

In addition, in the State of Maharashtra, by virtue of the
Maharashtra Taxation Laws Offences (Extension of Period of Limitation) Act,
1977, Chapter XXXVI of the Code has been made inapplicable to any offences
punishable under the following Acts :

(a) The Bombay Sales Tax Act, 1959

(b) The Maharashtra State Tax on Professions, Trades,
Callings and Employments Act, 1975

Further, by virtue of the Maharashtra Taxation Laws
Offences (Extension of Period of Limitation) Act, 1981, the period of
limitation in the State of Maharashtra, in respect of offences under certain
Acts has been extended to the time specified therein instead of the time
specified in S. 468 of the Code. The extended period of limitation for these
offences is as under :

(a) 3 years where the total amount of tax or duty involved
in the case of the said offence is Rs.25,000 or more; and

(b) 1 year in all other cases

An important Act to which this extended period applies is the
Bombay Stamp Act, 1958.

2.6 Computation of the period :

The period of limitation u/s.469 of the Code, commences :

(a) on the date of the offence; or

(b) where the commission of the offence was not known to the person aggrieved by the offence or to any police officer or the identity of the offender is unknown :

2.7 Continuing offence:

S. 472 provides that for a continuing offence, a fresh period of limitation begins to run at every moment of the time during which the offence continues. The term continuing offence has not been defined and thus, one must depend upon the language of the Act. In Maya Rani Punj v. CIT, 157 IT 330 (SC), the Supreme Court observed that if a duty continued from day to day, then its non-performance from day to day was a continuing wrong. The Madras High Court’s decision in the case of C. K. Ranganthan v. ROC, 45 SCL 500 (Mad.) has held that an offence u/s.211(7) of the Companies Act, 1956, i.e., relating to non-compliance of the balance sheet and profit loss account with the requirements of S. 211 and Schedule VI, is not a continuing offence. It is a one-time offence and there is a period of limitation which must be filed within one year as per S. 468(2)(b) of the Code. The Court further held that non-compliance of financial statements with the requirements of Schedule VI gives rise to a single default and to a single punishment. The provision does not contemplate that the obligation to secure compliance continues from day-to-day until the compliance is actually met, nor does it provide that continuance of business without securing compliance becomes a continuing offence. The Court also held, relying upon its earlier decision in the case of Asst. ROC v. H. C. Kothari, 75 Compo Cas. 688 (Mad), that the ROC was deemed to have knowledge of the offence when the statements were received by him. Hence, the period of limitation of one year would also commence from such date.

3. Auditor’s duty:

The Auditor can provide value added services to his clients by enlightening them about the periods of limitation in respect of any likely prosecutions against them or any suits which they have preferred against any person. He should enquire during the course of his audit as to whether any prosecution proceedings have been launched against the auditee or its officers and what would be the consequences. This becomes very important when dealing with offences under the Companies Act, Rent Act, Bombay Stamp Act, Registration Act, etc. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

Nirav Shah

Real Estate Laws: Recent Developments-II

Laws and BusinessI. Stamp Duty Ready Reckoner 2010

1.1 The State Government has issued the Ready Reckoner for
computing the Fair Market Values for immovable property in Maharashtra for the
year 2010. As expected, the property rates in Mumbai have been increased by
10-20% compared to last year. The state government expects to mobilise Rs.
5,075 crore as revenue through stamp duty and registration fee by the end of
2009-10 and hence, it has hiked the rates to achieve its target. Stamp duty is
only second to VAT in terms of revenue earners for the State of Maharashtra.
Even though on one hand, the State has reduced the peak duty rate to 5% when
compared to other States, it has on the other hand, consistently increased the
Reckoner rates which have more than compensated for the fall in duty rates.
Thus, the State has been able to increase its Stamp Duty revenue year after
year. Readers may be interested to know that as far back as in 1993, the State
Government had given an undertaking before the Bombay High Court in the case
of Ashok Bansilal Mutha v State of Maharashtra & Ors. (Contempt Petition No.
28 of 1993), that it will not use the Ready Reckoner for calculating stamp
duty. In spite of this, the Sub-registrars always insist upon payment of duty
as per the Reckoner.

1.2 There are no changes in the Valuation Guidelines. The
rates mentioned in the Reckoner are on a per square metre of built-up area
basis, i.e., the same as previous years. There were news reports that the
Reckoner would be aligned with the amendment to the Maharashtra Ownership Flat
Act and that henceforth the property rates would be on a carpet area basis.
This would have enabled parity between the Flat Ownership Agreement and the
Reckoner rates. However, the 2010 Reckoner continues with the built-up area
pricing only. All other valuation parameters are the same as before.

1.3 When one considers the hike in the registration fee
along with the hike in the Reckoner rates, it is a double whammy for property
buyers. It is high time that the Ministry of Urban Development, along with the
Ministry of Housing and Urban Poverty Alleviation crack the whip by
threatening to refuse disbursement of funds to the State under the Jawaharlal
Nehru National Urban Renewal Mission (JNNURM). Only then can we expect some
relief and rationalisation of stamp duty rates and /or property values.

II.
Property Tax Calculation

2.1 Currently, the BMC levies a property tax based on the
Rateable Value of flats. Under the rateable value system, property tax is
based on the expected rent which a property can fetch. In the case of owner
occupied properties, the rateable value is arrived at on the basis of a
schedule of rates prepared by the BMC for different buildings. In these rates,
what is noteworthy is that newer buildings have a higher rateable value as
compared to older buildings. Accordingly, newer buildings, no matter where
located, would pay a higher tax as compared to older buildings, no matter
where located. Accordingly, a new building in Dahisar would pay higher
property tax as compared to an old building in Cuffe Parade.

2.2 To rectify this anomaly and in a bid to earn more
revenue, the BMC has devised the Capital Value System of levying property tax.
This new method is to be implemented from the next financial year, i.e., from
1st April, 2010. Under the Capital Value taxation, property tax will be levied
based on the current market value of the property and not on the basis of the
erstwhile rateable value.

2.2.1 To arrive at the market value, the rates given in the
Stamp Duty Ready Reckoner are sought to be used. Once the market value is
determined on this basis, it would remain frozen for 5 years. Thus, if the
Reckoner Rates for 2010 are adopted on 1st April 2010, then they would
continue till 31st March 2015.

2.2.2 The rate of property tax would be decided every year
by the BMC in its Annual Budget. It is expected to be 0.30% to 0.45% of the
Capital Value of the Property. for example, if the Capital value of a flat at
Churchgate is Rs. 2,00,00,000, then the property tax @ 0.45% will be Rs.
90,000 per annum.

2.2.3 In computing the property tax, various factors need
to be borne in mind, such as, carpet area, use of the property, etc. In a
subsequent Article, we will examine the Capital Value System in greater depth.

2.2.4 After an increase in Reckoner Rates, removal of the
cap on registration fees, flat buyers / owners in Mumbai have been gifted one
more exploitive tax by the Government in 2010. The New Year could not have
gotten off to a better start for the real estate sector!

III. Stamp Duty on Agreements not provided for

3.1 A few years ago, Schedule I to the Bombay Stamp Act was
amended to introduce Art. 5(h) (A) which provides for a duty on any Agreement
not otherwise provided for under the Schedule and creating any obligation,
right or interest and having a monetary value. The duty was 0.1%.

Thus, all Agreements which created a monetary obligation or
an interest and which were not otherwise covered under the Act were chargeable
with duty under this Article. These included Share Subscription Agreements for
PE Funding, etc.

3.2 The 2009 Amendment Act has increased the duty under
this Article. Accordingly, the stamp duty would be 0.1% in case the value of
the agreement is Rs. 10 lakhs or less. In the case of an agreement which
exceeds Rs. 10 lakhs in value, the duty would now be @ 0.2% of the amount
agreed in the contract. E.g., in case a real estate fund agrees to invest Rs.
100 crores in a real estate project, the Share Subscription Agreement would
now be stamped with a duty of Rs. 20 lakhs.

Nirav Shah

Accounting Frauds : Prosecution under IPC

Laws and Business

1. Introduction :

1.1 Accounting frauds and scams, from being rare, are
becoming a norm. India has also had its share of frauds. Corporate India is yet
reeling from the recent case of Satyam Computers, an instance where the
promoters, CFO and auditors have been taken into ‘custody’. At a time like this,
it is relevant to consider penalties prescribed under the Indian laws for such
frauds.

1.2 Punishment for offences relating to accounting fraud,
forgery, etc., in case of companies are prescribed under two Statutes — the
Companies Act, 1956 and the Indian Penal Code, 1860 (‘the Code’).
Criminal Law in India is mainly governed by two major Acts : the Indian Penal
Code, 1860 and the Criminal Procedure Code, 1973. While the Indian Penal Code
deals with what can be considered as an offence and the punishment for various
offences, the Criminal Procedure Code, 1973 prescribes procedures and
formalities which must be followed in trying an offence.

1.3 As chartered accountants we rarely bother about criminal
law . . . However, Satyam’s case indicates that sometimes willingly or
unwillingly, we may become a party to criminal proceedings. Hence, it becomes
necessary to at least have a fair understanding about the basics of criminal
law. Further, even in cases of economic offences, criminal cases may be
initiated against companies, its officers and businessmen. In such an event it
would be of great assistance if we have some knowledge of criminal law. This
article examines some of the punishments prescribed under the Code for
accounting frauds. Some of the sections herein examined are those which form
part of the chargesheet filed by the Police in Satyam’s case.

2. Falsification of Accounts (S. 477-A) :

2.1 S. 477-A of the Code expressly deals with
Falsification of Accounts. It makes falsification of books and accounts
punishable. It also makes the act of making false entries or
omitting or altering any false entry punishable.

2.2 S. 477-A deals with the following two types of distinct
offences :

à
Falsification of accounts

à
Making of false entries

2.3
Falsification of Accounts :

à
The offender must be a clerk, officer or a servant.

à
He must have acted willfully and with an intent to defraud.

à
He must either destroy, alter, mutilate, falsify any book, electronic record,
paper, writing, valuable security, or account.

à
The above-mentioned documents must be of his employer.

2.4
Making False Entries :

à
The offender must be a clerk, officer or a servant.

à
He must have acted willfully and with an intent to defraud

à
He makes/abets any false entry or omits/ alters/abets the making of any
entry from any book, electronic record, paper, writing, valuable security, or
account.

2.5 The punishment for both the above-mentioned type of
offences is an imprisonment up to 7 years and/or a fine. The offence is a
non-cognisable offence under the Criminal Procedure Code. A non-cognisable
offence would mean one where the police can arrest only on the basis of a
warrant issued by a Magistrate. The police cannot arrest an accused merely on
the basis of a complaint, etc., like they can in the case of grievous crimes,
such as murder. The accused can get a bail against this offence.

2.6 For a charge u/s.477-A, it is not necessary to
show the following evidence that :

à
any particular person was defrauded. A general intent to defraud is enough.

à
any specific sum of money was involved.

à
the offence was committed on a particular date.

2.7 The person charged of the offence — the offender — must
be either a clerk, officer or a servant. Any other person is not covered by S.
477-A. The person must be employed by the employer in either of three
capacities. There must be an employer-employee relationship — Hari
Prasad v. State of UP, 1953 Cr. Lj 1496 (All). It has been held that
if a partner of a firm also has dual responsibilities to manage the business, or
write up the firm’s accounts, then he would be covered under this Section and
can be prosecuted for any such offence. A working director/managing director
would be a servant of his employer, i.e., the company.

2.8 Intention to defraud is essential to attract this
Section. Thus, something which is not true must be passed off as true with an
intention to cause some kind of injury to property. Two essential elements are,
deceit and injury. Hence, either there must be a suppression of the
truth or there must be a suggestion of a lie.

2.9 An important principle to note is that the sanction of the Company Court is not needed for prosecuting the managing director of a company in liquidation for an offence u/s.477-A of the Code. The Companies Act does not impact proceedings instituted by the Liquidator – C. Hanumantha Rao v. T. S. Rama Rao, AIR 1961 AP 493.

3. Forgery (S. 465) :

3.1 S. 465 punishes an act of forgery with a term of up to 2 years and/ or fine.

3.2 The term forgery is defined in S. 463 to mean:

the act of making a false document or part I thereof

with an intent to :

cause damage or injury to a person or to the public
support any claim or title
cause any person to part with any property
cause any person to enter into any contract
commit fraud

3.3 Forgery takes place only when a false document is made with an intent of causing damage or injury to any person. A false document is one where the person making it does so with the intention that it appears to have been made by another person.

4. Forgery of a Valuable Security (S. 467) :

4.1 S. 467 of the Code deals with an offence of a forgery of a valuable security. The important facets of this Section are as follows:

there must be a forgery.

it must be in respect of a valuable security, or must give authority to a person to make or transfer a valuable security or to receive principal, interest or dividend thereon. A valuable security is a document whereby any legal rights are created, extended, transferred, extinguished, released, etc. In Hari Prasad v. State of UP, 1953 Cr. Lj 1496 (All), it was held that account books containing entries which are not signed by any party are not valuable security.

it could also be in respect of a document acknowledging the payment or money or a receipt.

4.2 The punishment for the offence is imprisonment for life or with imprisonment for a term of up to 10 years. It also attracts a fine.

5. Forgery for Cheating (S. 468) :

5.1 S. 468 punishes a ‘forgery’ which is done for the purposes of cheating. It covers a forgery of a document or an electronic record which is done with the intention that such document/record shall be used for cheating. Falsification of books of accounts for the purposes of cheating are covered under this Section – Banessur Biswas (1872) 18 WR (Cr) 46.

5.2 S.415 definesthe term ‘cheating’ as follows:

There must be a deceit of a person by fraudulent or dishonest means.

As a result of such deceit, the other person must either:

deliver property to another person; or
consent to retention of property by another person; or
do or omit to do anything which he would not do

The above act or omission must cause damage or harm to mind, body, reputation or property of the person.

In the above case, the offender who deceives is said to cheat the other person.

5.3 It is noteworthy that the Section states the of-fender must have an intention of cheating while committing the forgery. Actual cheating or the fact that someone has indeed been cheated is not material to attract this Section. It is required to prove that the document has been forged by the accused and the accused did so with an intention of cheating.

5.4 The punishment prescribed for such an offence u/s.417 is imprisonment of up to 7 years and also fine. This offence is also a non-cognisable offence punishable by a Magistrate.

6. Using a Forged Document as a Genuine Document (5. 471) :

6.1 According to the provisions of S. 471, if any person fraudulently or dishonestly uses any document or an electronic record as genuine when he knows or believes that the same is actually a forged document/record, then he is punishable as if he had actually forged the same.

6.2 This Section does not prescribe any penalty for the offence, but treats it as a case of a forgery. Thus, it is essential to first see whether the document is indeed a forged document. If yes, then S. 471 can be applied. The onus is on the prosecution to demonstrate that the document is forged and that the offender knew about the forgery and yet used the same as an original document in either a fraudulent or dishonest manner.

7. Cheating to cause wrongful loss (5. 418) :

7.1 S. 418 of the Code is attracted if the following conditions are satisfied:

the offender was under an obligation imposed by law or legal contract to protect the interest of a person.

the offender actually cheated a person.

the offender cheated with the knowledge that he is likely to cause wrongful loss to the person cheated.

7.2 S. 418 applies to people who are entrusted with the responsibility of protecting other’s interest under a legal/contractual obligation. These include, bankers, trustees, advocates, etc. In one case the directors and accountant were accused of preparing a false balance sheet to mislead the public to induce them to deposit money with the bank. They were held to be liable of an offence under this Section. In the very old case of Giles Seddon v. S. J. Loane, (1910) 11 CrLj 624, the Madras High Court held that the mere fact that the balance sheet was false was not adequate to attract the provisions of this Section. The guilty knowledge of the director cannot be presumed from the mere fact that he authorised the issue of a balance sheet containing false entries but must be decided on a consideration of all the facts and circumstances, e.g., the nature of the false statements, the materiality of the amounts involved in the false entries, the ease or difficulty with which their truth or falsity could be ascertained, the course of business of the company, the position, individual standing of the directors, etc. The Court further held that mere mistakes in the classification of a debt as doubtful or bad is a matter on which experts might differ and that by itself does not warrant a case for cheating. There must exist some other corroborative evidence to show that all this was intended to be a part of a larger scheme of things conceived to deceive and cheat people. The same would even apply to a misrepresentation by way of an omission. In this case, debts due by directors were not dis-closed separately.

This is a very old judgment, almost 100 years old, and one wonders how the Courts of today would view the principles enunciated therein ?

8. Cheating to induce delivery of property (S. 420):

8.1 If cheating is done with an intention of dishonestly inducing the person deceived to deliver any property to any person, or to make alter or destroy a valuable security, then it is punishable u/s.420 of the Code. S. 420 of the Code is one of the more popular Sections of the IPC and one which is known even by laymen. What is necessary is that the act of cheating (as defined in S. 415) must be done to induce the person cheated to part with his property.

8.2 S. 420 is different in its application from S. 417 simple cheating. In the case of a simple cheating, there is no delivery of property, whereas it is an essential ingredient of S. 420.

8.3 An act of issuing a cheque when there are insufficient funds in the payer’s bank account would also constitute an offence punishable u/ s.420 if it can be demonstrated that the cheque caused deception from inception. In such a case, the act would be punishable under the Negotiable Instruments Act as well as S. 420 of the IPC.

8.4 This offence is punishable with an imprisonment of a term which extends up to 7 years and also fine.

9. Criminal Breach of Trust (5. 409) :

9.1 Certain categories of people are guilty of an offence u/ s.409 of criminal breach of trust if they being entrusted with any property have committed a criminal breach of trust in respect of the same. The categories covered includes 7 classes – public servants, bankers, brokers, factors, merchants, attorneys and agents. Such people are considered to be men of trust in whose control people entrust property. If they commit a criminal breach of trust, they are guilty u/s.409. A criminal breach of trust happens when a custodian of a property converts it to his own use or misappropriates the same for his use or dishonestly uses that property in violation of any law or contract. For example, an agent who is entrusted with his principal’s funds with instructions to only invest them in mutual funds, invests the funds in his family companies, he is guilty of criminal breach of trust. Similarly, if an advocate is an escrow account holder for a transaction and instead of investing the money in instruments instructed by the party, he invests them in his own firm, he would be guilty under this Section.

9.2 A question which arises is whether a director can be covered under this section, i.e., can he be treated as an agent of the company and covered by S. 409 if he misappropriates the property? In the case of R. K. Dalmia v. Delhi Administration, 32 Comp Cas 699 (SC), the Supreme Court held that funds which a company has in its bank account are property of the company within the meaning of the Code and persons having power to operate on that account will be guilty of criminal breach of trust if by operating on that account funds are misappropriated. Further, a director is an agent as well as a trustee of a company within the meaning of S. 409 of the Code and thus, if a director has misappropriated the company’s property, then he too can be covered by this Section.

10. Directors’ responsibilities:

10.1 The number of prosecution cases involving companies has increased recently. There is an increasing need for directors, including independent directors to be aware of the prosecution possible under Criminal Law.

10.2 Being aware of consequences under the law would make them more diligent and vigilant in the discharge of their duties.

Nirav Shah

ENVIRONMENTAL LAWS

Laws and Business

1. Introduction :

1.1 The environment in which businesses operate is extremely
important and valuable. If it is not preserved it would be lost forever since it
is rapidly depleting. Pollution of the environment is one of the main culprits.
Pollution could be of air, water, noise and could be caused by sewage,
effluents, waste, bio-medical waste, release of chemicals or smoke, etc. in the
air, noxious chemicals, etc.

1.2 Businesses need to follow the principle of sustainable
development and have legal and moral responsibility towards preserving the
environment. To protect and preserve the environment, the Government has enacted
various laws. Let us briefly examine some of the important Central enactments on
this subject.

1.3 The Courts are also taking a very strict view when it
comes to violation of environmental laws and have not hesitated in prosecuting
directors responsible along with offending companies. A recent judgment of the
Supreme Court in the case of UP Pollution Control Board v. Dr. B. K. Modi,
(2009) 2 SCC 147, has examined this issue in the context of discharge of
pollutants by a company in the river. The company, Modi Carpets was prosecuted
by the Board for discharging noxious effluents in the Sai River. The Pollution
Control Board also filed a criminal complaint against the Directors and MD. The
Allahabad High Court quashed the operation of the complaint against the MD by
holding that there was no material to prove that he was responsible for the
daily conduct of the business or that the offence was committed by his consent
or connivance. The SC referred to its earlier decision in the case of UP
Pollution Control Board v. Mohan Meakins Ltd., (2000) 3 SCC 745. In that case
also, the Directors were sought to be prosecuted for discharge of effluents by
the company in a river. In that case, the SC observed that in view of the
specific averments in the complaint against the Directors, the prosecution of
the Directors was permitted. The SC further observed in the impugned case, that
in matters of public health, the Courts cannot afford to take matters lightly.
All persons big or small should share the parliamentary concern over the
escalating pollution levels. Those who discharge effluents in the environment
should be dealt with sternly, irrespective of technicalities. Hence, the Court
ruled that the Magistrate should proceed with the complaint against the MD and
declined to quash the proceedings against him. Thus, compliance with
environmental laws has become extremely important.

2. Environment
(Protection) Act, 1986 :

2.1 This is a general Act which deals with
the protection and improvement of the environment. Although there were specific
Acts which dealt with air, water, and other pollution, the need was felt for a
general Act which would cover other environmental hazards which were left out.
The Act fixes responsibilities on persons carrying out industrial operations or
those who handle hazardous substances to comply with prescribed safety standards
and also to control and prevent pollution arising from the same. The Government
lays down various standards for the same under the Act and also requires the
filing of information, inspections, etc.

2.2 Definitions :

The Act defines the term environment to include water, air
and land and the inter-relationship which exists among and between water, air
and land and human beings, other living creatures, plants, micro-organisms and
property.

An environmental pollutant is any solid, liquid or
gaseous substance present in such concentration as may be or tend to be
injurious to the environment.

The all important term ‘environmental pollution’ means
the presence of any environmental pollutant in the environment.

A hazardous substance means any substance or
preparation which by reason of its chemical or physico-chemical properties or
handling is liable to cause harm to human beings, other living creatures,
micro-organisms, property or the environment.

2.3 Obligations :

2.3.1 The Act lays down various obligations on industries,
factories, etc. It prohibits the carrying on of any industry, operation or
process which discharges or emits any environmental pollutant in excess of the
prescribed standards. The standards are prescribed under the Environmental
Protection Rules, 1986. Further, no person can handle any hazardous substance
otherwise than in accordance with the prescribed safety standards.

2.3.2 If the discharge of any pollutant is or is likely to be
in excess of the prescribed standards, then the person responsible should take
steps for prevention or mitigation of the pollution and should also furnish
certain prescribed information to the authorities of the same. The authorities
would then take such remedial measures as are necessary, at the cost of the
polluter.

2.3.3 The Act prescribes for powers of entry, inspection,
examination, testing, searching, etc. of any place in connection with the
prevention of environmental pollution. The person so authorised can take samples
of air, water, soil or other substances for this purpose. However, he needs to
comply with the procedure prescribed in this respect.

2.3.4 The Act also empowers the Government to establish
environmental laboratories for carrying out certain inspection, testing,
analysis, functions under the Act.

2.4 Penalties :

Whoever contravenes any provisions of the Act or Rules, is
punishable with imprisonment up to five years or with a fine up to Rs.1 lakh or
both. Continuing defaults attract a fine of Rs.5,000 per day. Where the
contravention continues beyond a period of one year from conviction, the
punishment is an imprisonment of up to seven years.

2.5 Environmental
clearance :

The Government is empowered to prohibit or restrict the
location of industries, operations, in certain areas keeping in mind maximum
allowable limits of concentration of environmental pollutants, the climatic
features, the net adverse environmental impact, the proximity of the proposed
project to protected areas, etc.

2.6 Environmental
audit :

Every person carrying on an industry, operation or process
requiring consent under the Water Pollution Act, Air Pollution Act, and the
Hazardous Wastes Rules must submit an environmental statement for every
financial year to the State Pollution Control Board.

2.7 Rules :

The following Rules have been framed under the Act :

a) Environmental (Protection) Rules, 1986

b) Hazardous Wastes (Management and Handling) Rules, 1989

c) Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989

d) Manufacture, Use, Import, Export and Storage of Hazardous Micro-Organisms/Genetically Engineered Organisms or Cells Rules, 1989

e) Chemical Accidents (Emergency Planning, Preparedness and Response) Rules, 1996

f) Bio-Medical Waste (Management and Handling) Rules, 1998

g) Plastics Manufacture Sale and Usage Rules, 1999

h) Noise Pollution (Regulation and Control) Rules, 2000

i) Ozone Depleting Substances (Regulation and Control) Rules, 2000

j) Municipal Solid Wastes (Management and Handling) Rules, 2000

k) Batteries (Management and Handling) Rules, 2001

l) Hazardous Wastes (Management, Handling and Transboundary Movement) Rules, 2008

3. Air (Prevention and Control of Pollution) Act, 1981 :

3.1 This is a specific Act dealing with prevention, control and abatement of air pollution.

3.2 Definitions :
Air pollutant means any solid, liquid or gaseous substance including noise which is present in the atmosphere in such concentration as may be or tend to be injurious to human beings or living creatures or plants or property or environment.

Air Pollution means the presence of any air pollutant in the atmosphere.

Emission means any solid, liquid or gaseous substance coming out of any chimney duct or other outlet.

3.3 The Act provides for establishing Central and State Pollution Control Boards for prevention of air pollution. The same Boards also serve as Boards for water pollution. The Central Boards can establish or recognise laboratories to assist the Board in carrying out its functions. The State Boards lay down standards for emission of air pollutants into the atmosphere from industrial plants and automobiles or for the discharge of any air pollutant into the atmosphere from any other source.

3.4 Prevention and control of air pollution :
3.4.1 The State Government may, after consultation with the State Board, declare any area or areas within the State as air pollution control areas for the purposes of the Act. If the State Government is of opinion that the use of any fuel, other than an approved fuel, in any air pollution control area may cause air pollution, then it may prohibit the use of such fuel in such area. It can also direct that no appliance, other than approved appliances, shall be used in the premises situated in an air pollution control area.

3.4.2 With a view to ensuring that the standards for emission of air pollutants from automobiles laid down by the State Board are complied with, the State Government shall give such instructions as are necessary to the concerned authority in charge of registration of motor vehicles under the Motor Vehicles Act, 1939.

3.4.3 No person shall, without the previous consent of the State Board, establish or operate any industrial plant in an air pollution control area.

3.4.4 No person operating any industrial plant, in any air pollution control area shall discharge or cause or permit to be discharged the emission of any air pollutant in excess of the standards laid down by the State Board.

3.4.5 If the emission of any air pollutant, is or is likely to be in excess of the standards laid down by the State Board by reason of any person operating an industrial plant or otherwise in any air pollution control area, then the Board may make an application to Court for restraining such person from emitting such air pollutant.

3.4.6 The Act gives powers to the State Board to authorise any person for entry, inspection, examination, testing, searching, etc. of any place in connection with the prevention of air pollution. The person so authorised can also take samples. However, he needs to comply with the procedure prescribed in this respect.

3.5 Penalties :
Failure to comply with the key provisions of the Act attracts a penalty in respect of each such failure, or imprisonment for a term which shall not be less than one year and six months but which may extend to six years and with fine, and in case the failure continues, with an additional fine which may extend to Rs. 5,000 for every day during which such failure continues after the conviction for the first such failure. If the failure continues beyond a period of one year after the date of conviction, the offender shall be punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years and with fine.

4. Water (Prevention and Control of Pollution) Act, 1974 :
4.1 This Act seeks to prevent and control water pollution and for maintaining or restoring the wholesomeness of water.

4.2 Definitions :
‘Pollution’ means such contamination of water or such alteration of the physical, chemical or biological properties of water or such discharge of any sewage or trade effluent or of any other liquid, gaseous or solid substance into water (whether directly or indirectly) as may, or is likely to, create a nuisance or render such water harmful or injurious to public health or safety, or to domestic, commercial, industrial, agricultural or other legitimate uses, or to the life and health of animals or plants or of acquatic organisms.

‘Sewage Effluent’ means effluent from any sewerage system or sewage disposal works and includes sullage from open drains.

‘Sewer’ means any conduit pipe or channel, open or closed, carrying sewage or trade effluent.

‘Trade Effluent’ includes any liquid, gaseous or solid substance which is discharged from any premises used for carrying on any industry, operation or process or treatment and disposal system, other than domestic sewage.

4.3 The Act provides for establishing Central and State Pollution Control Boards for prevention of water pollution. The Central Boards can establish or recognise laboratories to assist the Board in carrying out its functions. The State Boards lay down standards for sewage and trade effluents and for the quality of receiving waters, works for the purification thereof and the system for the disposal of sewage or trade effluents.

4.4 Prevention of water pollution :
The State Government can restrict the application of the Act to certain areas, known as Water Pollution Prevention and Control area. No person shall cause any poisonous, noxious or polluting matter to enter into any stream or well or sewer or on land.

The State Board may make surveys of any area and gauge and keep records of the flow or volume and other characteristics of any stream or well in such area. A State Board may give directions requiring any person who in its opinion is abstracting water from any such stream or well in the area in quantities which are substantial in relation to the flow or volume of that stream or well or is discharging sewage or trade effluent into any such stream or well, to give such information as to the abstraction or the discharge at such times and in such form as may be specified in the directions.

The State Board is empowered to samples of effluents or sewage or trade effluents. The Act gives powers to the State Board to authorise any person for entry, inspection, examination, testing, searching, etc. of any place in connection with the prevention of water pollution.

4.5 No person shall, without the previous consent of the State Board :

a) Establish or take any steps to establish any industry, operation or process, or any treatment and disposal system or any extension or addition thereto, which is likely to discharge sewage or trade effluent into a stream or well or sewer or on land.

b) Bring into use any new or altered outlet for the discharge of sewage.

c) Begin to make any new discharge of sewage.

The Act lays down the procedure for the same.

4.6 Penalties :
Whoever fails to comply with any directions on information about abstraction of water or discharge of effluence or information regarding construction, installation or operation of any establishment of or any disposal system shall, on conviction, be punishable with imprisonment for a term which may extend to 3 months or with fine which may extend to Rs.10,000 or with both and in case the failure continues, with an additional fine which may extend to Rs.5,000 for every day during which such failure continues after the conviction for the first such failure.

Certain other offences are punishable with imprisonment for a period ranging from 18 months to 6 years and with fine. Continuing offences attract a fine of Rs.5,000 per day. Where such a failure continues beyond one year, the offender can be punished with imprisonment for a term of 2 to 7 years.

5. Director’s responsibilities :
5.1 The Board of Directors should enquire of the company’s compliance with the environmental laws. This especially true in the case of industries where environmental law compliance is critical to the survival of the entity. The recent example of the oil spill by British Petroleum in the Gulf of Mexico is an example in this direction. The issue has escalated into a high-profile political issue and could end up causing substantial losses to BP.

5.2 The company must designate a Compliance Officer to ensure compliance with various environmental laws. He must be a person who is well versed with the legal and commercial field. At every Board Meeting, the Compliance Officer should be asked to table a Compliance Certificate certifying compliance with all environmental laws. This should also be preferably signed by the Managing Director and/or the Whole-Time Directors and must be backed up with supporting certificates from various departmental heads who are responsible for compliance at an operational level.

6. Auditor’s duty :
6.1 In case the Auditor comes across a serious violation of environmental laws, then he should consider obtaining an opinion on its validity and/ or appropriate disclosure in the accounts and his report. In case of a hazardous chemical company, a serious lapse of an environmental law can make or mar the future of the company. In some cases, it could affect the ‘going concern concept’ of the company.

6.2 It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’. By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services.

Nirav Shah

Competition Law

I. Introduction

India has embraced globalisation and liberalisation by throwing open its doors for large corporate houses, both Indian and foreign. Earlier restrictions have been removed, barriers reduced, etc. Even the Monopolies and Restrictive Trade Practices Act which, for quite some time, was the bane of the Indian Industry has been watered down to near insignificance. It is in this background that the Parliament thought it fit to introduce a legislation to curb monopolies and promote competition. Competition is essential for the working of any economy to reduce economic inequalities. The Competition Act, 2002 (‘the Act’) is a step in this direction. The Act contains two aspects, one dealing with anti-competitive agreements, abuse of dominant position, etc., and the other dealing with the regulation of certain business combinations, such as mergers, acquisitions, etc. which have an adverse effect on competition. Recently, the Government has appointed the Chairman and two members of the Commission. The Commission is expected to begin hearings on matters of anti-competitive agreements and abuse of dominant positions soon. This Article deals with some of the salient features of the Act dealing with the regulation of business combinations. The provisions of the Act have overriding effect on any other inconsistent statute, e.g., Companies Act, Stamp Duty, FEMA, etc.

II. Background

2.1 Many countries such as the USA have an Anti-trust Law which aims at preventing monopolies and mega mergers which impede competition. These laws need to be also considered while structuring a cross-border merger. In UK, mergers and acquisitions may need the approval of the Monopolies and Mergers Commission. For instance, in the USA certain business combinations require filings and clearances with the Federal Trade Commission (FTC) or Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). The HSR Act requires parties to a merger to file certain information before the FTC and the DOJ before the merger proceeds. There is a minimum waiting period after filing the information with these agencies.

For instance, the acquisition of Honeywell by GE, ran into various problems under the Anti-trust provisions especially with the European Union. It was probably one of the rare acquisitions in which Mr. Jack Welch failed.

2.2 The U.K. Competition Act, 1998 is also a legislation in this direction. Similar provisions exist under the European Commission Regulations.

2.3 The Act seeks to ensure fair competition in India by the creation of a Competition Commission of India. The Commission would have a Principal Bench and several Additional Benches, including Merger Benches.

III. Business Combinations

3.1 Ss. 5 and 6 of the Act deal with the regulation of certain business combinations. While s. 5 defines the combinations which are covered within the purview of the Act, s. 6 lays down the regulations which would apply to such business combinations.

3.2 Combinations covered by s. 5

In certain cases the :

(i) acquisition of any enterprise(s) by any person(s); or

(ii) merger/amalgamation of enterprises

shall be treated as a combination of such enterprises and persons (in case of an acquisition) or enterprises (in case of an merger/amalgamation). These cases are as stated hereunder.

3.3 Acquisitions treated as combinations

Any ‘Acquisition’ where :

(a) the Acquirer and the Target Enterprise (i.e., whose control, shares, voting rights or assets are being acquired) jointly have :

(i) in India assets of a value exceeding Rs.1,000 crores; or

in India a turnover of a value exceeding Rs.3,000 crores; or

(ii) in India or abroad, in aggregate :

(A) assets of a value exceeding US$ 500 million; or

(B) turnover of a value exceeding US$1,500 million

(b) the group to which the Target Enterprise would belong post-acquisition would jointly have :

(i) in India assets of a value exceeding Rs. 4,000 crores; or

in India a turnover of a value exceeding Rs. 12,000 crores; or

(ii) in India or abroad, in aggregate :

(A) assets of a value exceeding US$ 2 billion; or

(B) turnover of a value exceeding US$6 billion

Any acquisition of control by a person over an enterprise in a case where he already has direct or indirect control over another similar enterprise which is engaged in the production, distribution or trading of similar/identical/substitutable goods or services, if :

(a) the Acquirer and the Target Enterprise jointly have :

(i) in India assets of a value exceeding Rs. 1,000 crores; or

in India a turnover of a value exceeding Rs. 3,000 crores; or

(ii) in India or abroad, in aggregate :

(A) assets of a value exceeding US$ 500 million; or

(B) turnover of a value exceeding US$1,500 million

(b) the group to which the Target Enterprise would belong post-acquisition would jointly have :

(i) in India assets of a value exceeding Rs. 4,000 crores; or

in India a turnover of a value exceeding Rs. 12,000 crores; or

(ii) in India or abroad, in aggregate :

(A) assets of a value exceeding US$ 2 billion; or

(B) turnover of a value exceeding US$ 6 billion

Any Merger or Amalgamation in which:

a) the merged enterprise would have:

i) in India assets of a value exceeding Rs. 1,000 crores; or
in India a turnover of a value exceeding Rs. 3,000 crores; or

ii) in India or abroad, in aggregate:

A) assets of a value exceeding US$ 500 million; or
B) turnover of a value exceeding US$l,500 million

b) the group to which the merged enterprise would belong post-merger would have:

i) in India assets of a value exceeding Rs. 4,000 crores; or
in India a turnover of a value exceeding Rs. 12,000 crores; or

ii) in India or abroad, in aggregate:

A) assets of a value exceeding US$ 2 billion; or

B) turnover of a value exceeding US$ 6 billion

3.4 The Value of the assets are to be computed as under:

Book Value of the Assets as per the last Audited Accounts

(-) Depreciation

(+) Value of Intangible assets such as value of

brand,goodwill, copyright/patent/ registered trademark / designs / registered user /permitted use, etc.

The last audited accounts means those pertaining to the financial year immediately prior to the financial year in which the date of the proposed merger falls. Interestingly, a similar provision has not been drafted in case of acquisitions.

3.5 Definitions

The Act defines certain terms which are used in

s.5 and s.6. These are as follows:

a) Acquisition means directly or indirectly acquiring or agreeing to acquire:

i) shares, voting rights or assets of any enterprise; or
ii) control over management or control over assets of any enterprise.

b) Control includes controlling the affairs or management by :

i) one or more enterprises, either jointly or singly, over another enterprise or group; or

ii) one or more groups, either jointly or Singly, over another ern-r pr ise or group.

c) Group means two or more enterprises which directly or indirectly are in a position to:

   i) exercise 26% or more voting in the other enterprise; or
   ii) appoint more than 50% of the Board of Directors in the other enterprise; or
   iii) control the management or affairs of the other enterprise.

d) Enterprise means:

i) a person or a Government department engaged in any activity (including profession or occupation).

ii) of production/ storage/ distribution/ supply / acquisition/ control of articles or goods or providing services.

iii) investment or the business of acquiring, holding, underwriting or dealing with any securities of any other body corporate

iv) either directly or indirectly through its uni ts / divisions / subsidiaries.

e) Person has been defined to include an individual, HUF, firm, company, AOP /BOl, corporation, body corporate incorporated abroad, co-operative society, local authority and every artificial juridical person.

f) Shares means shares carrying voting rights and includes:

(i) any security which carries voting rights; stock unless otherwise distinguished. Thus, preference shares would not be covered.

IV. Regulation of Business Combinations

4.1 No person or enterprise can enter into a combination which causes an appreciable adverse effect on competition within the relevant market in India and if they do then such a combination shall be void. Such agreements are known as Anti-competitive Agreements. For this purpose the term relevant market means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographical market of both markets. Relevant geographic market means a market comprising the area in which the conditions of combination of supply of goods or provision of services or demand for the same are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas. Relevant product market means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer. However, these provisions do not apply to any share subscription or acquisition by a Fl, Bank, VC Fund pursuant to a loan agreement. The Central Government has power to exempt any class of enterprises in public interest.

4.2 Any person or enterprise which proposes to enter into a combination, must give a notice to the Competition Commission, in the prescribed form disclosing the details of the proposed combination, within 30 days of :

a) the approval of the proposal relating to the merger or amalgamation, by the board of directors of the enterprises concerned with such merger or amalgamation;

b) the execution of any agreement or other document for an acquisition or acquiring of control.

After giving the Notice, for a period of 210 days thereof, the combination will not come into effect. Hence, the minimum waiting period is 210 days from the date of the Notice. Such a long waiting period is not only unusual compared to international anti-trust statutes but also undesirable.

The Commission shall inquire:

a) whether the disclosure made in the notice is correct;

b) whether the combination has, or is likely to have, an appreciable adverse effect on competition.

4.3 On receipt of the above Notice, the Commission shall or alternatively it may suo moto if it is of the opinion that the combination is likely to cause, an appreciable adverse effect on competition within the relevant market in India, issue a show cause notice to the parties to respond within 30 days of the receipt as to why an investigation in respect of such combination should not be conducted. Any person may also complain to the Commission that a proposed combination is likely to cause an appreciable adverse effect on competition or that it would abuse its dominant position.

4.4 In case the Commission is prima facie of the opinion that the combination has such an adverse effect, it shall, within 7 days from the date of receipt of the response direct the parties to publish details of the combination within 10 working days for bringing the combination to the knowledge or information of the public and persons affected by such combination. Any objection must be filed within 15 days. The Commission has power to call for further information.

4.5 Under section 31, the Commission has power to accept, reject or accept subject to modifications the combination. In all cases where the Commission is of the opinion that the combination has an appreciable adverse effect on competition it has powers to order that:

a) the acquisition;

b) the acquiring of control; or

c) the merger or amalgamation

shall not be given effect to. This provision is quite unusual as it gives the Commission powers to undo even a Court approved scheme of merger. Keeping in mind the fact that a merger scheme involves payment of stamp duty and consists of such other issues it would be quite interesting to learn how the merger would be undone.

4.6 The Commission has a maximum of 210 days to pass its Order in the absence of which it is deemed to have approved the Combination.

4.7 An appeal against the order of the Commission lies directly before the Supreme Court.

4.8 Concession under Regulations

The Draft Regulations issued by the Competition Commission of India have held that certain combinations are not likely to cause an appreciable adverse effect on competition in India and hence, they would be exempted from applying to the CCl. Some of the important combinations proposed to be exempted include:

i) an acquisition of shares or voting rights by the parties, solely as an investment or in the ordinary course of business, of not more than 15% of the total shares or voting rights of the company;

ii) an acquisition of assets by the parties, not directly related to the business activity of the acquirer or made solely as an investment or in the ordinary course of business, not leading to control of the enterprise whose assets are being acquired except in certain cases;

iii) an Acquisition of or Acquiring Of Control or Merger or Amalgamation, where the assets or turnover of Rs.1,OOOcrores or Rs.3,OOO crores respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination; or

iv) an acquisition of or acquiring of control or merger or amalgamation, where the minimum assets or turnover, in India, of Rs.500 crores or Rs.1,500 respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination;

Thus, several overseas acquisitions by Indian companies of Foreign Companies which do not have any presence in India would not be covered within the purview of the CCL This is a welcome step towards encouraging overseas buyouts. For example, the acquisition by Tata Motors of Jagaur of UK, would not fall within the CCI’s purview, since Jaguar does not have any presence in India and the Rules provide that both the parties must have at least Rs.600 crores of turnover in India.

4.9 Till the draft regulations get finalised and the operative sections for regulation of business combinations get notified by the Government, the Commission cannot entertain any hearings in respect of business combinations. Hence, till such time, these provisions would not have any effect.

V. Directors’ Responsibilities
5.1 Under the provisions of the Act, where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company as well as the company would be directly liable to be punished.

5.2 Further, any director with whose connivance, neglect or active consent any offence has been committed by the company, shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.

VI. Role of CAs

6.1 Chartered Accountants are authorised to appear before the Commission to represent the Complainant or the Defendant. This is a new area of practice for Chartered Accountants as the number of mergers and acquisitions which India is witnessing is only the tip of the iceberg.

6.2 In case of mergers or acquisitions of the auditee which satisfy the above tests and thus, fall within the purview of the Commission, the CA in his capacity as the Auditor should alert his client about the provisions of the Act and the action which can be taken by the Commission under the Act. By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby provide value added services to his client.

Nirav Shah

Real Estate Laws : Recent developments — Part II

Laws and Business

1. Introduction :

Last month, we examined some of the recent developments
pertaining to real estate in Mumbai and in India. This Article examines some
more developments which would have a far-reaching impact on property
transactions.

2. ULCRA repeal :

2.1 A few months ago, the State Government of Maharashtra
finally repealed the dreaded Urban Land Ceiling & Regulation Act (ULCRA).
Estimates say that this would release as much as 30,000 acres of land in Mumbai
alone. Several large land owning trusts are expected to benefit. Several lands
owned by mills such as NTC are expected to benefit.

2.2 The Government was under pressure to repeal ULCRA, since
the Centre had set a deadline of March 2008 to do so or else it could not access
over Rs.17,600 crore of funds under the Jawaharlal Nehru National Urban Renewal
Mission.

2.3 The Government is now toying with the idea of replacing
ULCRA with a vacant property tax. One can only hope such legislations do not see
the light of the day.

3. Increase in FSI in suburbs :

3.1 The State’s Finance Minister has in his budget speech
announced that the base FSI in the Mumbai suburban district would be increased
from 1 to 1.33 and brought on par with the FSI permissible in the island city.
The additional 0.33 FSI would have to be purchased as per the ready reckoner
rate for the area. Thus, instead of a developer constructing a building in the
suburbs by using 1.00 FSI and loading another FSI of 1.00 by buying Transfer of
Development Rights (TDR) from the market, as per the new proposal, the builder
would buy lesser TDR by 0.33%. Thus, builder can now purchase 1.33% from the
Government as FSI and only the balance 0.67% as TDR. This means more funds to
the Government. The maximum cap of FSI 2 for projects in the suburbs still
remains.

3.2 From a developer’s perspective, the cost advantage is
negligible, since the FSI rates are more or less comparable with TDR rates.
Further, the overall cap of 2.00 does not increase the overall supply of land,
it only substitutes one source (TDR) for another (FSI).

4. NOC for rented flats

4.1 The Supreme Court’s decision in the case of Mont Blanc
Co-operative Housing Society Ltd. has upheld the constitutional validity of the
State Government’s Notification dated 1st August 2001 that Non-Occupancy Charges
(NOC) levied by a society cannot exceed 10% of the service charges. Thus, a
housing society cannot charge more than 10% of the service charges in case of a
flat which has been rented out by its member. This was a vexed issue with
societies levying NOCs based on their own whims and fancies. In several areas
such as South Mumbai, the societies collected exorbitant amounts for flats
rented to consulates and corporates. For instance, in some case if the monthly
rent was Rs.10,000 and the maintenance charges were Rs.1,000, the Society
demanded 20% of that or Rs.2,000 as NOC. This was even higher than the
maintenance charges levied by the society.

4.2 The Supreme Court has granted temporary
relief to the Mont Blanc Society, allowing them to col-lect non-occupancy
charges at the rate of 10% of gross earnings of members till the final disposal
of the petition. All other societies in Maharashtra will have to adhere to the
Notification, and charge not more than 10% of the service charges, excluding BMC
taxes. The Notification had been issued u/s. 79A of the Maharashtra Co-operative
Societies Act, 1960.

5. Stamp Duty proposals :

5.1 The Maharashtra Government has once again decided to milk
its favourite cash cow, the Stamp Act. As per the revised estimates for 2007-08,
the Government is expected to net Rs.8,000 cr. from stamp duties alone and this
figure is estimated to cross Rs.9,600 crores for the year 2008-09.

5.2 Currently, development agreements and power of attorney
for development attract Stamp Duty @1% of the fair market value of the property
involved. Now Stamp Duty on these documents would be levied on rates as
applicable on a conveyance, i.e., @ 5%. Thus, the Government is equating
development agreements with conveyance deeds. It is submitted that this is not a
welcome amendment, since a DA cannot be equated with a conveyance.

5.3 Earlier, any power of attorney authorising the holder to
sell immovable property, if not given for a consideration, was chargeable with
Stamp Duty only at Rs.100. Now any power of attorney authorising the holder to
sell immovable property, whether or not given for a consideration, is
chargeable with Stamp Duty @ 5% of the market value of the property. A rebate of
this duty paid would be given while calculating the Stamp Duty on a conveyance
executed pursuant to the power of attorney between the donor and the holder of
the power.

An exception has been made for a power of attorney given to
close relatives, such as parents, spouse, children, grand children, siblings,
etc., authorising them to sell immovable property. In such cases, the duty would
be restricted to Rs.500. Hence, consider a situation where the owner of a
property is a non-resident in London. He has no family members in Mumbai and
wants to sell his property and hence, gives a power of attorney to his friend in
Mumbai. Obviously, this would be without consideration. This would now attract
duty @ 5% of the market value of the property. Is this fair ?

5.4 Presently, if after purchasing a flat from a developer it
is resold within 3 years of the date of agreement then while paying the duty on
the second agreement, credit is given of the duty paid on the first agreement.
Now this concessional period has been reduced to one year. Hence, now, if after
purchasing a flat from a developer it is resold within a period of one year of
the date of agreement, only then while paying the duty on the second agreement,
credit would be given of the Stamp Duty paid on the first agreement.

5.5 As a consequential amendment to the deemed conveyance amendment (see para 5.2 above), it is proposed to introduce an amnesty scheme in order to provide for concessional Stamp Duty on the conveyance of the underlying land, since if the building has been purchased some time back, then it would be unjust to collect Stamp Duty at present rates. Details of this amnesty scheme would be notified soon.

5.6 Like in other taxes, e-payment would soon be possible for Stamp Duty also. An e-Payment Gateway would be made available to the taxpayers. This will enable them to pay taxes conveniently at any time and from anywhere through Internet. The amendments which are required to be made to the rules under different tax laws, will be carried out in this year.

6. Sale of stilt parkings:

6.1 The Bombay High Court recently in the case of Panchali Cooperative Housing Society Ltd. at Dahisar held that the builder, NL Builders Pvt. Ltd., had no right to sell stilt parking areas in the society to outsiders. The Court dismissed the builders’ petition claiming that his right in the property developed by him is absolute. The builder had claimed that he had a right to sell that portion of the property that remained unsold, i.e., some of the stilt parking slots.

The Court held that as per the Maharashtra Ownership Flats Act, 1963, once the builder conveys the property to the society, and it is registered, the property belongs to the society.

6.2 This judgment settles an important principle regarding the rights of a society and a builder.

7. MOFA: Sale on carpet area basis:

7.1 The latest amendment in the real estate laws is a change to the Maharashtra Ownership Flats Act, 1963 (MOFA). Builders would now no longer be able to sell flats to buyers on the basis of the super built-up area. The amendment provides that builders must sell flats on the basis of the carpet area.

7.2 Builders normally sell flats on the basis of super built-up area or built-up area. The differences between the three types of areas are as follows:

Carpet Area : It is the internal area of a flat. It is the wall-to-wall area of the flat.

Built-up Area: It covers walls and balcony also.

Super Built-up Area: It includes the lobby, passage, elevators, fire fighting area along with the total utility. In other words, it covers common areas too. Sometimes, even the garden is included.

In some cases, the built-up area is 20% of the carpet area and the super built-up area is as high as 40% of the carpet area. However, these figures are subjective and vary from builder to builder and in some cases even building to building. Thus, there is a great deal of confusion in the flat purchasers’ minds who are often unable to understand the exact difference between carpet area, built-up area and super built-up area of a flat. The amendment would remove all such ambiguities. Any violation of this act can mean a 3-year imprisonment for the builder/promoter, proposed as per S. 13(A) of the Act.

7.3 While the amendment provides that developers can “sell the flat on the basis of the carpet area only”, they may separately charge for the common areas and facilities in proportion to the carpet area of the flat. Hence, they can continue to charge for common areas and facilities like staircases, lobby and lift as per the super built-up area concept. The only caveat is that the buyer must be made aware of the cost of the carpet area, which is the net usable wall-to-wall area of the flat.

8. Reverse mortgage scheme:

8.1 A few months ago, National Housing Bank (NHB), the housing finance regulator, announced the final operational guidelines on reverse mortgages. A reverse mortgage product seeks to monetise the house as an asset and specifically the owner’s equity in the house. The scheme involves senior citizen borrowers mortgaging their property to a lender, who makes periodic payments to borrowers during their lifetime.

8.2 A senior citizen who is living in his own house may obtain a reverse mortgage loan (RML) and have a recurring income by mortgaging his house to banks or other financial institutions. He can also be a joint borrower with his spouse, provided at least one of the borrowers is above 60 years. Thus, the minimum age limit for availing this scheme is 60 years.

The draft guidelines provided that in case of married couples being eligible as joint borrowers, both of them must be above the age of 60 years, but that has now been relaxed to include those couples where at least one of the borrowers is 60.

8.3 In the event of the death of the husband who may be the owner of the property, the wife – who may be a co borrower but not co-owner – will receive income. The lender will not evict the wife, but will modify the cash flow.

8.4 The recent Finance Act, 2008 has clarified that any transfer of a capital asset under a scheme of reverse mortgage would not be chargeable as capital gains. Further, the loan amount received by the borrower will not be included in the total income. The changes made in respect of ‘reverse mortgages’ have clarified doubts and has made the scheme workable.

Nirav Shah

Shops & Establishments Act

Laws and Business

1. Introduction :

1.1 The Bombay Shops and Establishments Act, 1948 (‘the
Act’) regulates the conditions or work and employment in shops, commercial
establishments, residential hotels, restaurants, theatres, other places of
public amusement or entertainment. It applies to the whole of Maharashtra.

1.2 The Act operates in municipal areas specified in Schedule
I to the Act. However, the State Government has power u/s.4 to exempt all or any
of the provisions of the Act to any establishment, employees or other persons.

2. Definitions :

2.1 Establishment — A shop, commercial
establishment, residential hotel, restaurant, theatre, other place of public
amusement or entertainment to which the Act applies and any other establishment
which is notified by the State Government.

2.2 Commercial establishment — It means an
establishment which carries on any business, trade or profession or any work in
connection with or incidental or ancillary thereto. The following establishments
are included within the definition of the term commercial establishment :

Legal practitioner —
However, the same has been held to be invalid and has been struck down by the
decision in the case of N. K. Fuladi v. State of Maharashtra, 1985 1 LLJ 512 (Bom.)

Medical practitioner

Architect

Engineer

Accountant — However, the
same has been held to be invalid and has been struck down by the decision in
the case of A. F. Ferguson & Co. v. State of Maharashtra (Bom.)

Tax consultant

Any other technical or
professional consultant

2.3 Employer — means a person having owning or having
ultimate control over the affairs of an establishment.

3. Registration :

3.1 Every establishment to which the Act applies must apply
for registration with the inspectors designated under the Act within the
specified time. The application must be made in the prescribed form along with
the prescribed fees.

3.2 The inspector would on being satisfied about the
application, register the establishment and issue a certificate of registration
to the employer. This certificate needs to be renewed every year.

3.3 Any change in the particulars submitted while making the
application must be communicated to the inspector by the establishment. Further,
within 10 days of closure of the establishment, the employer must communicate
such fact to the inspector and get his certificate cancelled.

4. Regulation of establishments :

4.1 The Act lays down the opening and closing hours of shops
and commercial establishments. For instance, no commercial establishment can be
opened earlier than 8.30 a.m. and close later than 9.30 p.m. It also empowers
the State Government to modify the same for different classes of shops and
commercial establishments. Offices which work “It also specifies that no
employee can be made to work for more than 9 hours per day and 48 hours in any
week.

4.2 Every shop and commercial establishment must remain
closed for one day in a week, e.g., a Sunday. The employee cannot be called for
work on this day and must be paid his salaries as if he has attended office on
that day.

4.3 The Act also prescribes similar rules for residential
hotels, restaurants, theatres or other places of public amusement or
entertainment.

4.4 Anybody who is between 15 and 17 years of age is
considered to be a young person. No young person can be required or allowed to
work, whether as an employee or otherwise, in any establishment

(a) after 7.00 p.m.

(b) for more than 6 hours in any day; and

(c) if the work involves danger to life, health or morals.

Women cannot be allowed to work in any establishment after
9.30 p.m.

4.5 Every employee, who has worked for at least 3 months in a
year, shall be entitled to leave of 5 days for every 60 days of service during
the year. However, if he has worked for at least 240 days in a year, then he is
entitled to 21 days leave. Further, he would be entitled to additional holidays
on certain days, such as 26th January, 15th August, etc. An employee is
prohibited from working when he is given a holiday or is on leave as per the
provisions of the Act.

4.6 If an employer wants to terminate the services of any
employee who has been working for a continuous period of one year or more, then
he needs to give him a notice period of 30 days. If this is not done, then the
termination is bad in law and the employee can claim reinstatement with full
wages. However, this provision would not apply in case of a termination due to
misconduct.

4.7 It should be remembered that the State can, on an
application, exempt the operation of the above provisions to any establishment
or employee. For instance various 5-star hotels have got exemptions from the
provisions of S. 33 which mandate that women cannot work after 9 p.m. However,
various conditions have been imposed while granting such an exemption.
Similarly, BPOs have got exemptions from some of the provisions pertaining to
working hours, etc.

5. Application of other laws :

5.1 The State Government may prescribe that the Payment of
Wages Act, 1936 shall apply to any class of establishments or employees to which
this Act applies.

5.2 The provisions of the Industrial Employment (Standing
Orders) Act, 1946 apply to any establishment to which this Act applies as long
as it employs more than 50 employees.

5.3 The State Government may prescribe that the Maternity Benefit Act, 1961 would apply to any establishment to which this Act applies.

6. Health & Safety :

6.1 Every establishment shall be kept clean and have proper ventilation. It must be sufficiently lit during all working hours. The Act prescribes standards for the same.

6.2 Every establishment must take precautions against fire. Further, certain types of establishments must also maintain a first-aid kit.

7. Registers & inspection :

7.1 The Act requires establishments to maintain such registers and records and display such notices as may be prescribed. The rules framed under the Act require every establishment’s name board to be in Marathi in addition to any other language. However, the lettering of the Marathi script should be of the same size as that of the other language.

7.2 The inspectors appointed under this act have power of entering and inspecting any establishment, examine the prescribed registers and records, take evidence of any persons he considers necessary.

7.3 The Act prescribes various penalties for contravention of the provisions of the Act. For instance, S. 52 lays down the penalties for contravening a majority of the provisions of the Act. It specifies a penalty of Rs.1,000 to 5,000 for each offence. There is also an enhanced penalty for repeat offenders who have already been convicted under the Act.

Role of a CA :

A CA can make his clients about the provisions of this Act and enlighten them about the requirements of compliance with the Act. This would be a value-added service which he can provide to his clients. He can also undertake a compliance audit for his clients. By broadening his peripheral knowledge, a CA can add value to his services.

Nirav Shah

Agricultural land Laws : MLRC, 1966

Part 2

(In this Article, we continue our examination of the Maharashtra Land Revenue Code, 1966 (‘Code’) which deals with the law relating to agricultural land and land revenue in the State of Maharashtra.)

1. Uses of land:

1.1 The holder of any land which is assessed or held for agricultural purposes is entitled to himself or through his agents to erect farm buildings, wells, or make any other improvements for better cultivation of the land. Interestingly, the Code does not define the term ‘agricultural’. Reference may be made to the definition under various other Land Laws. Activities such as, horticulture, crop farming, grazing, dairy farming, poultry farming, livestock breeding, etc., would generally be covered under this definition. It is a matter of fact whether a particular land can be said to be used for agricultural operations or not.

1.2 Before commencing construction or renovation of any farm building on lands located in cities, certain types of municipal corporations, etc., the holder requires the prior permission of the Collector for such work. The permission is granted subject to certain conditions.

1.3 Without the prior permission of the Collector:

(a) No land which is used for agricultural purpose can be used for any non-agricultural purpose;

(b) No land which is used for one non-agricultural purpose can be used for any other non-agricultural purpose;

(c) No land which is used for one non-agricultural purpose can be used for the same purpose but in relaxation of any conditions imposed;

Land which is used for non-agricultural purpose is popularly known as ‘N.A. Land’. The Maharashtra Land Revenue (Conversion of Use of Land and Non-Agricultural Assessment) Rules, 1969 need to be complied with for converting an Agricultural Land into NA Land.

1.4 Procedure for conversion into N.A. Land:

(a) An applicant who desires to convert agricultural land into N.A. Land must make an application to the Collector for permission in the prescribed form and in the prescribed manner.

(b) The Collector must acknowledge the application within 7 days.

(d) In cases where the Collector fails to take any action within 90 days of the acknowledge-ment or within 90 days of receipt (if no acknowledgement is also granted, then the permission applied for is deemed to be granted).

(e) Once the permission is granted, the applicant must inform the Tahsildar about the change of user of the land within 30 days in the prescribed format.

(f) Once the land is permitted to be made into N.A., a sanad is granted by the Collector to the holder of the land.

(g) Once permission is granted for N.A. use, such use must be commenced within one year of the date of the Collector’s Order.

(h) Where permission is granted for construction of a structure to be used for a non-agricultural purpose, then the provisions of the Maharashtra Land Revenue (Conversion of Use of Land and Non-Agricultural Assessment) Rules, 1969 need to be complied with in this respect. These include provisions on the minimum open space to be maintained, the number of storeys to be constructed, the size of the building, the plinth area, the dimensions of a room used for residential purposes, types of building material to be used, construction of cess-pools, stables, privies, etc.

In the case of Jamunabai P. Shah v. Bajirao Kalbor, 1995 (1) Mah. LJ 143, it was held that NA use commences from the date on which the land is in fact put to non-agricultural use and not from the date of permission by the Collector.

1.5 Bona fide Industrial Use of Land:

1.5.1 In the following cases prior permission is not required for conversion of the use of agricultural land:

(a) If land is situated within the industrial zone of a development plan prepared under the Maharashtra Regional and Town Planning Act, 1966; or

(b) If the land is situated within the area where no plan exists for a bona fide industrial use; or

When land is so used, a sanad shall be granted in the prescribed form.

1.5.2 The conditions to be complied in this respect are as follows:

(a) The user has clear and proper access to such land

(b) The land should not be reserved for any public purpose

(d) It is not a land notified for acquisition by the State

(e) The industry/project is not within 30 metres of any railway line or 15 metres of any high voltage transmission line.

(f) No Central/State/Local laws are being contravened.

1.5.3 The following activities are treated as being of bona fide industrial purpose:

Manufacture, preservation or processing of goods

Handicraft

Industrial business or enterprise, carried on by any person

Construction of industrial buildings used for the manufacturing process or purpose. It should be noted that construction and real estate development per se are not permitted activities

Power projects

Ancillary industrial usages like:

Research and development

Godown

Canteen

Office building of the industry concerned
providing housing accommodation to the workers of the industry concerned

Establishment of an industrial estate includ ing co-operative industrial estate, service industry, cottage industry, gra-modyog units or gramodyog Vasahats

1.5.4 A special township project means one which is framed under the Regulations for Development of Special Township under the MRTP Act, 1966.

1.5.5 Whenever any agricultural land is converted into N.A. Land or is used for a bona fide industrial use, then the holder is liable to pay a Conversion Tax. This tax is equal to 5 times the non-agricultural assessment of the land.

1.5.6 Any person who contravenes the provision of change of use of land would be liable to pay non-agricultural assessment. Further, he would be liable to such fine as the Collector determines. He would also be liable to restore the land to its original use or carry out such actions as the Collector determines in respect to the land. In certain circumstances, the Collector has power to regularise unauthorised use of land, subject to the following conditions :

(a) the holder pays the applicable Conversion Tax.

(b) the holder pays the N.A. assessment with reference to the altered use since commencement of that use.

(d) he abides by all conditions imposed by the Collector.

It may also be noted that under the Foreign Ex-change Management Act and Regulations issued thereunder, an Indian company cannot raise Foreign Direct Investment for acquiring agricultural lands with an intention of subsequently making them N.A. Lands. Recently, a large real estate developer was questioned by the Enforcement Directorate/RBI for using FDI proceeds for buying agricultural lands.

2. Land revenue:

2.1 All agricultural and non-agricultural land is subject to land revenue.

2.2 Land revenue is assessed with reference to the use of the land:

(a) for the purpose of agriculture,
(b) for the purpose of residence,

(d) for the purpose of commerce,

(e) for any other purpose.

2.3 Non-agricultural assessment of lands :

2.3.1 N.A. assessment of lands is determined with reference to the use which such land is put to and whether it is situated in urban or non-urban areas.

2.3.2 The Collector would classify the villages in non-urban areas into Class-I and Class-II after considering the market values of the land, their situation, the non-agricultural purpose for which they are used, their advantages, disadvantages, etc. Class-I N.A. lands are assessable at a rate not exceeding 10 paise per square metre per year, while for Class -II N.A. lands the rate is not exceeding 5 paise per square metre per year.

2.3.3 In the case of N.A. assessment in urban areas, the Collector would divide them into blocks on the basis of the market value of lands, their N.A. use, advantages, disadvantages, etc. The N.A. assessment of such lands cannot exceed 3% of the full market value. The term full market value means:

Market Value of the Land

+ Capitalised Assessment

Capitalised Assessment means an amount equal to 16 times the assessment on the land for the time being in force. The full market value is estimated on the basis of sales, leases, land acquisition awards, etc., which have taken place in a period of five years immediately preceding the year in which the standard rate for N.A. assessment is being fixed (see para 6.3.4 below).

2.3.4 The Collector has powers to fix the rate of N.A. assessment per square metre of land in each block or urban area. Such rate is called the ‘the standard rate of non-agricultural assessment’ and is fixed as a percentage of the full market value. Each standard rate remains in force for a block of five years. In the year 2002, the Code was amended to provide that the non-agricultural assessment for the guaranteed period of five years commencing from 1st August 2001 shall not exceed:

(a) thrice the non-agricultural assessment rate of 1991 for land in a municipality and twice such rate for other lands in cases which are already assessed for non-agricultural purposes; and

(b) six times the non-agricultural assessment rate of 1991 for land in a municipality and four times such rate for other lands for cases to be assessed for non-agricultural purposes.

The rate of assessment, depending upon the type of land use, is as follows:

2.3.5 The method of computing the standard rate is as follows:

(a) The Collector first estimates the full market value of non-agricultural land in each block of land separately for each of the five years immediately preceding the year for which standard rate is being worked out.

(b) He then determines the full market value per square metre of land in each block of land.

(c) The standard rate of non-agricultural assessment per square metre of land in each block = 3% of the full market value per square metre of land.

(d) These rates are to be approved by the State Government. They are then published in the Official Gazette and they come into force from the date of publication.

3. Recovery of land revenue:

3.1 Chapter XI of the Code is a very important Chapter since it provides for the manner of recovery of land revenue. The claims of the State Government have precedence over all other debts, claims, etc., against any land. If the land revenue due is not paid by the prescribed dates, then it becomes an arrear of land revenue and the person responsible for its payment becomes a defaulter. In several Acts one comes across the phrase ‘all sums required to be paid under this Act may be recovered as an arrear of land revenue’. For instance, S. 46 of the Bombay Stamp Act, 1958 empowers the Collector to recover any duties or sums due under that Act as if they were an arrear of land revenue. Hence, it is important to understand what is the process prescribed for the recovery of land revenue under the Code.

3.2 The process of recovery of land revenue specified u/s.176 of the Code may be briefly described as follows:

(a) by serving a written notice on the defaulter

(b) by forfeiture of his occupancy

(c) by selling his movable property, other than certain necessary personal effects, tools of an artisan, articles for religious endowments

(d) by attaching and selling his immovable property, other than houses belonging to an agriculturist and occupied by him

(e) by arresting and imprisoning him. The arrest process would be stayed if the defaulter furnishes adequate security to the Collector.

(To be continued)

Nirav Shah

General Clauses Act

Laws and Business

1. Introduction :

The General Clauses Act, 1897 (‘the Act’) is a unique
Act in the sense that its utility lies in the interpretation of other
enactments. Interpretation of statutes is a vexed issue which professionals in
general and tax practitioners in particular face time and again. The Act throws
light on some of these issues. This Article discusses the important provisions
of this unique Act.

2. Definitions :

S. 2 of the Act defines certain important terms. However,
unlike definitions in other acts, these definitions apply to all Central Acts
and Regulations made after March 1897 unless there is anything repugnant in the
subject or context. Some of the important terms defined by S. 2 are as follows :

2.1 The term Act when used with reference to an
offence or a civil wrong, shall include a series of acts, and words which refer
to acts done, extend also to illegal omissions.

2.2 The term affidavit includes an affirmation and
declaration in the case of persons by law allowed to affirm or declare instead
of swearing.

2.3 The term commencement, when used with reference to
an Act or Regulation, shall mean the day on which the Act or Regulation comes
into force.

2.4 The term Document includes any matter written,
expressed or described upon any substance by means of letters, figures or marks,
or by more than one of those means which is intended to be used or which may be
used, for the purpose of recording that matter. This definition is of particular
importance under the Stamp Acts, Registration Act, etc. Other enactments which
define the term document are the Indian Evidence Act, 1872 and the Indian Penal
Code. These two Acts also contain a similar definition of the term ‘document’.

2.5 The term financial year means the year commencing
on the first day of April;

2.6 A thing shall be deemed to be done in good faith
where it is in fact done honestly, whether it is done negligently or not.

2.7 The term immovable property has been defined to
include land, benefits to arise out of land and things attached to the earth, or
permanently fastened to anything attached to the earth. This is a very important
definition which is relevant for various Acts such as the Stamp Acts, Sale of
Goods Act, Sales Tax Acts, Registration Act, Central Excise Act, etc. The Bombay
Stamp Act has incorporated this definition in the Act itself. The two leading
decisions on this definition are those of the Supreme Court in the case of
Sirpur Paper Mills (1998) 1 SCC 400 and the recent case of Duncan’s
Industries (2000) 1 SCC 633. The Central Board of Excise and Customs
has issued an order u/s.37B of the Central Excise
Act, 1944 (Order No. 58/1/2002-CX, dated 15-1-2002) wherein after considering
seven Supreme Court decisions including the two mentioned above, the CBEC has
explained its position on when is a property immovable or movable. Moveable
property is defined to mean property of every description, except immovable
property. These two definitions apply to all Central Acts made after January,
1868.

2.8 Local authority is defined to mean a municipal
committee, district board, body of port commissioners or other authority legally
entitled to, or entrusted by the Government with, the control or management of a
municipal or local fund. Various decisions have held that the following
authorities are covered within the definition of a local authority — a Village
Panchayat, a Port Trust, a University, a State Road Transport Corporation, a
Dock Labour Board, a Metropolitan Development Authority, a Cantonment Board, a
Tahsildar, a District School Board, etc.

2.9 An offence means any act or omission made
punishable by any law. If an act done is made punishable by law, it is an
offence. Similarly, an offence is committed if an omission is made by a person
and that omission is punishable.

2.10 A person is defined as including any company or
association or body of individuals, whether incorporated or not.

2.11 A rule means a rule made in exercise of a power
conferred by any enactment, and includes a regulation made as a rule under any
enactment.

2.12 The term sign with its grammatical variations and
cognate expressions, shall, with reference to a person who is unable to write
his name, include mark, with its grammatical variations and cognate expressions.

2.13 The term son, in the case of anyone whose
personal law permits adoption, includes an adopted son; similarly, father,
in the case of anyone whose personal law permits adoption, includes an adoptive
father.

2.14 A will includes a codicil and every writing
making a voluntary posthumous disposition of property.

2.15 A year means a year computed according to the
British calendar.

3. General Rules of Construction :

3.1 Unless provided otherwise, any central Act comes into
force from the day it receives the assent of the President.

3.2 Repeal of Acts :

3.2.1 S. 6 to S. 8 deal with repealed acts and their
effects. S. 6 provides that in case any Central Act or Regulation is repealed by
any subsequent law, then, unless a different intention appears, the repeal shall
not :

(a) revive anything not in force or existing at the time at
which the repeal takes effect; or

(b) affect the previous operation of any repealed act or
anything duly done or suffered thereunder; or

(d) affect any penalty, forfeiture or punishment incurred
in respect of any offence committed against the repealed act; or

(e) affect any investigation, legal proceeding or remedy in
respect of any such right, privilege, obligation, liability, penalty,
forfeiture or punishment aforesaid.

Further, any such investigation, legal proceeding or remedy,
may be instituted, continued or enforced, and any such penalty, forfeiture,
liability or punishment may be imposed as if the repealing Act or Regulation had
not been passed.

Two decisions of the Constitution Benches of the Supreme Court in the cases of Rayala Corpn. (P) Ltd. and M. R. Pratap, (1969) 2 SCC 412 and Kolhapur Canesugar Works Ltd., (2000) 2 SCC 536 have observed that there is a difference between’ omission’ of a statute and its ‘repeal’ and S. 6 of the Act applies to a repealed Section and not to one which has been omitted. The Apex Court in Kolhapur’s case held that repeal of a statute or deletion of a provision, unless covered by S. 6(1) of the Act or a saving provision, totally obliterates it from the statute book and the proceedings pending thereunder stand discontinued. These judgments were recently followed in another decision of the Supreme Court in the case of General Finance Co. v. Asst. CIT, 124 Taxman 432 (SC). The Apex Court held that the principle underlying S. 6 of the Act as saving the right to initiate proceedings for liabilities incurred during the currency of an act will not apply to omission of a provision in an act but only to repeal, because an omission is different from a repeal. Hence, while dealing with a case for prosecution for non-compliance u/s.269SS of the Income-tax Act, 1961, the Court held that as S. 276DD which dealt with prosecution for offences u/ s.269SS had been omitted (and not repealed) from the statute books, and prosecution could not be launched or continued by invoking S. 6 of the General Clauses Act after its omission. Hence, the prosecution proceedings were quashed.

3.2.2 Any Act which repeals any other enactment by which the text of any Act or Regulation was amended by the express omission, insertion or sub-stitution of any matter, then, unless a different intention appears, the repeal shall not affect the continuance of any such amendment made by the enactment so repealed and in operation at the time of such repeal. This Section refers to textual amendments and clarifies the effect of repeal of amending statutes. It is a well-settled law that the repeal of a statute does not repeal such portion of the statute as has been incorporated into another statute. Even if the original Act is repealed, the incorporated Sections still operate in the later Act. When a sub-sequent Act amends an earlier one in such a manner as to incorporate itself in the earlier one, then the earlier Act must be read and construed as if the altered words had been written into the earlier Act and the old words are cancelled, so that there is no need for a reference to the amending Act.

3.2.3 In order to revive any enactment which has been wholly or partially repealed, the purpose to do so must be expressly stated in the Act.

3.2.4 Any act which repeals and re-enacts, with or without modification, any provision of a former enactment, then references in any other enactment or in any instrument to the provision so repealed shall, unless a different intention appears, be construed as references to the re-enacted provision. In Mahindra & Mahindra v. UOI, AIR 1979 SC 798 it was held that if a provision of one statute is incorporated in another, any subsequent amendment in the former statute or even its total repeal, would not affect the provision as incorporated in the latter statute. In Gauri Shankar Gaur v. State of UP, AIR 1994 SC 169, it was held that if a later Act merely makes a reference to the earlier Act, it is only by way of a reference and all amendments, repeals, new law subsequently made will have effect, unless its operation is saved by this provision.

3.2.5 Where any Act or Regulation is repealed and re-enacted, then, any Notification, order, scheme, rule, form, or bye-law made or issued under the re-pealed Act or Regulation, shall, insofar as it is not inconsistent with the provisions re-enacted, continue to be in force, and be deemed to have been made or issued under the provisions so re-enacted.

3.3 S. 9 deals with the commencement and completion of time. It states that for the purpose of excluding the first in a series of days or any such period, it is sufficient if the Act uses the word ‘from’ and for including the last in a series of days or any such period of time to use the word ‘to’. Thus, if an Act uses the word ‘from’, then the first day should not be counted and if it uses the word ‘to’, then the last day should be included. Thus, in the case of Cartwright v. Mac Cormack, (1963) 1 All ER 11,where an insurance policy was issued for ‘IS days from the commencement of the policy’, it was held that the first day was excluded and the policy commenced from midnight of that day. In Union Bank Official Liquidator v. Padmanabha Menon, AIR 1955 NUC 1824, an application had to be made within three years from the date of appointment of the liquidator and in computing that period, the first day was to be excluded. It was held that the principle of S. 9 does not apply only when the words ‘from’ and ‘to’ are used in a statute. It only indicates that if the first day has been excluded, it is sufficient to use the word’ from’ and if the last day is to be included the word to be used is ‘to’.

3.4 According to S. ID, in case any Act requires something to be done in any Court or office on a particular day, and the same is closed on that day or on the last day of a period, then the action may be done on the next working day. However, this does not apply in cases where the Limitation Act applies. The object is to enable a person to do on the next working day what he could have done on a holiday. Thus, an act of the Court should not prejudice a person’s legal remedy, as the law does not compel the performance of an impossibility. There is a cleavage of judicial decisions over whether S. 10 applies to decrees and orders of the Courts. According to one school of thought, the Section applies and hence, if the time specified by the decree for doing something, say a payment, falls on a holiday, then the money can be deposited on the next working day. However, the other view is that S. 10 only applies to a case in which an act is allowed to be done by an Act, and not to an act to be done under a decree. If the payment is not done on the specified date since the day was a holiday, the decree can be executed. In this respect, the Supreme Court’s decision in the case of C. F. Angadi v. Y. S. Hirannayya (1972) 1 SCC 191 is relevant. The Apex Court held that where a party to a consent decree is given time to do an act on a day and he fails to do so on account of impossibility of performance, but he does on the next practicable day, then it must be held that the act was done in time and in terms of the consent decree. It is submitted that this is the more rational view. In an interesting decision in the case of Dharmsi Morarji Chemicals v. Occhavlal Hargovaindas Shah, AIR 1927 Bom. 480, a suit was to be filed and the due date for filing the suit (3 years from the date of payment) under the Limitation Act expired on 20th April. However, the suit was filed only in June. The Court ignored the delay, because in the interim period the High Court was closed on account of its annual summer vacation. It was held that if an act of a party is delayed on account of an act of the Court, then he is entitled to an extension over that period during which he is delayed by the Court’s action.

3.5 S. 11 states that distance, for the purposes of any Act, is to be measured in a straight line on a horizontal plain, unless a contrary intention appears from the statute. In Rex v. [okhu, AIR 1948 All 299, it was held that where the words used in an Act were ‘within the distance of two miles from the limits of a public ferry’, there was no reason why the distance contemplated should not be the shortest distance between the two points. This principle is also helpful under the Income-tax Act for determining whether a land is an urban agricultural land or a rural agricultural land. S. 2(14)(iii) of the Income-tax Act excludes an agricultural land from the definition of a capital asset if it is more than within 8 kilometers from the local limits of any municipality.

3.6 U/s.12, where any Act specifies any Customs/ Excise duty is to be based on any given quantity, e.g., weight, measure, value, etc. of the goods, then a similar duty is leviable according to the same rate on a pro rata basis on a greater or lesser quantity of goods.

3.7 S. 13 states that words in masculine gender would be deemed to include females and words in singular shall include the plural and vice versa. However, both these provisions apply provided they are not repugnant to the subject or the context. In E. Alfred v. First Addl. ITO, Salem, AIR 1958 Mad, it was held that the liability under the Income-tax imposed on the legal representative of a deceased attaches itself to all the legal representatives of the deceased. As per S. 13(2) of the General Clauses Act, the word ‘singular’ includes the plural and hence, when there are many representatives within the knowledge of the ITO, all of them must be served with notices. In the case of Vijaya Manohar Arbat v. Kashirao Sawai (1987) 2 SCC 278, the Court held that the expression ‘his father or mother’ in the Code of Criminal Procedure is not confined only to the father or mother of a son, but also applies to the parents of a daughter. Accordingly, the daughter has an obligation even after marriage to maintain her parents if they are unable to do so. A daughter after her marriage does not cease to be a daughter of her parents. However, the Supreme Court in the case of Dhandhania Kedia v. CIT, AIR 1959 SC 219, held that this Section can be applied only when there is nothing to the contrary Where the words of the Income-tax Act are Clear, then there is no room for application of this Section.

4. Orders, Rules:

4.1 Whenever a power to issue any Notification, order, scheme, rule, form, or bye-law is conferred, then the power includes the power to add to, amend, vary or rescind the same.

4.2 In case any Act or Regulation which is not to come into force immediately on its passing, confers a power to make rules or bye-laws, or to issue orders with respect to various matters, then that power may be exercised at any time after the passing of the Act or Regulation. However, the rules, bye-laws or orders so made or issued shall not take effect till the commencement of the Act or Regulation.

4.3 In case a power to make rules or bye-laws is conditional upon the same being made after their previous publication, then the following provisions would apply:

a) first a draft of the proposed rules or bye-laws would be published in the prescribed manner for the information of persons likely to be affected.

b) the draft should include a notice specifying a date on or after which the draft will be taken into consideration;

c) the rule-making and sanctioning authority shall consider any objection or suggestion with respect to the draft;

d) once the rule or bye-laws purported to have been made in exercise of a power to make rules or bye-laws are published in the Gazette, then it shall be conclusive proof that the same have been duly made.

5. Others:

5.1 S. 63 to S. 70 of the Indian Penal Code and the provisions of the Code of Criminal Procedure in relation to the issue and the execution of warrants for the levy of fines shall apply to all fines imposed under any Act, Regulation, rule or bye-law, unless provided otherwise. This provision is based on the Rule of Convenience, i.e., there is a uniform procedure for all enactments to be followed for recovery of fines, unless the statute itself provides another mode.

5.2 In case an act or omission is an offence under two or more Acts, then the offender shall be liable to be prosecuted and punished under either or any of those enactments, but he shall not be liable to be punished twice for the same offence. Thus, where an act is an offence under two or more enactments, the offender cannot be punished twice for the same offence.

5.3 Where any Act or Regulation authorises or requires any document to be served by post, the service shall be deemed to be effected by properly addressing, pre-paying and posting by registered post, a letter containing the document, and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post. Thus, a uniform procedure has been laid down in all cases requiring service of notice by post. However, this proposition may be rebutted by providing evidence to show that actually there was no service of notice. In a case where a notice was served for specific performance of an Agreement by a Registered AD and returned un-served due to alleged refusal, it was held that the Notice must be deemed to have been served – Bhabhia Devi v. P. Yadav, (1997) 3 SCC 631. In the following cases it was held that the notice is deemed to have been duly served: Shimla Development Authority v. Santosh Sharma, (1997) 2 SCC 637 (Notice sent by Registered AD, but neither the unserved notice nor the AD card was received); State of Kerala v. VTK Udaya, 1995 Suppl. (3) SCC 518 (Notice returned with endorsement ‘not known’); Harcharan Sing v. Shiv Rani, AIR 1981 SC 1284 (Addressee refused to accept letter).

5.4 Any enactment may be cited by reference to the title or short title by reference to the number and year thereof, and any provision in an enactment may be cited by reference to the Section or sub-section of the enactment in which the provision is contained. Any Act or Regulation in which a description or citation of a portion of another enactment is made shall be construed as including the word, Section or other part mentioned or referred to as forming the beginning and as forming the end of the portion comprised in the description or citation.

6. Conclusion:

The Courts have, in innumerable pronouncements, held that if a term is not defined in a particular Act, Rule, etc., then the definition given in the General Clauses Act will prevail. For instance, in the case of Karam Chand Thapar, AIR 1961 SC 838, the Supreme Court held that the purpose of the Act is to place in a single Act provisions as regards definitions of words and legal principles of interpretation which would otherwise have to be incorporated in many Acts and Regulations. The definition and the rules of interpretation contained in the Act have to be read in every other statute governed by it. Similarly, in Dulichand Laxminarayan, 29 ITR 535 (SC), it was held that the definitions given in S. 3 of the Act apply when there is nothing repugnant in the subject or the context.

Hence, knowledge of the basic provisions/principles of the General Clauses Act will assist the Auditor not only in interpreting the provisions of the Corporate and Tax Laws, but also in adding value to his advisory services.

Nirav Shah

Agricultural land laws : btala, 1948

1. Introduction:

In the previous two articles, we examined the Maharashtra Land Revenue Code, 1966. We continue with our study of laws pertaining to agricultural lands in the State of Maharashtra by examining Acts which impose a ceiling on agricultural land. Agricultural land ceiling and use in Maharashtra is governed by the following two Acts :

(a) Bombay Tenancy and Agricultural Lands Act, 1948 (‘BTALA’)

(b) Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961.

This Article gives a bird’s-eye view of the BTALA (also ‘the Act’). This Act is relevant to companies since it lays down the situations under which an agricultural land can be transferred to a non-agriculturist. This would be relevant to ascertain how and when can a company acquire agricultural land. If a Company acquires agricultural land in contravention of the Act, it can have serious consequences. The prohibition on companies acquiring agricultural land is also found under other laws. For instance, sometime ago, the Enforcement Directorate raided the offices of a large real estate developer company since it had acquired agricultural land with the proceeds of Foreign Direct Investment.

2. Applicability:

2.1 The Act is applicable to the Bombay Area of the State of Maharashtra. The Bombay Re-organisation Act, 1960 divided the State of Bombay into two parts, namely, Maharashtra and Gujarat. Thus, the BTALA is in force in the whole of Maharashtra except the Marathwada (Latur, Nanded, Aurangabad) and Vidarbha (Nagpur, Akola, etc.) regions.

2.2 The Act seeks to govern the relationships between tenants and landlords of agricultural lands. Further, it lays down the law in respect to fixation of rent, rights of tenants, etc. Thus, it is similar to the Maharashtra Rent Control Act, 1999.

3. Definitions:

3.1 The Act defines the term ‘agriculture’ to include the following :

(a) horticulture

(b) raising of crops, grass or garden produce

(d) the use of any land for the purposes of rab manure

However, it states that the following are not agriculture :

(a) allied pursuits

(b) cutting of wood alone

Since the definition is an inclusive one, it retains its common parlance meaning as well as something more — Official Asssignee v. Maheshri Firm of Chandulal, 71 IC 657.

This is a definition which has been the series of a spate of controversies. Even under other Acts such as the Income-tax Act, there are several decisions on what constitutes agriculture. The decision of the Supreme Court in the case of CIT v. Benoy Kumar Sahas Roy, AIR 1957 SC 768 is relevant in this respect. It held that the term agriculture cannot be disassociated from the primary significance thereof, which is cultivation of the land and even though it can be extended in the manner both in regard to the process of agriculture and the products which are raised upon the land, there is no warrant for extending it to the land.

The expression emphasises the cultivation of land. Any operation which has something to do with the land, any operation which helps the land to yield the fruits or its crops, any operation which proves the natural produce of the land, may come within the expression — N. G. Desai v. State of Bombay, 57 Bom. LR 199.

3.2 The term ‘agriculturist’ is defined to mean someone who cultivates land personally.

4. Tenant:

4.1 A tenant is defined to mean a person who holds land on lease and includes :

(a) A person who is deemed to be a tenant u/s.4

(b) A person who is a protected tenant; and

4.2 A permanent tenant means one who was considered accordingly prior to 1955 or someone whose commencement or duration of tenancy cannot be satisfactorily proved by reason of antiquity.

4.3 Deemed tenant:

4.3.1 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. Further, such a person should not be a part of the owner’s family or be his servant or be a mortgagee in possession.

4.3.2 Lawful cultivation is of prime importance and hence, the landlord must have placed his tenant in lawful possession of the land. If a litigation is pending in respect of the title to the land, cultivation on that land would not be lawful.

4.3.3 Land is said to be cultivated personally if a land is cultivated on one’s own account by :

(a) one’s own labour. An agriculturist lady continues to be so even after her marriage and she can continue her occupation as an agriculturist — Babib Doshi v. Dy. Collector, 1986 CLH 845. The cultivation must not be as an agent of the owner.

(b) 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.

(d) cultivation through an agency on behalf of the juristic person does not come within the meaning of the words to cultivate personally in S. 2(b). An idol or juridical person is not capable of cultivating personally

— Shri Kalanka Devi Sansthan Patur v. Pandu Marotti, 1963 Mah LJ 249

4.3.4 A relative of a landlord does not automatically become a deemed tenant unless the relationship of landlord and tenant is proved — Smt. Amtibai Jesangbai v. Patel Purshottamdas, AIR 1983 (Guj.) 84.

4.3.5 The onus is on the person who alleges that he is a tenant to demonstrate that he is a tenant. All persons other than those specifically excluded and who are lawfully cultivating land belonging to others are deemed to be tenants.

4.3.6 If a person is cultivating a land under an Agreement of Sale he does not become a deemed tenant
— Ambalal v. Mangalbai, (1978) 19 GLR 799.

4.4 A protected tenant means one who has been afforded such protection under the earlier Tenancy Act of 1939.

5. Ceiling Area:
5.1 Ceiling Area means the area of land fixed as ceiling area u/s.5 or u/s.7 in relation to land held as an owner or a tenant. It may be noted that this ceiling is different and separate from the ceiling fixed under the Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961. The objective of fixing a ceiling is to give each family a fair amount of subsistence, secondly to arrive at the economic unit or cultivation and thirdly to enable larger cultivation areas to those who can afford them in-sofar as it does not hamper equitable distribution of land.

5.2 The ceiling, depending upon the type of land, is as follows:

48 acres of jirayat land, i.e., dry crop land

24 acres of seasonally irrigated land or paddy or rice land

12 acres of perennially irrigated land

If the land consists of a combination of the above, then the ceiling shall be determined as follows:

1 acre of perennially irrigated land = 2 acres of seasonally irrigated land/paddy land = 4 acres of jirayat land

Warkas land, i.e., land used for rab manure for rice cultivation is to be excluded. Further, potkahraba land, i.e., one which is not fit for cultivation is not to be included in computing the land.

5.3 The Economic Holding is as follows:

16 acres of jirayat land

8 acres of seasonally irrigated land or paddy or rice land

4 acres of perennially irrigated land

If the land consists of a combination of the above, then the ceiling shall be determined as specified for ceiling computation.

While people should be allowed to own land to the maximum extent possible, the cultivators must be given enough to at least maintain themselves and their family’s proper standard of living. This is taken care of by economic holding.

6. Rent control and tenancy protection:

6.1 The Act contains provisions for the following:

(a)    Fixing the minimum and maximum rent for agricultural land
(b)    Fixing the rent by the mamltadar for different classes of land situate in a village
(c)    Liability of tenant to pay land revenue, irrigation cess and certain other cesses
(d)    Termination of tenancy under certain cases, such as, non-payment of rent, unlawful assignment/sub-letting, permanently damaging the land, etc.
(e)    Surrender of tenancy by the landlord
(f)    Provisions for dwelling houses of tenants
(g)    Tenants right to certain trees planted by him and produce thereon
(h)    Prohibition on a tenant from sub-dividing, sub-letting or assigning the land
(i)    The landlord is entitled to recover possession of the land if he requires it bona fide for cultivation personally or for any non-agricultural purpose. However, the landlord needs to give a notice to the tenant for the same.

Nirav Shah

Partnership Firm — Stamp Duty Issues

Laws and Business

1. Introduction :

1.1 Partnership is probably the oldest form of doing
business. Even today, a majority of the businesses in India are organised as a
‘partnership’.

1.2 Stamp duty is an important source of revenue for the
Maharashtra Government.

1.3 This article deals with some issues relating to stamp
duty, which are peculiar to partnership.

2. Charge of stamp duty :

2.1 The Bombay 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 the analysis of S. 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.

2.2 Instrument :

The term ‘instrument’ is defined in S. 2(1) of the Act as
follows :

“(1) ‘instrument’ includes every document by which any
right or liability is, or purports to be, created, transferred, limited,
extended, extinguished or recorded, but 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.

2.3 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 partnership.

2.4 The term ‘instrument of partnership’ and the term
‘partnership’ have not been defined in the Act.
Hence, the term ‘partnership’ would have to be under-stood as defined in the
Indian Partnership Act, 1932.

3. Stamp duty on formation of partnership :

3.1 Stamp duty on formation of partnership is levied under
Article 47(1).

3.2 According to that 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 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.500,000, the stamp duty would range from Rs.500 to Rs.5,000.
If the capital contributed in cash is in excess of Rs.500,000, then the stamp
duty payable would be the maximum amount of Rs.5,000.

(b) Where capital contributed by partners is
by way of property other than cash, then the stamp duty payable is
that leviable on a conveyance under Article 25.

3.3 Article 25 :

Since Article 25 is made applicable to partnership, the
relevant provisions of Article 25 are summarised below :

Clause (a) levies stamp duty on movable
property @ 3%.

Clause (b) levies 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%.

Clause (c) provides that if it relates to both movable
and immovable property, then stamp duty will be payable at rates specified in
clauses (a) and (b), respectively. In other words, in respect of movable
property at 3% and in respect of immovable property at the rates applicable
under clause (b).

Clause (d) has two sub-clauses and both apply only to
residential premises and provide a concessional slab-rate levy in the case
of flats in a co-operative housing society.

4. Admission of partner or additional capital by
partners :

4.1 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.

4.2 If in an existing partnership, additional capital is brought in by one or more partners, whether it would 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. v. CIT, (1984) 145 ITR 442 (AP)

   b) CIT v. S. R. Uppal, (1989) 180 ITR 285 (Punj. & Har.)

    c) Ram Narain & Bros. v. CIT, (1969) 73 ITR 423 (All.)

   d) Janson v. CIT, (1985) 154 ITR 432 (Kar.)

e) CIT v. Palaniappa Enterprises, (1984) 150 ITR 237 (Mad.)

5. Retirement of a partner or dissolution of partnership:

5.1 Earlier there was no express provision for levy of stamp duty in the case of retirement of a partner. Now, it is expressly provided, and the stamp duty payable is the same as in the case of the dissolution discussed below.

5.2 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, the stamp duty of only Rs.200 is payable.

5.3 The implications of these provisions are as follows:

a) If a partner has introduced certain property in 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. 200 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 the 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.200 is payable.

5.4 An issue arises in the case of a 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 ? S. 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).

6. Arrangements resembling a partnership:

6.1 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 is a partnership? The stamp duty consequences on the owner and the developer would vary depending upon the nature of the arrangement.

6.2 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”.

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.

6.3 Element of profit sharing:

Thus, sharing of profits is an essential element. The instrument must demonstrate that what is happening in effect is that the net profits are being shared and not the gross returns. Various English decisions such as J. Lyons & Co. v. Knowles (1943) 1 KB 366 (CA) 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 v. Coulson (1916) 2 KB 177 (lessee of a theatre and manager of a theatrical company) French v. Styring (1892) 2 CBNS 357, (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 partnership.

In Sutton & Co. v. 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 partnership between Sand G as no partnership was intended, and that the agreement was merely to divide gross returns and not profits of a common business.

b) Further, S. 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 1. – 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 of 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.

c) 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 S. 5 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.

d) The profit sharing need not always be a percentage share in the profits and it can also be a fixed sum payable to some of the partners. This would not invalidate the concept of a valid partnership. The shares do not always need to be stated in proportion to the profits. – Raghunandan Nanu Kotharev. Hormasji Bamji, AIR 1927 Born. 187 and CIT v. J. K. Doshi and Co., 176 ITR 371 (Born).

6.4 Mutual agency concept:

6.4.1 Mutual agency is also a key condition of the 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.

6.4.2 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 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.

6.4.3 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 concerned parties 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.

6.5 AOP v. Partnership:

If, instead of a partnership, an association of persons is selected as an entity for the development business, then there could be some issues from a stamp duty perspective. The Bombay Stamp Act (Article 47) contains an express provision for levying stamp duty on introduction of property in the firm by way of capital contribution by a partner. However, there is no provision for introduction of property by way of capital contribution in an AOP by a member. The moot point which arises in this case is, whether Article 25 levying stamp duty (@5%) on a conveyance would apply or Article 5(h)(B) would apply under which the stamp duty would be Rs.100 only.

6.6 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.

Nirav Shah

Penalties and prosecution under the Companies Act – Part 2

Laws and Business

1. Compounding of Offences :

1.1 In the last Issue we examined the penalties and
prosecution prescribed under the Companies Act, 1956. One of the remedies
against prosecution prescribed in the Act is ‘compounding of offences’.
For certain offences, compounding is possible, whereas for some other offences,
compounding is not possible. Compounding refers to a process whereby for an
offence in respect of which prosecution is launched against the
directors/officers, the authority only levies a monetary penalty. ‘Compounding’
is also known as ‘composition of offences’. ‘Composition’ means a compromise and
means condonation of an offence in exchange for money. In other words,
punishment and prosecution/imprisonment is converted into a fine. The Act
expressly deals with compounding in S. 621A.

1.2 S. 621A overrides anything contained in the Code of
Criminal Procedure. It applies to offences committed by a company or its
officers. In Usha (India) Ltd., In re, 85 Comp. Cases, 581 (CLB),
it was held that the presence of a non-obstante clause in S. 621A
overrides the Cr.PC. Thus, the jurisdiction granted to the CLB in regard to
compounding is independent of any provision in the Cr.PC. Even if a matter lay
before the High Court for quashing the criminal proceedings, it had nothing to
do with compounding. Compounding proceedings are independent of any criminal
proceedings for the same alleged offence.

However, two types of offences are not compoundable.
These are :

(a) For which the punishment is imprisonment only; and

(b) For which the punishment is imprisonment and
fine.

Thus, the Act deems these two types of offences as serious
and hence, no compounding is prescribed. In addition to the above two
categories, compounding cannot be done for a subsequent same offence committed
within 3 years. In other words, a repeat offence committed after 3 years of
compounding of the offence is treated as a new offence.

1.3 The sum payable for compounding cannot exceed the maximum
fine imposable.

2. Procedure :

2.1 The procedure for compounding is as follows :

(a) It can be done at any stage — before or after launch of
proceedings. There are several cases when after being issued ‘Show Cause’
notice companies voluntarily go in for compounding out of abundant caution to
buy peace and avoid litigation. Thus, like anticipatory bail, anticipatory
compounding is possible. Compounding of offences acts as a bar against
prosecution if it is done before the institution of the prosecution —
Reliance Industries Ltd., In re, 89 Comp. Cases 465 (CLB). It should
however, be borne in mind that the power to compound offences vested in the
CLB is a discretionary power — Ritesh Polyesters Ltd., 123 Comp. Cases
348 (CLB). Thus, it is not an automatic privilege granted by merely applying
for compounding. If a prosecution has
ended in a conviction and if the accused has ap-pealed against the punishment,
he may yet file a compounding application while the appeal is pending and if
he is successful, he would not have to suffer the sentence awarded —
Chottey Singh v. State of UP, 1980 Cr. LJ 583 (All).

(b) The appropriate authority for compounding is the
Company Law Board. However, in cases where the maximum fine does not exceed Rs.
50,000, the Regional Director is also empowered to compound. Thus, the RD can
only compound those offences where the punishment is only by way of a fine.
The Companies Amendment Act, 2002 proposes to substitute the appropriate
authority with the Central Government. However, the official date for this
change has not yet been notified.

(c) The application for compounding should be made to the
ROC who would then forward the same to the CLB/RD along with his comments. As
per Rule 20B of the Companies (Central Government’s General Rules and Forms,
1956) the application to the ROC should be made in e-Form 61.

The Company Law Board Regulations, 1991 state that an
application to CLB should be filed in Form No. 3 of the said Regulations. The
detailed application as per these Regulations should be attached to the e-Form
61. However, no such Form has been prescribed for an application to the RD.
The Company Law Board Regulations, 1991 do not state whether the Form should
be filed separately for each of the notices and hence, it is possible to file
a consolidated Form No. 3 for a company and all its directors/officers.

(d) Further, the Section also empowers the Court to
compound any offence which is compoundable by the CLB/RD. Further, while
allowing a compounding application, the Court has to follow the procedure laid
down under the Cr.PC. Thus, there is a concurrent jurisdiction for compounding
with the CLB and the Court. However, the procedure under Cr.PC laid down
u/s.621A(7) is not applicable when the compounding application is made before
the CLB. The CLB is not bound to follow any procedure, nor does it have to
obtain the permission of the Court at any stage. An appeal lies against its
order to the High Court. Thus, there is an option to a party to get
compounding done by the Criminal Court with the prior sanction of the Court or
get it done by the CLB without any prior permission and without following any
procedure — Hoffland Finance Ltd., In re, 90 Comp. Cases, 38 (CLB).
This view was also upheld by the Delhi High Court in the case of VLS
Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the
compounding powers of the CLB u/s.621A(1) and of the Court u/s.621(7) are
parallel and one power is not dependent upon the other. The CLB can compound
even if the prosecution is pending in a Criminal Court.

(e) The compounding application should be in detail and
should lay down for each allegation — the facts, allegation and submissions.
Chartered Accountants are familiar with filing paper books before the ITAT and
they may use similar formats before the CLB.

2.2 In addition, the following guidelines issued by the DCA
are also relevant :

(a) The CLB/RD may ask for any officer to file a return or other documents within a specified time and non-compliance of this order is a punishable offence with fine of up to Rs.50,000 and/or a term of up to 6 months.

(b) More than one offence under one charging Section can be compounded at a time.

(c) In the case of a company, the composition fee shall be paid from its own funds while in the case of directors it shall be paid from director’s personal funds.

2.3 In the case of offences committed by a company fits directors when the company is under Court-approved liquidation, the DCA’s views as regards compounding applications are as follows:

a) There is no bar to any compounding application by the directors merely because the company is in winding-up.

b) Such compounding application for the directors does not require the prior approval of the Company Court.

c) However, compounding of proceedings against a company will not be permissible in view of S.446.

3. CLB’s order:

3.1 If the CLBdeems the case as fit for compounding, then it would pass an order to that effect. Some of the factors considered by the CLB include:

a) While compounding offences, it would consider the nature of the offence and the financial position of the company as well as the continuance of the default while determining the composition fee. It would ensure that having compounded the offence the same violation does not continue. It would also consider whether the application is an anticipatory one or in response to a prosecution being launched. In the case of Otto Burlingtons Mail Order P. Ltd., In re., 96 Comp. Cases, 525(CLB),the CLB considered all these factors while dealing with a compounding application for failure to obtain the Central Government’s approval u/s. 297. It observed that since the default was for several days, the penalty was large. Further, the offence was not a continuing one. Lastly,it was a voluntary application without fear of a prosecution. Hence, the CLB allowed the compounding application.

d) Similarly,in the case of First Leasing Co. of India Ltd., 42 SCL 65 (CLB), the application was allowed since the company had rectified the defaults u/s.211, u/s.217 and u/s.295, and had inadvertently committed the offences.

c) In a case where the company did not attach the balance sheet of the subsidiary along with the holding company due to non-finalisation of the subsidiary’s accounts and there was no willful omission, the CLB compounded the offence – Shaw Wallace and Co. Ltd., (2000) CLC 2008 (CLB).

d) However, in the case of General Produce Company Ltd. In re, 81 Comp. Cases 570 (CLB), since the accounts were not filed, delay was not rectified, company’s registered address was incorrect, directors stated that they were not directors and yet they signed compounding applications, the CLB rejected the compounding applications.

e) In a violation u/s.297, the quantity of goods involved in contracts with interested directors was negligible and hence, compounding was allowed with going into the merits of the case – Dintex Dyechem Lid., 104 Comp. Cases 735 (CLB).

3.2 If the CLB does not pass a speaking and reasoned order, but merely permits the composition on payment of a fee, the question which arises is whether such an order can be challenged before the High Court as being bad in law. The Delhi High Court had an occasion to deal with such a matter in the case of VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the if the order indicates that the provisions of S. 621A were followed and if after being satisfied with the facts and circumstances, the CLB exercises the power vested in it by S. 621A, then merely because they have not given reasons for their conclusion, cannot be a ground for challenging the order.

3.3 Once compounding is done, either the prosecution cannot be launched or if it has been launched, it cannot be continued further and the accused is discharged. There is an automatic vacation of prosecution.

3.4 An appeal lies against the CLB’s order to the High Court. A shareholder is also entitled to file an appeal against the CLB’s order and it is not correct to say that he has no locus standi in such an order. He can file a complaint before a Court u/ s.621 regarding the offence and hence, he is also entitled to appeal against the CLB’s Order – VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.).

4. Role of CAs:

4.1 Compounding is an avenue which companies should pursue to avoid litigation and prosecution. Chartered Accountants can play a very active role in guiding their clients on the process and benefits of compounding.

Nirav Shah

Corporatisation of Firms

Laws and Business

1. Introduction :

1.1 Partnership firms and sole proprietary concerns have been
and continue to be one of the most popular business entities in India. However,
concerns of growth, limited liability, expansion, private equity funding,
foreign investment, etc., have forced even the staunchest supporters of these
business entities to consider a company structure. Some of the biggest benefits
of a corporate structure are limited liability, perpetual existence, a body
corporate, etc.

1.2 In the light of this background, let us examine how a
firm can be converted into a company. Further, what are the issues in this
connection.

1.3 Two routes :

There are two alternative options by which a firm can be
converted into a company :

(a) Conversion under Part IX of the Companies Act, 1956

(b) Sale of the business by the firm to a company and
claiming of exemption u/s.47(xiii) of the Income-tax Act.

2. Conversion under Part IX of Companies Act :

2.1 Steps to be
taken :

(a) One of the options available for converting a firm
into a company, is a conversion under Part IX of the Companies Act. Here the
firm is converted into a limited company by registering it under Part IX of
the Companies Act, 1956.

(b) Some of the important steps to be taken in this
respect, include :

(i) Increasing the number of partners from 3 to a
minimum of 7, since the company to be registered should have a minimum of
7 members

(ii) Restructuring the Partnership Deed keeping in mind
the requirements of Part IX of the Companies Act, 1956

(iii) Applying to the ROC for Registration under Part
IX along with the applicable fees

(iv) Obtaining the Certificate of Registration as a
company from the ROC

(v) Issuing the equity shares to the erstwhile partners

(vi) Intimating the Registrar of Firms

(c) Upon conversion of the firm into a limited company,
the partners of the firm at the time of conversion will become the
shareholders of the company.

2.2 No Stamp Duty :

A conversion under Part IX of the Companies Act, 1956 would
not attract any incidence of Stamp Duty, as under Part IX, 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 decisions in the case of Vali
Pattabhirama Rao, 60 Comp. Cases 568 (AP) and Rama Sundari Ray v. Syamendra Lal
Ray, ILR (1947) 2 Cal. 1, which state that under Part IX, 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, no incidence of Stamp Duty.

2.3 No Capital Gains Tax :

A conversion under Part IX of the Companies Act, 1956 would
not attract any incidence of Capital Gains Tax, as under Part IX, there is a
statutory vesting of the assets of the firm in the company and there is no
transfer or distribution of capital asset as envisaged by S. 45(1) or S. 45(4).
This view is supported by the decision in the case of Texspin Engineering and
Manufacturing Works, 263 ITR 345 (Bom.), which states that under Part IX, there
is a statutory vesting of the assets of the firm in the company and there is no
transfer. As per
S. 45(4), transfer should be on account of dissolution of the firm which is not
the case here. Hence, the liability to pay Capital Gains Tax would not arise.

2.4 Sale of shares :

Once the firm is converted into a limited company under Part
IX, the shareholders of that company can sell their shares at any time to anyone
without holding it for a certain minimum period. The condition u/s.47A of the
Income-tax Act, 1961 that 50% of the shareholders must continue to hold the
shares for a minimum period of five years does not apply to a conversion under
Part IX of the Companies Act. This condition only applies to the second mode of
conversion, i.e., a sale of the business by the firm to a company and the
partners claiming exemption u/s.47(xiii) of the Income-tax Act. This proposition
has also been laid down by the AAR’s recent decision in the case of Unicore
Finance Luxembourg, 189 Taxman 250(AAR).

2.5 Tenancies :

An interesting issue arises in the case of conversion of a
partnership firm which is a tenant into a company under Part IX of the Companies
Act, 1956. Various High Court decisions mentioned earlier have held that under
Part IX, there is a statutory vesting of the assets of the firm in the company
and there is no transfer. Thus, a conversion under Part IX of the Companies Act,
1956 would not be treated as a transfer, since there is a statutory vesting of
the assets of the firm in the company. Hence, there is a good case for holding
that there would not be a transfer of tenancy or an illegal subletting of
tenancy.

3. Sale of
business :

3.1
Steps :

The firm would make a slump sale of its business as a going
concern or a lock, stock and barrel sale to the company. In return for the same,
the company would issue shares to the partners of the firm.

3.2 Capital Gains Tax :

The sale by the firm would be taxable u/s.50B of the
Income-tax Act as capital gains. However, S. 47(xiii) of the Income-tax Act
exempts the gains arising from the transfer of any capital asset by a firm to a
company as a result of the succession of the firm by a company in the business
carried on by the firm. The conditions to be satisfied for availing this
exemption are as follows :

(a) all the partners of the firm must become shareholders
in the company in the same proportion as their capital;

(b) the aggregate shareholding of the partners in the
company must be at least 50% and it must so continue for 5 years from the
date of the succession;

(d) all the assets and liabilities of the firm become the
assets and liabilities of the company.

If these conditions are satisfied, then the gain on sale would be exempt. However, if any of these conditions are violated, then S. 47A of the Income-tax Act provides that gains which were exempt would become taxable in the company’s hands in the year of violation of conditions.

3.2 Stamp Duty :

Stamp duty as on a conveyance would be levied on the slump sale on the net value of the undertaking after reducing the liabilities from the total assets. For this purpose, it would be necessary to bifurcate the assets into movable and immovable assets. The immovable assets would require an instrument of transfer and would have to be registered. However, the movable assets may be transferred by delivery and possession without an instrument of transfer. If no instrument is executed for the movable assets, then there would not be any Stamp Duty incidence on their transfer.

3.3 Other :

One of the more contentious issues would be under the Rent Act in regard to the change in the tenancies of the firm. On a slump sale, the landlord can contend that there is an illegal subletting or assignment and hence, he can terminate the tenancy. It may be noted that the earlier Bombay Rent Act contained a provision that if the tenancies were transferred along with the sale of the business as a going concern and the goodwill and stock-in-trade of the business, then the transfer was not illegal. However, such a provision is not found under the current Maharashtra Rent Control Act, 1999.

Nirav Shah

Legal compliance — Directors’ responsibility

Laws and Business

1. Introduction :

1.1 In India, we are surrounded by a plethora of laws and
regulations. Being in business is not easy and there is a multitude of legal
obligations and reporting requirements. It is in this backdrop that a business
must consider and study the relevance of several laws which could turn out to be
decisive to the success of a business. Non-compliance with certain laws may
affect the very substratum of the business or the going concern concept of an
entity.

1.2 A company is an inanimate body and it functions through
its Board of Directors. The Directors are the brain and the heart of the
company. The Directors have been vested with wide powers under the Companies
Act, 1956. However, as powers and responsibilities are two sides of the same
coin, the Directors also have several and vicarious responsibilities. It is well
known that Directors owe a fiduciary responsibility to the company and its
shareholders as they are Trustees and Agents of the company.

1.3 The Companies Act contains several express provisions
dealing with the responsibility of Directors — the Act prescribes that in case
of certain offences by the company, the Directors are personally liable. For
instance, in several Sections, the Companies Act provides that the company and
every ‘officer in default’ shall be liable for punishment and/or
prosecution. S. 5 of the Act defines the term ‘officer in default’ to mean the
Managing Director and any Director so specified, and failing both, all the
Directors of the Board. However, if the Director can demonstrate that he had
entrusted responsibility of overseeing the compliance to a competent and
reliable person, then he would be able to use this as a defence. S. 211 of the
Act is one such Section which expressly makes such a provision. Thus, it all
boils down to a question of fact as to whether the Director was negligent in his
duties and hence, punishable for the offence.

2. Are Directors responsible under laws other than the Companies Act ?

2.1 The Companies Act is only one of the several laws which
impact a company. A company is also liable for complying with several other laws
which directly or indirectly impact its operations. Directors being the organ
through which a company functions they are also responsible for ensuring that
the company complies with the responsibilities and obligations mandated by the
relevant enactments. The important laws concerning a company in addition to the
all-important Companies Act, 1956, can be classified as under :

Commercial Laws

Immovable and Intellectual Property Laws

Financial & Capital Market Laws

Labour Laws

Taxation Laws

Others

2.2 Some of the important laws under each of the above
include :

(A)
Commercial Laws :

Indian Contract Act

Limitation Act

Benami Transactions (Prohibition) Act

Arbitration and Conciliation Act

Negotiable Instruments Act

Information Technology Act

The Competition Act

2.3 Immovable and Intellectual Property Laws :

Bombay/Indian Stamp Act

Registration Act

State Property laws, if the company is a real estate developer, such as, the Development Control Regulations, Maharashtra Flat Ownership Act, etc.

Trademarks Law

Patents Law

Copyrights Law

Geographical Designs Act

Rent Act

2.4 Financial & Capital Market Laws:

SEBIDIP Guidelines – for a company coming out with a public issue

SEBI Insider Trading Regulations

SEBI (ESOP) Guidelines

SEBI (Buyback of Shares) Regulations

Regulations for Capital Market Intermediaries, if the company is one, e.g., the company is a stockbroker

Listing agreement

Foreign Exchange Management Act and Regulations

2.5 Labour Laws:

Payment of Bonus Act

Payment of Gratuity Act

Employees’ Provident Funds & Miscellaneous Provisions Act

Minimum Wages Act

Workmen’s Compensation Act

Employee Pension Scheme

Employees State Insurance Act

Industrial Disputes Act

Payment of Wages Act

Factories Act

Employers’ Liability Act

Employment Exchanges (Compulsory notification of vacancies) Act

Equal Remuneration Act

The Maternity Benefit Act

2.6 Taxation Laws:

Income-tax Act

Central Excise Act

Customs Act

Value Added Tax/Sales Tax

Service Tax/Finance Act

Central Sales Tax

2.7 Others:

Sector Specific Laws, e.g., Drugs and Cosmetics Act, Drug Price Control Order, Narcotic Drugs and Psychotropic Substances Act for Pharma Sector, Cinematograph Act for Media Sector, etc.

Air Pollution Act, Water Pollution Act, Environment Protection Act, etc.

Shops and Establishments Act

3. There can be no quarrel against the proposition that a company can be proceeded against in criminal proceedings even where the imposition of sentence is provided for. That law is laid down in Standard Chartered Bank & Others v. Directorate of Enforcement & Ors., [(2005) 4 SCC 530]. However, that case does not state that the company alone should be prosecuted. Hence, in the case of a company not only the company, but also the Directors can be personally proceeded against and punished. We are all familiar with the Directors’ responsibility u/s.138 of the Negotiable Instruments Act dealing with dishonouring of a cheque. The consequence u/ s.138 is imprisonment and there is no provision even for exempting professional and independent Directors of the company, who are in no way connected with the day-to-day management of a company. However, there are judicial decisions whiCn have taken a reasonable interpretation on this enactment but harassment continues. Thus, Director’s responsibilities are extremely onerous and it is often said that being a company’s Director is like wearing the proverbial ‘Crown of Thorns’.

4. Many laws provide that where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company would be liable to be punished. Further, any director with whose connivance, neglect or active con-sent any offence has been committed by the cornpany, shall also be deemed to be guilty of the offence and shall be liable to be directly proceeded against and punished. It is important to understand the meaning of the terms, such as connivance, neglect and consent.

(….To be continued)

Nirav Shah

Real Estate Act

1. Introduction :

1.1 In September 2009, the Ministry of Housing & Urban Poverty Alleviation, Government of India, introduced the draft of the Real Estate (Regulation of Development) Act (‘the Act’). It is expected that the Ministry would finalise this Act sooner than later. This article gives an overview of this all-important act for the real estate industry.

1.2 The Act proposes to introduce a radical change in the real estate industry — for the first time a Real Estate Regulatory Authority would be constituted to regulate, control and promote planned and healthy development and construction, sale, transfer and management of residential properties. It aims to protect the public interest vis-à-vis real estate developers and also to facilitate the smooth and speedy construction and maintenance of residential properties. Thus, just as the capital markets have a regulator in the form of SEBI, the banking industry has RBI, the real estate sector would also have an authority. A reading of the Act shows that this is likely to be a State Act with each State having its own Regulator.

2. RERA :

2.1 A Real Estate Regulatory Authority (‘RERA’) would be constituted under the Act. It will consist of a Chairman and two Members. The Chairperson must be a person of the post of the Principal Secretary to the State Government while the Members must be persons with expert knowledge in law, finance, management, urban development, etc. The RERA would have various powers and rights.

2.2 The Act also constitutes a Real Estate Appellate Tribunal to adjudicate any dispute and hear and dispose of appeal against any direction, decision or order of the RERA under the Act. The Tribunal will consist of a Chairman and two Members. The
Chairperson must be a Judge of a High Court while the Members must have held the post of the Principal Secretary to the State Government or must be persons with expert knowledge in law, finance, management, urban development, etc.

3. Application of the Act :

3.1 Although the Regulator would be known as the Real Estate Regulatory Authority, it is important to note that the Act does not apply to all types of property development. It only applies to the construction of the following properties :

(a) Construction of apartments : An apartment is defined to mean a dwelling unit by any name which is a separate and self-contained part of any property located in a residential building. Thus, only construction of residential buildings would be covered. A building constructed only for commercial, industrial, office, retail purposes, would not be covered. However, in certain cases this Act would not apply (see para 4.1 below).

(b) Construction of a colony : A colony has been defined to mean an area of land divided or proposed to be divided into plots or flats for residential, commercial or industrial purpose. Thus, if a colony is to be constructed, then it can include buildings constructed for commercial, industrial, office, retail purposes, etc. However, in certain cases this Act would not apply (see para 4.1 below).

3.2 The Act applies to a promoter, meaning :

(a) a person who constructs a residential building consisting of apartments, for the purpose of selling all or some of the apartments to other persons; or

(b) a person who develops a colony for the
purpose of selling to other persons all or some of the plots, whether with or without structures thereon.

4. Registration of Project :

4.1 The Act provides that a promoter shall not develop land into a colony of plots or construct a building for marketing all or some of the apartments, without registering such project with the RERA. It is important to note that the registration is required qua a project and not qua a developer. Thus, one developer would need to register each and every project to be undertaken by him. However, registration is not required if the number of apartments to be constructed does not exceed four or if the area of the colony’s land to be constructed does not exceed 1,000 square metres (10,764 square feet) or if the number of apartments does not exceed four.

4.2 For making an application for registration, the promoter needs to apply in the prescribed form, submit all the relevant documents and pay the prescribed fees. One of the documents to be submitted is a copy of the approval and sanction from the Competent Authority, obtained in accordance with the building regulations. This means that the application can only be made after the developer receives the IOD/CC for the project and not before that.

4.3 If the RERA does not take any action on the application within 30 days, then it is deemed to have granted its approval. In case, the RERA refuses to grant registration, then it must first give a hearing to the applicant.

4.4 Each registration is valid for three years and can be renewed if the project completion time has been extended for reasons beyond the promoter’s control. A total of two renewals of one year each can be granted. Thus, the maximum time for one registration can be five years.

4.5 The promoter is also required to make an application for allotment of a password on the RERA’s website. If the project has been registered by RERA, then it will also grant a password to the promoter.

4.6 The Act provides an imprisonment of up to 3 years and/or a monetary penalty for non-registration of a project.

Nirav Shah

Transmission Formalities (Part I)

Introduction “Mors certa est, vita non est” The above latin phrase meaning “Death is Certain, Life is Not” sums up the reality of life. As certain as Death is, it’s very timing is extremely uncertain and unpredictable. More often than not, it catches you when one least expected it!! Hence, Life is Uncertain.

An unexpected demise of a close relative comes as a bolt from the blue for the family and while they are yet mourning, they have to grapple with several succession formalities, such as, death certificates, execution of wills, transmission formalities, etc.

Ironic as it may sound, it is this certainty of death which throws up several uncertainties for the heirs which a deceased may leave behind. Quite often, the family, in its period of grief, overlooks some formalities which snowball into major problems subsequently. Let us look at some of the important formalities which the family of a deceased are faced with and some practical suggestions to deal with them.

‘Transmission’, ‘Succession’ and ‘Inheritance’ are three terms which one often comes across when dealing with the property of a deceased. It would be gainful to understand the meaning of these three terms:

Succession – Black’s Law Dictionary defines the term to mean the devolution of title to property under the law of descent and distribution. Inheritance – succession by descent – East v. Twyford, 9 Hare, 729

Transmission – Stroud’s Judicial Dictionary defines the term as transmission by operation of law, unconnected with any direct act of the party to whom the property is transmitted.

Doctor’s Certificate

The first formality which the deceased’s family needs to immediately comply with when a person dies, is to obtain a Doctor’s Death Certificate. This is the most important document which sets in motion a chain of events. Hence, it always helps to have a family physician. There have been cases where there is no family doctor and when a person dies at home, no doctor is willing to give the certificate.

The Doctor’s Certificate is required in Form 4A under Rule 7 of the Maharashtra Registration of Births and Death Rules, 2000, framed under the Registration of Births and Deaths Act, 1969. The Forms are issued by the Municipal Corporation of Greater Mumbai. It is very important that the Doctor mentions the name of the deceased correctly just as it appears in all legal documents. If the deceased used aliases, it may be worthwhile to add them also in the Certificate. Get multiple copies of this document since the original would have to be surrendered to the Municipality.

Police Report

Consider a situation where a person is pronounced dead on admission to a hospital or has died at home, but is unsuccessfully taken for resuscitation efforts to the hospital. The hospital would like to rule out foul play in such cases and also the need for a post-mortem.

Hence, in addition to a Doctor’s Death Certificate, the hospital would also require the family to lodge a Police Report. The local Police Station would take down the close relative’s statement in Marathi which would include, the number of members living with the deceased, their ages, occupation and whether or not the family suspects any foul play. The Police Station would also fill up two Forms, Form 4 and Form 5, and obtain the relative’s signature on the Report. The family would be well advised to understand the contents of the Report before signing the same. The Report would be retained by the Police Station.

If the Police suspect a foul play, then they would insist upon a post-mortem before allowing cremation. The hospital would also not hand over the body of the deceased, without this Police NOC or a post-mortem. One age-old issue which often crops up is that of Police jurisdiction. Which Police Station should the family go to? Should it be the one where the deceased resided or the one where the hospital was situated?

Death Certificate from Municipality

A cremation (assuming a Hindu deceased) would be allowed only on the basis of a Doctor’s Death Certificate. The original of the Doctor’s Death Certificate and Police Form 4 along with a copy of Police Form 5 should be handed over to the office of the crematorium where the cremation of the deceased is to take place. The office would hand over a receipt in lieu of all these documents which should be carefully preserved. These documents are transmitted by the crematorium to the local Municipality office. As always, get copies made of this document.

BMC’s Death Certificate

An application for a Death Certificate should be made to the office of the local ward of the Municipality in which the deceased resided. Normally, this application is to be made about a week after the death. Along with the application, a copy of the crematorium’s receipt should also be submitted. Care should be taken to fill in the details of the deceased as they appear in all legal documents.

The family can obtain as many copies of the Death Registry Certificate as they desire. It would be desirable to make copies of this Certificate and to get them Notarised by a Notary Public, since this is the most important document which would be required at several places.

Nomination

If the deceased has made Nominations in respect of his flat, bank account, Public Provident Fund, Insurance Policies, Demat Accounts, Mutual Funds, etc., then the nominee should intimate the fact of death along with a copy of the Death Certificate to these organisations. The assets would then stand in the name of the Nominee. It may be noted that the nominee is only a stop-gap arrangement till such time as the Will is executed or the assets are distributed in accordance with the Succession Law in case of intestate succession.

However, in the case of physical shares and demat accounts, the Nominee is both the legal and the beneficial owner and overrides what is stated in the Will. This is borne out by section 109A of the Companies Act, 1956 as well as the Bombay High Court’s decision in the case of Harsha Nitin Kokate v. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. Clause 72 of the New Companies Bill, 2011 also carries forth this position. Hence, a person making his Will should ensure that the Nominee of his demat account is the same person who is the beneficiary of the same under the Will.

Will

Assuming that there is a valid Will left behind by the deceased, the same should then be placed before the family of the deceased by the Executor of the Will. The Executor should start taking steps for transmission of the properties of the deceased. Again, it would be desirable to make copies of this Will and to get them Notarised by a Notary Public, since the Will would be required at several places.

Transmission of Flat where there is no Nomination

On the death of a person, his flat in a co-operative society can be transferred by the Society to his nominee, if a nomination was made, or to his Legal Heir. Section 30 of the Maharashtra Co-operative Societies Act, 1960 provides that in the event of the death of a member of a Society, the Society is required to transfer the member’s interest to the nominee or to such person as may appear to the Committee to be the heir or legal representative of the deceased member.

The Act does not define the term “heir”. The Supreme Court in the case of N. Krishnammal v. R. Ekambaram, 1979 AIR SC 1298, has defined the term as follows:

“…The word “heirs”, as pointed out by this Court in Angurbala Mullick v. Debabrata Mullick (1) cannot normally be limited to “issues” only. It must mean all persons who are entitled to the property of another under the law of inheritance.”

The Act also does not define who is a “Legal Representative”. Hence, one may refer to the Civil Procedure Code. Section 2(11) of the Code of Civil Procedure, 1908 that defines a “Legal Representative” as follows:

“(11) ” legal representative ” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued;”

The decision of the Bombay High Court in the case of Om Siddharaj Co-Op. Hsg. Society Ltd v. The State of Maharashtra, 1998 (4) Bom. CR 506 is relevant:

“…On a plain reading of section 30, it is clear that on death of a member of the society, it is incumbent on the society to transfer the share or interest of the deceased member to” a person or persons nominated in accordance with the Rules”. It is only in the event of there being no nomination of any person, the society can transfer the share or interest of the deceased member to “such person as may appear to the committee to be the heir or legal representative” of the deceased member. The language of the section is clear and unambiguous. …..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 of the society to be the heir or legal representative of the deceased member.”

Hence, a co-operative society would be well within its rights to transfer the flat to the legal heirs of the deceased, if there is no nomination. The Society may, for its protection, insist upon a No Objection Certificate from the other legal heirs/representatives (if there are others than the transferee) and an Indemnity Bond from the transferee.

Transmission of Tenanted Property

A common misconception which most people have is that tenancy can be transferred or bequeathed by way of a will. Tenancy is a personal right of the tenant and hence, it cannot be transferred by way of any testamentary document. This principle has also been upheld by the Supreme Court in the case of Vasant Pratap Pandit vs Dr. Anant Trimbak Sabnis, 1994 SCC (3) 481. Tenancy passes on a tenant’s death to any member of his family who was residing with him at the time of his death. In the absence of such a member, it passes to any heir of the tenant. The Supreme Court in the above case has held that from a plain reading of the Rent Act, it is obvious that the legislative prescription 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 such prescription seems to be that, when a tenant is in occupation of the 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 avowed 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. It is only when such members of the family are not there, the ‘heirs’ will be entitled to be treated as tenants as decided, in default of agreement, by the court. In other words, 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.

Transmission of Land

In respect of any land belonging to the deceased, a Probate of the Will would be required, in case the deceased was a Christian or a Hindu, Sikh, Jain or Buddhist whose immovable properties are situated within the territory of West Bengal or the Presidency Towns of Madras and Bombay. A Probate would be required for effecting a change in the Record of Rights, 7/12 Extract, Property Card, etc.

Agricultural Lands of Deceased

U/s. 63 of the Bombay Tenancy and Agricultural Lands Act, 1948, 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. An important exception to the provisions of section 63 is the case of succession to agricultural land by a non-agriculturist. Thus, even if the legal heirs of an agriculturist are non-agriculturists or the legatees under his will are non-agriculturists, the succession/bequest in their favour would be valid. In law, succession to property cannot lie in a vacuum and the Act would not override succession laws. The Act has no application to transmission of interest of holder on his death to his successor by any mode of succession of lands held by tenants.– Ghanshyambhai Nakheram v State of Gujarat, (1999) 2 Guj LR 1061.

If any person acquires any right by virtue of succession, survivorship, inheritance, etc., in any land, then, as per the Maharashtra Land Revenue Code, 1966, he must give a notice of the same to the Talathi within 3 months of such event. The Talathi would then enter such changes in a Register of Mutations which would alter the original record of rights.

U/s. 4 of the Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961, the ceiling on the holding of agricultural lands is per “Family Unit”. This is a very unique and important concept introduced by this 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 a person and 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 v. Smt. Banabai And Anr. (1986) 4 SCC 281. His minor children are also included in the definition of a family unit.

A very interesting scenario arises in the case of testate/intestate succession. For instance, there is a person who is holding land up to the maximum limit permissible. His major son is also independently holding another piece of land up to the maximum limit permissible. The father dies and his sole legal heir is his son. On his death, the land becomes that of the son. Can the son contend that since he has received the land by inheritance, the ceiling should not apply to the second land received by him? The Supreme Court had an occasion to consider this issue in the case of State of Maharashtra v. Annapurnabai and others, AIR 1985 SC 1403. The facts were that the declarant died pending determination of excess ceiling area. A contention was raised that consequently on his death the proceedings stand abated and that therefore, the authorities have no jurisdiction to proceed further with the determination of the excess land under the Act. The Supreme Court held that until the proceedings are completed, there is no abatement and the excess ceiling land has to be computed pursuant to the declaration under the provisions of the Land Ceiling Act and that therefore, the

Government continues to have jurisdiction to determine the excess land. It held that the heirs and legal representatives of a deceased holder cannot be treated as independent tenure holders for fixing ceiling. Therefore, each heir would not be treated as independent tenure holders for fixing the ceiling in respect of agricultural land.

Similarly, the Supreme Court in Bhikoba Shankar Dhumal v. Mohan Lal Punchand Tathed 1982 SCR (3) 218 held that the persons on whom his ‘holding’ devolves on his death would be liable to surrender the surplus land as on the appointed day, because the liability attached to the holding of the deceased would not come to an end on his death. The heirs of the deceased cannot be permitted to contend to the contrary and allowed to get more land by way of inheritance than what they would have got if the death of the person had taken place after the acquisition of surplus land by the Government.

Further, a person holding surplus land, i.e., land in excess of the ceiling area, cannot transfer the same. In Kewal Keshari Patil v State of Mah, 1966 Mah LJ 94 it was held that a Will is not a transfer. When the Will was executed, it is not a transaction which is contravening the ceiling under the Act.

Dwelling House

The Hindu Succession Act earlier made a special provision in respect of partition of dwelling-houses which has now been omitted with effect from 9th September, 2005. A dwelling house has been defined as a house wholly inhabitated by one or more members of the family of the deceased at the time of his death – Narsimaha Murthy v. Susheelabai (1996) 3 SCC 644. It has also been held to mean the home or abode or residence of a person – K Ratnsawamy, (1980) 2 SCC 548.

The Act originally provided that where a Hindu (male or female) died intestate leaving behind both male and female heirs specified in Class I, and his/her property included a dwelling-house wholly occupied by members of his/her family, then, any such female heir could not claim partition of the dwelling-house until the male heirs choose to do so. However, the female heir was entitled to have a right of residence in such house. If such female heir was a daughter, then she was entitled to a right to residence in the dwelling-house only if she was unmarried or had been deserted/separated from her husband, or was a widow. Thus, the section prevented female members from claiming partition of a dwelling-house till such time as the male members decided to do so.

In 2005, this section has been deleted altogether to remove the inequalities. Now, a daughter of the family will also inherit a dwelling house under the provisions of the Act and she can also ask for a partition of such dwelling house where the male members are residing. Thus, a married daughter has a right to ask for a partition of a house where her brother is residing on the death of their father. This is an important provision which should be borne in mind.

Transmission of Demat Account in case of Joint Holders

In several cases, it so happens that the names of the husband and wife are added as first and second holders in demat accounts. The Will of the husband also provides that after his demise, all his assets go to his wife. In such an event, transmission of the demat account from the first holder to the second holder is a relatively easy process.

An application needs to be made to the depository for simultaneous closure of the joint account and transfer of all the securities to a new sole account of the second holder, i.e., the wife. Thus, as a result, all the securities would stand transmitted to a new sole account belonging to the wife, who was the second holder in the husband’s joint account. This application only requires a copy of the Death Certificate and KYC details of the second holder.
(to be continued….)

Nirav Shah

Guarantor’s Liability

Introduction

How often have we come
across requests from close friends and relatives to stand as a guarantor
for a loan proposed to be taken by them? The loans could be housing
loans or for business. Further, one is also conversant with promoters of
companies/partners of firms standing as guarantors for loans obtained
by their entities. This is even true in case of large listed companies
where the promoters, managing directors, etc., are required to furnish
promoter guarantee. If the going is good and the original debtor meets
his dues, then all is well that ends well. However, what happens if the
original debtor cannot/does not meet his dues and the creditor/bank
invokes the guarantee furnished by the guarantor? Does the creditor have
to first approach the primary borrower or can he directly approach the
guarantor who may be in a better financial position than the borrower?
Let us look at some of the issues arising in this important aspect of
trade and commerce.

Meaning of Guarantee

Section
126 of the Indian Contract Act, 1872 defines a ‘contract of guarantee’
as a contract to perform the promise or discharge the liability of a
third person in the case of the third person’s default. Performance
guarantees/bank guarantees are also instances of contracts of guarantee.
For instance, Mr. A agrees to pay the housing loan amount borrowed by
Mr. C from a bank if Mr. C cannot/does not pay the loan. This is a
contract of guarantee.

A contract of guarantee is not a contract
in respect of a primary transaction but it is an independent
transaction containing independent and reciprocal obligations —
Industrial Finance Corp. v. Cannanore Spg. and Wvg. Mills, (2002) 5 SCC
54.

The person who gives the guarantee is called a surety or a
guarantor, the person to whom the guarantee is given is called the
creditor and the third person on whose behalf the guarantee is given is
called the principal debtor. Thus, the essentials of a guarantee are as
follows:

(a) It is a contract and so all the elements of a valid
contract are a must. Without a contract this section has no
application. Since a contract is a must, it goes without saying that all
the prerequisites of a contract 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 v. Jadunath,
(1931) AIR PC 79. The contract may be oral or written.

(b) There
must be a principal debtor-creditor relationship. Without this there
can be no contract of guarantee. The surety’s obligations arise only
when the principal debtor defaults and not otherwise.

(d) There must be a consideration for the surety. If there is no consideration at all, then the surety agreement is void.

However,
anything done or any promise made for the benefit of the principal
debtor is sufficient consideration to the surety for giving the
guarantee. A contract of guarantee is a complete contract by itself and
separate from the underlying contract. Enforcement of an on-demand bank
guarantee in accordance with the terms of the bank guarantee would not
be the subject-matter of judicial intervention. The only reason why
Courts would interfere if the invocation is not as per the terms of the
guarantee or it has been obtained by fraud — National Highways Authority
of India v. Ganga Enterprises, (2003) 7 SCC 410.

Nature of liability

The
liability of the surety is co-extensive with that of the principal
debtor. However, the contract may provide otherwise. Thus, the guarantor
has to pay all debts, interest, penal charges, etc., payable by the
principal debtor. He is liable for whatever the debtor is liable. Where
the liability arises only on the happening of some event, then the
guarantee cannot be invoked till such contingency has happened. Even if
winding-up proceedings have been filed against the principal debtor, the
surety would remain liable to pay to the creditor. A discharge of the
principal debtor by operation of law does not absolve the surety of his
liability — Maharashtra State Electricity Board v. OL, (1982) 3 SCC 358.

Continuing Guarantee

A guarantee which extends
to a series of transactions is a continuing guarantee. Whether or not a
contract is a continuing guarantee is to be ascertained from the
language of the transaction. For instance, Mr. A guarantees payment of
all dues by Mr. X to Mr. C in respect of goods supplied by Mr. C. This
is an example of continuing guarantee and does not come to an end with
the clearance of the first payment. A continuing guarantee can be
revoked at any time by giving notice to the creditor. However, the
revocation operates only in respect of future transactions.
Alternatively, the death of a surety revokes all future transactions
under a continuing guarantee.

Alterations

Any
variation made in the contract of guarantee without the guarantor’s
consent by the principal debtor and the creditor, discharges the
guarantor from all transactions after the variation. For instance, Mr. C
agrees to lend money on 1st June to Mr. B, repayment of the same
guaranteed by Mr. A. Mr. C instead lends on 1st April. The surety is
discharged from his obligations since the creditor may now demand a
repayment earlier than what was originally agreed upon. However, if
there is an unsubstantial alteration which is to the surety’s benefit,
then the surety is not discharged from his liability. However, if the
alteration is to the disadvantage of the surety, then the surety can
claim a discharge.

Discharge

The guarantor is
discharged by any contract between the creditor and the principal debtor
by which the debtor is released of by any act of the creditor which
results in the discharge of the debtor. For instance, A guarantees the
repayment of the loan taken by X Ltd from C Ltd provided C Ltd supplies
certain goods to X Ltd. C Ltd does not supply the goods as agreed. A is
discharged from his guarantee. Similarly, a contract between the
creditor and the principal debtor under which the creditor gives a
concession or extends the time for repayment to the principal debtor,
releases the guarantor from his obligations.

If the creditor
does anything which affects the rights of the surety or omits to do
anything which we was required to do to the surety, then the guarantee
contract comes to an end. Thus, the creditor cannot gain out of any
negligence on his own accord.

However, it has been held that the
discharge of the principal debtor by virtue of a Statute/Notification
does not discharge the guarantor — SBI v. Saksaria Sugar Mills, (1986) 2
SCC 145.

Guarantor steps into shoes of creditor

On
discharge of the liability of the principal debtor, the guarantor steps
into the shoes of the creditor, i.e., he becomes entitled to all
actions and rights against the principal debtor which the creditor had.
He also becomes entitled to the benefit of all security which the
creditor had against the debtor, whether or not the surety is aware of
the security. The term ‘security’ includes all rights which the creditor
had against the property of the principal debtor on the date of the
contract — State of MP v. Kaluram, AIR 1967 SC 1105.

In case the creditor loses or parts with security without consent of the security, then the surety is discharged to the extent of the value of the security. In one case, the debtor gave a guarantee and a pledge of his goods as security for loan to a bank. The surety was aware of the pledge. However, the bank lost the goods due to its own fault. Held, that the surety was discharged from his obligations — State Bank v. Chitranjan Raja, 51 Comp. Cases 618 (SC).

Must creditor first proceed against debtor?

The law in this respect is very clear. The creditor is free to directly proceed against the guarantor instead of first approaching the principal debtor and then failing him, the guarantor/surety.

In Bank of Bihar Ltd. v. Damodar Prasad, (1969) 1 SCR 620, the Supreme Court held that it is the duty of the surety to pay the amount. On such payment he will be subrogated to the rights of the creditor under the Indian Contract Act, and he may then recover the amount from the principal debtor. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In that case the creditor was a bank. It was held that a guarantee is a collateral security usually taken by a banker. The security will become useless if his rights against the surety can be so easily cut down.

In State Bank of India v. M/s. Indexport, (1992) 3 SCC 159, it was held that the decree-holder bank can execute the decree against the guarantor without proceeding against the principal borrower and then proceeded to observe:

“The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises whether a decree which is framed as a composite decree, as a matter of law, must be executed against the mortgage property first or can a money decree, which covers whole or part of decretal amount covering mortgage decree can be execute earlier. There is nothing in law which provides such a composite decree to be first executed only against the principal debtor.”

In Industrial Investment Bank of India
Limited v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, it was held that the liability of the guarantor and principal debtor is co-extensive and not in alternative and the creditor/decree-holder has the right to proceed against either for recovery of dues or realisation of the decretal amount.

SARFAESI Act vis-à-vis Surety

A related question which arises is what is the position of the guarantor under the SARFAESI Act in case he gives a security for a loan borrowed by the principal debtor from a bank/financial institution. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘the SARFAESI Act’) ensures that dues of secured creditors including banks, financial institutions are recovered from the defaulting borrowers without any obstruction. Secured creditors have been empowered to take steps for recovery of their dues without intervention of the Courts or Tribunals by directly taking over the properties of the borrowers.

In the case of Union Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, the Supreme Court had an occasion to consider the position of the guarantor under the SARFAESI Act. In this case, the guarantor mortgaged her property as security for the loan given by the bank to the principal debtor. She also executed an agreement of guarantee for the principal and interest amount. The loan account became an NPA and the bank directly approached the guarantor for the amounts due. On her failure to repay, the bank invoked

the provisions of the SARFAESI Act against her and took possession of her mortgaged property. The Supreme Court held that nothing prevents the bank from directly approaching the guarantor without first approaching the debtor. It further held that the action taken by the bank for recovery of its dues by issuing notices under the SARFAESI Act cannot be faulted on any legally permissible ground.

It further held that if the guarantor had any tangible grievance against the recovery proceedings under the

SARFAESI Act, then she could have availed remedy by filing an application u/s.17(1) of the Act before the Debt Recovery Tribunal. The expression ‘any person’ used in the Act is of wide import. It takes within its fold, not

only the borrower but also guarantor or any other person who may be affected by the action taken under the Act. Both, the DRT and the Appellate Tribunal are empowered to pass interim orders under the Act and are required to decide the matters within a fixed time schedule. It is thus evident that the remedies available to an aggrieved person under the SARFAESI Act are both expeditious and effective.

Epilogue

The guarantor’s liability is like the proverbial ‘Sword of Damocles’ which is hanging by a very slender thread and can come down at any time. One may even rephrase the legal maxim of ‘Caveat Emptor’ to say ‘Guarantor be aware of what you guarantee’. Thus, it is very important that before giving any promoter/ personal guarantee, a person is well aware of the risks and consequences of the same.

Nirav Shah

Succession Documents

Introduction

In the past couple of Articles, we have seen various transmission formalities which the family of a deceased must comply with in respect of his estate. In the case of several assets, such as land, flats, etc., the Registrar, Society, etc., may insist upon a Succession Document to transmit the assets of the deceased to his family. These include, Probate, Letters of Administration, Succession Certificate, etc. Quite often, these terms are loosely used to denote one for the other whereas, in reality, there is a marked difference between the various types of Succession Documents. Each of them is appropriate under a given set of circumstances and has a specific purpose. Let us look at the various Succession Documents which one encounters along with when each one is used.

Relevance of various Documents

Table-1 shows the different Succession Documents and their applicability to various situations. Let us now examine each one of them in detail.

Probate

Meaning: A probate means the copy of the will certified by the seal of a Court. 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 or otherwise of the will. A probate is different from a succession certificate. Thus, a probate is granted by a Court only when a will is in place.

Necessity: According to the Indian Succession 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 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. Thus, for Hindus, Sikhs, Jains and Buddhists who are /whose immovable properties are situated outside the territories of West Bengal or the Presidency Towns of Madras and Bombay, a probate is not required. It also applies to Parsis who are/whose immovable properties are situated within the limits of the High Courts of Calcutta, Madras and Bombay. However, absence of a probate does not debar the executor from dealing with the estate.

Procedure: To obtain a probate, an application needs to be made to the relevant court along with the original will. The executor has to disclose the names and addresses of the heirs of the deceased. Once the Court receives the application for probate, it would invite objections, if any, from the relatives of the deceased. The Court would also place a public notice in a newspaper for public comments. The petitioner would also have to 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 case of a person who is missing or has disappeared, it may become difficult to prove ‘death’. U/s. 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 would grant probate specimen of the probate is given in the Act) under its seal. The probate would be granted in favour of the Executor/s named under the Will. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat v Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali v State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the will but also the explanations, objections and proof given by the parties of the suspicious circumstances surrounding the execution of the ‘Will’. The onus of proving the will is on the propounder. The propounder has to prove the legality, execution and genuineness of the will by proving absence of suspicious circumstances and also proving the testamentary capacity and the signature of the testator. When suspicious circumstances are said to exist the onus is on the propounder to explain their non-existence to the court’s satisfaction and only when such onus is discharged the court would accept the will and grant probate – K. Laxman v T. Padmining (2009) 1 SCC 354. Probates can be granted after a minimum time of 7 days from the death of a person. No maximum period has been specified. A registered Will improves the chances of getting a Probate faster. In the case of a registered Will, no one can allege that the Will is fraudulent. However, registration does not mean that it is the last Will of the deceased. Hence, a challenge on the count of it not being the last Will remains open.

Opposition: If any relative, heir of the deceased, or other person feels aggrieved and objects to the grant of a probate, then he must file a caveat before the Court opposing the will. Once a caveat has been filed, the Courts would hear the aggrieved party and he would have to prove that he would have a share in the estate of the testator if he had died intestate.

Why does one need a probate? One of the questions which almost always arises 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 required are as follows:

• It is necessary to prove the legal right of a legatee under a will in a court.

• Some listed / limited companies insist on a probate for transmission of shares.

• Similarly, some co-operative housing societies insist on a probate for transmission of the flat.

• The Registrar of Sub-Assurances would insist on a probate usually for registration of immovable properties.

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 insist on an indemnity from the legatee in its favour against any possible claims/law suits from the other heirs of the deceased.

Effect: A probate of a Will when granted establishes the Will from the death of the testator and validates all intermediate acts carried out by the executor. It is conclusive evidence of the representative title of the executor – Harmusji v Dosabhai ILR 12 Bom 164.

Special Factors : Some of the rules in respect of obtaining a probate are as under:

(a) For obtaining a probate, the applicable court fee stamp would be payable as per the rates prescribed in different states. For instance, for obtaining 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:

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

(c) If there are more than one executors, then the probate can be granted to all of them simultane-ously 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 on its contents or of its substance, if the same can be proved by evidence.

(e) A probate petition requires the following con-tents:

• A copy of the will or the contents of the will in case the will has been lost, mislaid, destroyed, etc.

• The time of the testator’s death – proof of death.

• A statement that the will is the last will and testament of the deceased and that it was duly executed.

• Details and value of assets mentioned or covered in the Will for 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 property within the jurisdiction of the Judge where the application is moved.

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

Letters of Administration
Meaning: When a person dies intestate, i.e., without making a will, then in order to succeed to the property of the deceased, the heir(s) would require letters of administration. If the deceased was a Hindu, Muslim, Buddhist, Sikh or Jain, then the Letters may be granted to any person who according to the Rules for Intestate Succession is entitled to succeed to the estate of the deceased. If more than one person is entitled, then the Court would be at discretion to grant the letters to one or more of them. If no person applies for such Letters, then the Court can grant them even to a creditor of the deceased. In case the intestate belonged to any community other than that specified above, say, Parsis, Christians, etc., then the Indian Succession Act, 1925 lays down a separate set of rules for granting letters of administration.

Other Situations when Letters are granted: Under one situation, letter of administration may also be granted in case there is a Will. If a Will has been probated in a Court outside the State of residence of the deceased or in a Foreign Court and a properly authenticated copy of such a Will is produced, then ‘letter of administration’ may be granted on the basis of copy of the Will and probate e.g., a Hindu’s Will is probated in London and it includes property situated in Mumbai. Letters may be granted in respect of such a probated Will.

Some of the other scenarios when letter of administration may be granted are as follows:

• In case an executor of a Will fails to take up his executorship or if a valid executor has not been appointed or if the executor dies before the testator and there is no successor executor, then instead of a probate letters of administration would be required.

• Again if no Will is produced but there is a reason to believe that there exists a Will, then letters of administration may be granted as a stop gap arrangement till such time as the Will is produced.

• When executor is absent from State in which application for probate is made.

• When minor is a sole executor.

• Where residuary legatee survives the testator but dies before the estate has been fully bequeathed.

• Where executor cannot be found and residuary legatee cannot be identified, then it is treated as if the deceased died intestate.

Effect: Letters of administration entitle the administration (i.e., the person in whose name the letters are granted) to all the rights belonging to the deceased as if he been granted those rights immediately on his death. However, they do not validate any acts of the administrator which tend to damage the estate of the deceased. They have effect over all the property and estate, whether movable or immovable of the deceased throughout the State in which they have been granted. They are conclusive as to the representative title against all debtors of the deceased and all persons holding property which belong to the deceased. They afford full indemnity to his debtors and persons delivering up such property to the holder of the letters.

Ineligibility: Letters cannot be granted to a minor, person of unsound mind, etc.

Application: An application for letters of administration should be made to the District Judge of the district in which the deceased had a fixed abode at the time of his death. The petition shall be made stating amongst other things, the time and place of death, his family members, details of assets of the deceased, right which petitioner claims etc. The application must also state that to the best of the belief of the applicant, no other application has been made for grant of letters. Letters can be granted after a minimum time of 14 days from the death of a person. No maximum time has been specified. An appeal against the District Judge’s Order lies to the High Court. However, High Court also has concurrent jurisdiction with District Judge and hence, in the cities of Mumbai, Kolkatta and Chennai, the High Court would exercise the jurisdiction.

Opposition: If any relative, heir of the deceased, other person feels aggrieved by the grant of letters, then he must file a caveat before the Court opposing the application. Once a caveat has been filed, the Courts would hear the aggrieved party and the party would have to prove that he would have a share in the estate of the intestate.

Succession Certificate

Meaning: A succession certificate is a certificate granted by a High Court in respect of any debt due to the deceased or securities owned by him. In case the deceased died living behind a will which only empowered the beneficiaries to collect his debts and securities, then the courts would grant a succession certificate instead of a probate. It merely empowers the grantee to collect the debts owed to the deceased. A succession certificate would not be granted if the Indian Succession Act mandatorily requires a probate or letters of administration. Thus, a succession certificate cannot be granted in respect of a flat in a co-operative society of the deceased. It can be used only for debts and securities and no other type of property. Thus, it would cover dues, shares, debentures, provident fund balances, etc.

Application: An application for a succession certificate must be made, along with the payment of requisite Court fees, to a District Judge giving inter alia the following particulars:

•    Proof of death and time of death of the de-ceased
•    Proof of ordinary residence of deceased
•    Details of family members
•    Right in which the petitioner claims
•    Details of Debts and securities in respect of which the certificate is applied for.

If the Judge is satisfied, then he would grant a succession certificate. The certificate would specify the debts and securities set forth in the application and would empower the recipient of succession certificate to receive interest or dividends and/or negotiate or transfer all or any of the specified securities.

A certificate may be revoked if it was proved that the same was obtained by fraud, the application was defective, etc.

An appeal can be filed to the High Court against the District Judge’s order granting, refusing or revoking the certificate.

Effect of succession certificate: A certificate granted would have validity throughout India. The certificate granted with respect to the debts and securities specified in the certificate, shall be conclusive as against the persons owing such debts or liable on such securities. Further, it affords full indemnity to all persons as regards all payments made, or dealings had, in good faith, with the certificate holder in respect of the debts or securities of the deceased.

Legal Heir Certificate

Meaning: A legal heir certificate or a certificate of heirship is a different kettle of fish altogether and is sometimes required. It is granted under the Bombay Regulation No. VIII of 1827, a pre-independence Order of the then Governor General of India. This is a requirement which several legal practitioners are also unaware about and practically, it can be quite a task to obtain one. Generally, it is issued by a tehsildar. However, in the city of Mumbai, the City Civil Court would issue such a certificate.

It is issued to provide formal recognition of heirs, executors and administrators and for appointment of administrator and managers of the deceased’s property by the courts. The Regulation states that it is generally desirable that the heirs, executors or legal administrators of persons deceased should, unless their right is disputed, be allowed to assume the management or sue for the recovery in Courts of justice. Yet in some cases it is necessary or convenient that such heirs, executors or administrators, in order to give confidence to persons in possession of, or indebted to the estate to acknowledge and deal with them, should obtain a certificate of heir-ship, executorship, or administratorship, from the competent Court.

In Anthony Fernandez and others, 1993(1) Bom.C.R. 580 the Bombay High Court has held that Bombay Regulation VIII of 1827 continues to be in force and the provisions thereof are supplemented in certain respects by the Indian Succession Act, 1925. Conse-quently, an application for recognition of a person as an heir of the deceased can be made under this Regulation.

Effect of Certificate: If an heir is desirous of having his legal heir right formally recognised by a Court in order that it is safer when he deals with persons, then he can apply to the Court for recognition as the ‘legal heir’. The Judge would then invite objections within one month from the date of Notice. If the Judge is satisfied that there are no objections or they are not sufficient, then he would grant recognition in the form of a Certificate in the form contained in Appendix B to the Regulations. The Certificate would regonise the person named as the legal heir, executor or administrator of the deceased.

An heir, executor or administrator, holding a proper certificate, may do all acts and grant all deeds competent to a legal heir, executor or administrator, and may sue and obtain judgment in any Court in that capacity.

An heir, executor or administrator, holding a certificate, shall be accountable for his acts done in that capacity to all persons having an interest in the property, in the same manner as if no certificate has been granted.

Certificate creates No Title: R.8 provides that the Certificate confers no right to the property, but only indicates the person who, for the time being, is in the legal management thereof, the granting of such certificate shall not finally determine nor injure the rights of any person; and the certificate shall be an-nulled by the Court, upon proof that another person has a preferable right.

In Aloysius Manuel D’souza v Mary Kamala William Manuel D’souza, 2006(6) Bom.C.R. 56(O.S.), a Division Bench of the Bombay High Court held that the grant of heirship certificate does not establish the right of a party in property of the deceased by itself. The right, if any, of a person claiming ownership in the property of the deceased are not taken away by grant of an heirship certificate to an heir. On the other hand, the Regulation makes it clear that heir-ship certificate holder is accountable to all persons having an interest in the property for the acts done by him. Based on the heirship certificate simplicitor the heirship certificate holder cannot be said to have acquired any right, title or interest in the estate of the deceased.

In Group Grampanchayat v Sunanda Shamrao Bandishti, 2011 (5) Bom.C.R. 162, it was held that the grant of an heirship certificate to the respondents would not in any way affect the right, title or interest, if there be any, of the petitioner in any of the properties of the deceased. In proceedings for heirship certificate, the Court is not required to determine title of the deceased to any property. It is required only to consider whether the persons claiming heirship certificate are heirs of the deceased. If any person comes forward to claim nearer kinship than the applicants, the rival claims for the applicant and the person claiming nearer kinship and to be an heir would be considered by the Court. The Court may decline to grant heirship certificate to an applicant and come to the conclu-sion that the applicant is not an heir of the deceased or that there are other nearer kins who are entitled to the heirship certificate. The question of title to the property allegedly held by the deceased is alien to such enquiry. Whether the deceased had any title to the property is not and indeed cannot be decided by the Court in an application for ‘heirship certificate’ made under the Regulation.

Required For: It may be required for transferring electricity meter, telephone connection, bank account, etc., of the deceased in the name of the legal heir. It may also be required if a person is buying property belonging to the deceased to establish that the sellers are the true legal heirs.

One other important area where the legal heir certificate is required is for efiling the Income-tax Return of the deceased u/s. 159 of the Income-tax Act. Thus, for the period starting from 1st April of the year in which the assessee expired till the date of death, his legal representative would be assessed u/s. 159. A new feature has been introduced in case of efiling for registering the legal heir to do efiling on behalf of the deceased assessee. The documents required for registering a person as a legal heir are copy of the Death Certificate, Copy of PAN card of the deceased, Self attested PAN card copy of the heir and the legal heir certificate. Thus, this cumbersome certificate is required by the Income-tax Department. This is one area where representations need to be made to the CBDT to do away with the requirement of furnishing a legal heir certificate for efiling the return of a deceased assessee.

Conclusion

As would be evident from the above discussion, there are several succession documents which one comes across when a person dies. Obtaining them can be quite an arduous task for the family of the deceased. Just as the Government has introduced efiling in several areas, such as, income-tax, service tax, company law, etc., time has come for introducing online applications for several of these documents. If that is too much to ask then let us have a separate fast track Court dedicated to obtaining all these succession documents. Why not have an one-stop shop concept for all things related to succession? Till such time as India reaches an utopian situation, I leave you with my modified version of the famous saying, “Where there is a Will, there is a Way” : I conclude by saying:

“Where there is a Death, there is a Succession,

Where there is a Succession, there may be an Argument,

And if there is an Argument, there is a need for a Succession Document!!”

Nirav Shah

Maharashtra Apartment Ownership Act

Introduction

The Maharashtra Apartment Ownership Act, 1970 (“the MAOA”) has been enacted to provide for the ownership of an individual apartment in a building and to make such apartment heritable and transferrable property. In the State of Maharashtra, three entities are possible for an association of the unit/flat owners in a building – a cooperative society, a company or a condominium. While the Maharashtra Flat Ownership Act deals with flats in a co-operative society or a company, the MAOA deals with apartments in a condominium, also popularly known as condos. The fundamental difference between the two is that while in the case of MOFA, the title to the land and building vests in the society/company and in the case of MAOA, all the apartment owners have a common undivided interest in the land and building.

Currently, several new projects in and around Mumbai have preferred a condominium structure since it does not involve the hassles associated with a society. Even across India condos are popular. In fact, in several places across India, one finds very few societies. Several Southern States have a practice where the builder conveys interest in land and apartment separately to the buyer. This is done under a condominium structure.

The MAOA applies only to property, the sole owner or all the owners of which submit the same to the provisions of the Act by duly executing and registering a Declaration in the prescribed format. However, no property shall be submitted to the provisions of MAOA, unless it is used for residence, office, practice of any profession or for carrying on any occupation, trade or business or for any other type of independent use. Section 10 of the MOFA expressly provides that it does not apply to property in which the apartment takers propose to submit the apartments to the MAOA. In such cases, a co-operative society or a company cannot be formed.

The owner of the land may submit such land to the provisions of MAOA with a condition that he shall grant a lease of such land to the apartment owners.

Important Definitions

The MAOA lays down certain important definitions.

Apartment

Apartment has been defined to mean a part of the property intended for any type of independent use, including one or more rooms or enclosed spaces located on one or more floors in a building, intended to be used for residence, office, profession, business, other type of independent use, etc., and with a direct exit to a public street, road or highway or to a common area leading to such street, road or highway.

Building has been defined to mean a building containing 5 or more apartments, or 2 or more buildings, each containing 2 or more apartments, with a total of 5 or more apartments for all such buildings, and comprising a part of the property.

Apartment Owner

An apartment owner has been defined to mean the person owning an apartment and an undivided interest in the common areas and facilities. This is one of the important features of a condo that the owner has an undivided interest in the common areas and the facilities. Common areas have been defined to mean:

(a) the land on which the building is located;

(b) the foundations, columns, girders, beams, support, main walls, roofs, halls, corridors, lobbies, stairs, stairways, fire-escapes and entrances and exits of the building;

(d) the premises for the lodging of janitors or persons employed for the management of the property;

(e) installations of central services, such as power, light, gas, hot and cold water, heating, refrigeration, air conditioning and incinerating;

(f) the elevators, tanks, pumps, motors, fans, compressors, ducts and in general all apparatus and installations existing for common use;

(g) such community and commercial facilities as may be provided for in the Declaration; and

(h) all other parts of the property necessary or convenient to its existence, maintenance and safety, or normally in common use; Thus, the apartment owners are the legal and beneficial owners of their individual flats under the MAOA whilst under a society structure, the flat owners only own shares of the society which entitle them to occupancy rights over the flat.

Thus, the flat is legally owned by the society but beneficially occupied by the flat owner. Although in essence the effect is the same, in Law, there is a difference between the two structures.

Association of Apartment Owners

This is an association of the owners of all the apartments acting as a group in accordance with the bye-laws and Declaration. At least 5 apartments are required to form an association as compared to 10 members to form a society under MOFA.

The Declaration must be in Form A and shall be signed by the apartment owner in the presence of a Magistrate and shall be filed with the Registrar of Co-operative Societies within 30 days from the date of its execution.

The Declaration must contain various clauses, including the following important ones:

(a) Description of the common areas and facilities;

(b) Description of the limited common areas and facilities, if any, stating to which apartments their use is reserved;

(c) Value of the property and of each apartment, and the percentage of undivided interest in the common areas and facilities appertaining to each apartment and its owner for all purposes, including voting; and a statement that the apartment and such percentage of undivided interest are not encumbered in any manner whatsoever on the date of the Declaration;

(d) Statement of the purposes for which the building and each of the apartment are intended and restricted as to use;

(e) Provision as to the percentage of votes by the apartment owners which shall be determinative of whether to rebuild, repair, restore or sell the property in the event of damage or distinction of all or part of the property.

A copy of this Declaration needs to be fled with the Registrar of Co-operative Societies. The association would elect from among the apartment owners a Board of Managers. Subject to the bye-laws of the association, the Board may engage the services of a Secretary, a Manager or Managing Agent.

One difference between this association and a society is that usually the bye-laws of the association do not provide that a transfer of an apartment requires its permission. The bye-laws of a society require its prior permission before any transfer. This coupled with the transfer fees/donations, has been the subject-matter of perennial disputes in the case of cooperative societies. Hence, an association scores over a society in this respect.

Apartment Ownership

Each apartment owner is entitled to the exclusive ownership and possession of his Apartment. Each apartment owner shall execute a Deed of Apartment in relation to his apartment. Deeds of apartments shall include the followings particulars namely:-

(a) Description of the land, including the libber, page and date of executing the Declaration, the date and serial number of its registration and the date and other reference, if any, of its filing with the Registrar of Cooperative Societies.

(b) The apartment number of the apartment.

(d) The percentage of undivided interest appertaining to the apartment in the common areas and facilities. A copy of every Deed of Apartment shall be filed with the Registrar of Co-operative Societies.

The first as well as subsequent transfers of apartments by owners must be by way of a Deed of Apartment only.

Common Areas and Facilities

Each apartment owner is entitled to an undivided interest in the common areas and facilities in the percentage expressed in the declaration. Such percentage shall be computed by taking as a basis the value of the apartment in relation to the value of the property; and such percentage shall reflect the limited common areas and facilities. This is one of the main distinguishing feature of a condominium as compared to a society. In a society, it is the society which has undivided interest over the common areas. The flat occupants only have a right to use them whereas under a condo structure, they have an undivided right over these areas.

The interest of each owner in the common areas and facilities is undivided and no one can claim a partition or division of the same.

However, each apartment and its percentage of un-divided interest in the common areas and facilities appurtenant to such apartment shall be deemed to be separate property for the purpose of assessment to property tax. Neither the building, the property nor any of the common areas and facilities shall be deemed to be separate property for the purposes of the levy of such property tax.

Common Profits and Expenses

The common profits of the property after meeting the common expenses must be distributed among the apartment owners according to their percentage undivided interest in the common area and facilities. Common expenses has been defined to mean:

(a) all sums lawfully assessed against the apartment owners by the Association of Apartment Owners;

(b) expenses of administration, maintenance, repair or replacement of the common areas and facilities ;

(d) expenses declared as common expenses by the provision of the MAOA, or by the Declaration or the bye–laws.

Encumberances against Apartments

After recording the Declaration, no encumbrance can arise or be effective against the property. During such period encumbrances may be created only against each apartment and the percentage of undivided interest in the common areas and facilities appurtenant to such apartment. However, no apartment and percentage of undivided interest shall be partitioned or sub-divided in interest.

Even if some labour has been performed or material furnished that shall not be the basis for a charge or any encumbrance under the provisions of the Transfer of Property Act, 1882, against the apartment of any other property or any other apartment owner not expressly consenting to or requesting the same, except that such express consent shall be deemed to be given by the owner of any apartment in the case of emergency repairs.

In the event of a charge or any encumbrance against two or more apartments becoming effective, the apartment owners of the separate apartments may remove their apartments and the percentage of undivided interest in the common areas and facilities appurtenant to each apartments from the charge or encumbrance by payment of the fractional or proportional amounts attributable to each of the apartments affected. Such individual payment shall be computed by reference to the percentages appearing in the Declaration.

Damage/Destruction of Property

If within 60 days of the date of damage or destruction to all or part of the property, it is not determined by the Association of Apartment Owners to repair, reconstruct or rebuild, then:

(a) the property shall be deemed to be owned in common by the apartment owners;

(b) the undivided interest in the property owned in common which shall appertain to each apartment owner shall be the percentage of the undivided interest previously owned by such owner in the common areas and facilities;

(c) any encumbrances affecting any of the apartments shall be deemed to be transferred in accordance with the existing priority to the percentage of the undivided interest of the apartment owner in the property;

(d) the property shall be subject to an action for partition at the suit of any apartment owner, in which event the net proceeds of sale together with the net proceeds of the insurance on the property, if any, shall be considered as one fund and shall be divided among all the apartment owners in percentage after first paying out, all the respective shares of the apartment owners to the extent sufficient for the purpose and all charges on the undivided interest in the property owned by each apartment owner.

Conclusion

The MAOA is a noble concept since more and more flat owners are feeling that the co-operative society is actually a noncooperative entity. The time has come for an increasing number of buildings to consider the MAOA as a worthy alternative to the MOFA.

Nirav Shah

Maharashtra Housing (Regulation and Development) Act, 2012

Conveyance

Provisions relating to conveyance are dramatis personae in the Bill. The maximum upheaval has taken place in this area and hence, one needs to study these provisions in depth.

S.10(1) of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (“MOFA”) currently provides that as soon as the minimum number of persons required to form a co-operative society have taken flats, the promoter has a duty to submit an application to the Co-operative Society Registrar for the registration of the society. The minimum number is 60% of the total flats. This application as per the Rules is to be made within 4 months from the date on which the minimum number is met. The promoter can also form a company instead of a society.

The Bill has modified this provision by extending the time available for forming a society or a company. A promoter must now make an application within 4 months from the earliest of the following dates:

(a) the date on which the OC is received for the building; or

(b) the date on which a minimum 60% of the flat purchases have taken possession; or

Two other new features also find a place in MHRD which are not to be found under MOFA. In the case of a layout which consists of more than one building or wings of a building, the promoter must constitute a separate co-operative society or a company in respect of each such wing or building. The abovementioned timelines for formation of the entity would be separate qua each building or wing. This is a good amendment so that the conveyance of all buildings is not delayed till the completion of the layout. In the case of Jayantilal Investments v Madhuvihar Co-op. Hsg. Society,(2007) 9 SCC 220, the Supreme Court had an occasion to consider the timing when a conveyance needed to be executed in the case of a layout. Can conveyance be delayed till all the buildings in the layout are developed was the issue? In this respect, the Solicitor General made the following arguments, which in a way are the reasons for the new provision in the Bill: “ ..

It is submitted that, it is not open to the builders to insert clauses in the agreement with the flat takers stating that conveyances will be executed only after the entire property is developed. Learned amicus curiae submitted that the contention of the promoter in the present case is that its obligation to form society and execute a conveyance only after completion of the scheme is misconceived because u/s. 10 and 11 when the builder enters into an agreement with the flat takers he is required to form a cooperative society as soon as the minimum number of flat takers is reached and, thereafter, the conveyance has to be executed in favour of the society within four months after the formation thereof in terms of Section 11. He submitted that MOFA has been enacted to regulate the activities of the builders and not to confer benefits on them…”

The Supreme Court in this case remanded the matter back to the High Court for a fresh consideration. A Bombay High Court judgment in the case of Padmavati Constructions v State of Maharashtra, 2007 (1) Bom. CR 609 had held that conveyance of buildings in a layout need not be held up till the entire layout is completed.
Further, the promoter must take steps for forming an Apex Body or Federation consisting of all co-operative societies/companies within the layout.

The Apex Body would be the nodal authority for administering and maintaining the common areas and facilities within the layout while the individual societies would retain control of the internal affairs of their own respective buildings or wings as the case may be. Thus, the Apex Body would function like an Advanced Locality Management for the layout, but it is a more structured and formal concept. There are no timelines for the formation of the Apex Body. Probably, the Rules would deal with the same.

In cases where the promoter fails to execute a conveyance, the members of the society can make an application for execution of an unilateral deemed conveyance. An appeal can be made to the Housing Appellate Tribunal against an Order in respect of an unilateral deemed conveyance.

In respect of a layout, conveyance of title from the Promoter to the Society till such time as the entire development of the layout is completed, it shall be only in respect of the structures of the buildings in which a minimum number of 60% of total flats are sold along with FSI consumed in such building. Moreover, the conveyance shall be subject to the common right to use, the internal access roads and recreation areas developed or to be developed in the layout and with the right to use of the open spaces allocated to such building in terms of the agreement for sale executed by the Promoter with each flat purchaser.

There is an important non-obstante clause which provides that irrespective of anything contained in the MHRD/other Law/any agreement/any judgment/ Court order, the Promoter is entitled to develop and continue to develop the remaining layout and to construct any additional structures thereon by consuming the balance FSI, balance TDR and any future increase in FSI or TDR.

If the FSI of the plot in a layout is increased subsequent to the conveyance of any building in the layout to flat purchasers, then a part of the increase in the FSI shall belong to the flat purchasers of the conveyed structure or structures. The part belonging to the society is computed as a proportion of the FSI utilised or consumed by the conveyed structure to the total FSI of the layout. The promoter would have a right over the balance FSI or TDR remaining after what belongs to the society and it shall not be necessary for him to obtain any consent or permission from the flat purchasers for the purpose of utilising the balance FSI or TDR rights. These are indeed interesting amendments to the existing provisions under MOFA.

In cases where the promoter’s title to be conveyed is qua the entire undivided land appurtenant to all buildings in a layout, and if no period for executing such conveyance is agreed upon, then such conveyance shall be executed by the promoter in favour of the Apex Body within such time as may be prescribed after the formation of the Apex Body. It is likely that the Rules which would be framed under MHRD would prescribe the time limit.

The Bill provides that upon execution of the conveyance in its favour, the Society/ Company shall be entitled to the FSI or TDR rights relating to the building which has been conveyed and the proportionate share in the FSI increase explained above. If, after the conveyance of the layout land to the Apex Body, there is any increase in FSI or TDR or any benefits available on a layout plan due to changes in Government policies, then such increased FSI or TDR shall be apportioned among the respective legal entities in proportion to the TDR or FSI used for the purpose of construction of the buildings managed by them.

Additions and Alterations

U/s. 7(1) of the MOFA, once the approved plans of a building have been disclosed to any flat buyer, the promoter cannot make any alteration in the structures described there, in respect of the flats which are agreed to be taken without the previous consent of the purchaser. Further, he cannot make any alterations or additions in the building’s structure without the previous consent of all persons who have agreed to take flats in that building. For instance, in Khatri Builders v Mohd. Farid Khan, 1992 (1) Bom. C.R. 305 it was held that trying to construct an additional flat on the terrace by acquiring additional FSI falls within the mischief of section 7(1) of MOFA. What constitutes a consent was the subject-matter of discussion in this case where the Court held as under:

“46. Thus, there is consistent view of this court, that the blanket consent or authority obtained by the promoter, at the time of entering into agreement of sale or at the time of handing over possession of the flat, is not consent within the meaning of Section 7(1) of the MOFA, inasmuch as, such a consent would have effect of nullifying the benevolent purpose of beneficial legislation.

47. It is, thus, clear that it is a consistent view of this court, that the consent as contemplated u/s. 7(1) of the MOFA has to be an informed consent which is to be obtained upon a full disclosure by the developer of the entire project and that a blanket consent or authority obtained by the promoter at the time of entering into agreement of sale would not be a consent contemplated under the provisions of the MOFA…”

Even in Bajranglal Eriwal v. Sagarmal Chunilal, (2008) 6 Bom.C.R. 887, it was held that it is not open to a developer/promoter to rely upon a general consent. To allow such generalised consents to operate would defeat the public policy which underlies the provisions of section 7(1).

The Bombay High Court’s decision in the case of Jitendra Shantilal Shah v Zenal Construction P Ltd, Appeal from Order No.884 of 2008 is interesting. A plot was proposed to be amalgamated with an adjoining plot on which a building was already constructed. The Court held that the proposed construction violated section 7(1), since it touched the old building and entire open space of the occupants of the old building would be blocked. An SLP has been filed (SLP(C)No.10335/2009) before the Supreme Court against this Order of the High Court. However, in Jamuna Darshan Co-op. Hsg. Society v JMC & Meghani Builders, 2011(4) BCR 185, where a separate building was to be constructed as per the plan sanctioned by the Municipal Corporation, it was held that flat purchasers’ further consent was not required to be obtained since it must be deemed to have been obtained when their agreement itself was entered into and when they were shown the sanctioned plans.

The MHRD Bill contains a similar provision as section 7(1) of MOFA albeit with a twist. In case any alterations or additions are:
(a)    required by any Government Authority;
(b)    required due to changes in law; or
(c)    disclosed in the Agreement for Sale
then the same shall not require the prior consent of the flat purchasers. Thus, the flat buyers should carefully read the contents of the Agreement. The old legal maxim of caveat emptor or buyer beware of what you buy would squarely apply.

A second new entrant in the Bill is a provision which permits the promoter to amend the layout, including the garden, recreational area, park, playground, etc., which had been disclosed in the building plans. These can be amended without prior consent of the flat purchasers, if the same is amended in accordance with the Development Control Regulations and for utilisation of the full development potential which is available from time to time.

A third scenario has been provided where a promoter can make changes without prior approval of purchasers. In case of development under a layout or a township, the promoter can construct any new building after obtaining the local authority’s permission in accordance with the Development Control Regulations, the only caveat being that the promoter shall not reduce the aggregate area of recreation garden, park, playground without the prior consent of all flat purchasers.

The fallout of this provision probably lies in the Supreme Court’s decision in the case of Jayantilal Investments v Madhuvihar Co-op. Hsg. Society,(2007) 9 SCC 220 which held that once the original plans of the building are approved by the local authority and the flats are sold on that basis, promoter/developer is prohibited from making any additions or alterations without the consent of the flat purchasers. A comprehensive project scheme has to be disclosed on such plot of land where the builder is going to construct the flats. Builders cannot construct additional structures which is not in the original layout plan without the consent of flat purchasers. The following extract from the Supreme Court’s decision are relevant:

“……he is also obliged to make full and true disclosure of the development potentiality of the plot which is the subject matter of the agreement. ….he is also required at the stage of lay out plan to declare whether the plot in question in future is capable of being loaded with additional FSI/ floating FSI/TDR. In other words, at the time of execution of the agreement with the flat takers the promoter is obliged statutorily to place before the flat takers the entire project/ scheme, be it a one building scheme or multiple number of buildings scheme. …….the above condition of true and full disclosure flows from the obligation of the promoter under MOFA …..This obligation remains unfettered because the concept of developability has to be harmoniously read with the concept of registration of society and conveyance of title. Once the entire project is placed before the flat takers at the time of the agreement, then the promoter is not required to obtain prior consent of the flat takers as long as the builder put up additional construction in accordance with the lay out plan, building rules and Development Control Regulations etc..”

Consequent to the Supreme Court remanding the case back to the Bombay High Court, the High court in Madhuvihar Cooperative Housing vs M/s. Jayantilal Investments, First Appeal No. 786 of 2004, Order dated 7th October, 2010 has passed the following Order:

“40. It can, thus, be seen that it is settled position of law, as laid down by the Apex Court, that a prior consent of the flat owner would not be required if the entire project is placed before the flat taker at the time of agreement and that the builder puts an additional construction in accordance with the layout plan, building rules and Development Control Regulations. It is, thus, manifest that if the promoter wants to make additional construction, which is not a part of the layout which was placed before flat taker at the time of agreement, the consent, as required u/s. 7 of the MOFA, would be necessary.”

Does this new provision mean that if there is a relaxation in the FSI Policy then the promoter can amend the layout to take full advantage of the available development potential? This is one area which is likely to attract maximum attention.

Penalties

Under MOFA, the promoters, on conviction of certain offences, are punishable with imprisonment of a term upto 3 years and/or with a fine. Further, when a promoter is convicted of any offence, he is debarred from undertaking construction of flats for 5 years. Any promoter who commits a criminal breach of trust of any amount advanced for a specific purpose is liable to an imprisonment of upto 5 years and/or fine.

The Bill has converted all offences into civil offences since all imprisonment provisions have been done away with. Interestingly, the Central RERA yet retains prosecution. Failure to refund the sum received with interest in case of non-possession or the act of creating a mortgage without consent of the flat purchaser attracts a penalty of Rs. 10,000 per day or of Rs. 50 lakhs, whichever is lower. Certain offences attract a penalty of up to Rs. 1 crore. Any person who fails to comply with the orders of the HRA or the Tribunal is liable to a penalty of upto Rs. 10 lakhs. The earlier draft of the Bill provided for imprisonment in certain cases which has now been dropped.

A new penalty has been introduced on the flat purchaser/allottee in case he does not pay the sums/ charges payable under the Agreement for Sale. On an order by the HRA, the purchaser is liable to a penalty of up to Rs. 10,000 or 1% of the Agreement value, whichever is higher.

Auditor’s duty

CAs have been given an important role under the MHRD since the Bill provides that the accounts of a promoter must be audited. For this purpose, a CA would have to be conversant with the requirements of Schedule II to understand the various Heads of Accounts which the promoter is required to maintain.

Conclusion

The intent behind the Act is noble, but what one needs to see is whether the implementation of the Act would also be noble. As would be evident from the above analysis, that like a mystery novel, there are several twists and turns in this Bill. The true impact of many provisions would come out once Rules are framed and actual cases become testing waters.

One must always remember that, in Law, and more so when it comes to property law, there is often a slip between the cup and the lip. There have been several innovative concepts such as deemed conveyance which have remained ‘pie in the sky’ concepts. One can only hope that the MHRD will lead to the constitution of an effective and efficient regulator and not lead to more corruption, bureaucracy and red tape.

Nirav Shah

Heritage TDR

Introduction

The city of Mumbai is filled with ancient structures of neo-classical design/art deco structures which probably are the city’s last connection with its glorious past. In such a scenario, it becomes necessary to preserve this past and all things associated with it. However, there is also a need to redevelop/repair certain old structures.

To strike a balance between these two seemingly conflicting objectives, R. 67 of the Development Control Regulations for Greater Mumbai (DC Regulations) provide for the conversion of listed buildings, areas, artefacts, structures and precincts of historical and/or aesthetical/architectural/cultural value. These structures are known as “heritage buildings and heritage precincts”. A precinct generally means a space which has formal or artificial boundary lines around it. Thus, it is like an imaginary carved out area. Mumbai is the first city in India to get heritage protection.

The State Government comes out with a List of such structures and they are known as Listed Buildings/ Heritage Buildings and Listed Precincts/Heritage Precincts. The List divides the structures into three Grades—Grade I, Grade II and Grade III with Grade I being the most important and valuable.

Development/Redevelopment/Repairs of Heritage Buildings/Precincts

Carrying out any of the following activities in relation to heritage buildings/precincts requires the prior permission of the BMC Commissioner:

• Development/redevelopment
• Engineering operation • Additions/alterations/repairs/renovation
• Painting of buildings, replacement of special features
• Demolition of whole or part or plastering of the structure

The BMC Commissioner would consult the Heritage Conservation Committee of the State Government for this purpose. He has powers to overrule the Committee’s recommendations in exceptional cases. The Heritage Conservation Committee and the BMC have often been at loggerheads on several issues and the matters have gone to Court, for instance, hoardings on heritage buildings and precincts was the subject matter of dispute in the case of Dr. Anahita Pandole vs. State, 2004(6) Bom. CR.246. Hoardings in Heritage Precincts have also been the subject of other litigations, such as, Mass Holdings P Ltd vs. MCGM, 2006(1) AIR Bom. 658.

If there are any religious buildings in the List, then any changes required on religious grounds which are mentioned in any sacred texts or as a part of any holy practices shall be treated as permissible. However, they must be in consonance and in accordance with the original structure and architecture, designs, aesthetics and special features.

The above restrictions apply only to Grade I and Grade II heritage buildings.

Changes in Regulations
After consulting the Heritage Committee and with the State Government’s approval, the BMC Commissioner can alter, modify or relax the DC Regulations if it is needed for the conservation, preservation or retention of the historical, aesthetical, cultural or architectural quality of the Heritage Buildings/ Precincts. However, before carrying out any such modifications, he must hear out any persons who will suffer undue loss due to such changes.

Heritage TDR
If any application for development is refused/modified under R. 67, and such act results in depriving the owner/lessee of any unconsumed FSI, then the aggrieved shall be compensated by the grant of a Development Rights Certificate (also known as “Heritage TDR”). TDR from heritage buildings in the island city (that is, up to Mahim) may also be consumed in the same ward in which it originated. The TDR Certificate shall be governed by R. 34 and Appendix VIIA of the DC Regulations.

Before granting the TDR, the Commissioner would determine the extent to which it is required after consulting the Heritage Committee and it requires the prior sanction of the Government.

Restrictions on Heritage Structures Structures must maintain the skyline in the precinct as may be existing in the surrounding area so as not to diminish or destroy the value and beauty of the said listed Heritage Buildings. For instance, a 40-storey tower would look out of place in a group of heritage structures, all of which are 2-3 storeys tall. The tower would spoil the entire skyline of such an area. The BMC has issued Notification No. DCR. 1090/3197/(RDP)/UD-11 dated 25-04-1995 for the height of buildings in A Ward. The height after reconstruction must be limited to the existing height of the buildings of similar age in the area. Even a new building must conform to the general height pattern. In the case of listed heritage buildings and in the case of all buildings within the Fort precinct, clearance is required from the Heritage Committee. However, this restriction does not apply to the Backbay Reclamation Blocks area. Restrictive covenants imposed by the

State/BPT/Collector/BMC, etc., shall be in addition to the conditions of R. 67. However, if there is any conflict, then R. 67 shall prevail. Non-cessed buildings included in the List must be repaired by their owners/lessees and cessed buildings can be repaired by the MHADA/co-operative society/owner/ occupiers.

Grading
Grading of buildings in the List into I, II and III are carried out. Listing does not prevent change or ownership or usage. Care must be taken to ensure that the development permission relating to these buildings is given without delay. The Grading and various conditions for each Grade are as follows:

Conclusion

This is an important legislation to preserve and protect our city’s cultural heritage. Recently, the BMC has proposed to add some more structures to the Heritage List, a move which has been sharply opposed by the real estate developers and residents of those structures. While the debate over what should and what should not be included in the List would rage on, there is no denying that sustainable development with an eye on the past and future is the need in a metropolis like Mumbai.

Nirav Shah

Land Acquisition Rehabilitation and Resettlement Bill, 2011

Introduction
The Land Acquisition Act, 1894 (“the Act”) provides for instances when the Government can compulsorily acquire private land for public purposes and for companies. It also provides for the manner of compensation and other incidental matters in this connection. The provisions of the Act have been found to be inadequate in addressing certain issues related to the exercise of the statutory powers of the State for involuntary acquisition of private land and property. The Act does not address the issues of rehabilitation and resettlement of the affected persons and their families. The definition of the crucial term “public purposes” is very wide and is often the subject-matter of great dispute. There have been multiple amendments to the Land Acquisition Act, 1894 not only by the Central Government but also by the State Governments. Further, there has been heightened public concern on land acquisition, especially multi-cropped irrigated land and there is no central law to adequately deal with the issues of rehabilitation and resettlement of displaced persons. As land acquisition and rehabilitation and resettlement need to be seen as two sides of the same coin, a single integrated law to deal with the issues of land acquisition and rehabilitation and resettlement was necessary.

Accordingly, to have a unified legislation dealing with acquisition of land, to provide for just and fair compensation and make adequate provisions for rehabilitation and resettlement mechanism for the affected persons and their families, the Land Acquisition Rehabilitation and Resettlement Bill, 2011 (“the Bill”) was introduced in Parliament. The Bill thus provides for repealing and replacing the Land Acquisition Act, 1894 with broad provisions for adequate rehabilitation and resettlement mechanism for the project affected persons and their families. An important milestone was crossed by the Bill when the Government managed a broad all-party consensus on this crucial legislation. Hence, let us look at some of the salient provisions of this very important Law relating to land acquisition.

Applicability of the Bill

The provisions relating to land acquisition, rehabilitation and resettlement, shall apply, when the Government acquires land,—

(a) for its own use, hold and control; or

(b) with the purpose to transfer it for the use of private companies for public purpose (including Public Private Partnership projects but not including national or state highway projects); or

The provisions relating to rehabilitation and resettlement shall also apply in cases where,—

(a) a private company purchases or acquires land, equal to or more than 100 acres in rural areas or equal to or more than 50 acres in urban areas, through private negotiations with the owner of the land;

(b) a private company requests the Government for acquisition of a part of an area so identified for a public purpose:

The Bill does not apply to certain land acquisition Acts, such as:

(a) The Ancient Monuments and Archaeological Sites and Remains Act, 1958
(b) The Atomic Energy Act, 1962
(c) The Metro Railways (Construction of Works) Act, 1978
(d) The National Highways Act, 1956
(e) The Special Economic Zones Act, 2005
(f) The Electricity Act, 2003
(g) The Railways Act, 1989

Determination of Social Impact and Public Purpose

Whenever the Government intends to acquire land for a public purpose, it shall carry out a Social Impact Assessment study in consultation with the Gram Sabha in rural areas or an equivalent body in urban areas, in the affected area in such manner and within such time as may be prescribed.

Public Purpose has been defined to include the provision of land for:

(a) strategic defence purposes/national security /safety of the people;

(b) railways, highways, ports, power and irrigation purposes for use by Government and public sector companies or corporations;

(d) planned development of villages or any site in the urban area or provision of land for residential purposes for the weaker sections or the provision of land for Government administered educational, agricultural, health and research schemes or institutions;

(e) residential purposes to the poor or landless or to persons residing in areas affected by natural calamities, or to persons displaced by reason of the implementation of any Government scheme

(f) the provision of land in the public interest for any other use or in case of PPPs (Public Private Partnership) projects with the prior consent of at least 80% of the project affected people

(g) the provision of land in the public interest for private companies for the production of goods for public or provision of public services with the prior consent of at least 80% of the project affected people. However, if public sector companies want the land for similar uses then the 80% consent condition does not apply.

To ensure food security, multi-crop irrigated land shall be acquired only as a last resort. An equivalent area of culturable wasteland shall be developed, if multi-crop land is acquired. In districts where net sown area is less than 50% of the total geographical area, no more than 10% of the net sown area of the district will be acquired. The Social Impact Assessment study shall include all the following:

(a) assessment of nature of public interest involved;

(b) estimation of affected families and the number of families among them likely to be displaced;

(d) extent of lands, public and private, houses, settlements and other common properties likely to be affected by the proposed acquisition;

(e) whether the extent of land proposed for acquisition is the absolute bare-minimum extent needed for the project;

(f) whether land acquisition at an alternate place has been considered and found not feasible;

(g) study of social impact from the project

It remains to be seen whether such a Study delays the land acquisition process. The Study should be evaluated by an independent multi-disciplinary expert group constituted by the Government.

If the land sought to be acquired is 100 acres or more, then the Government must constitute a Committee to examine the land acquisition proposals. It would be headed by the Chief Secretary of State/ Union Territory. The role of the Committee would be to ensure the following:

(a) there is a legitimate and bona fide public purpose for the proposed acquisition which necessitates the acquisition of the land identified;

(b) the public purpose referred shall on a balance of convenience and in the long term, be in the larger public interest so as to justify the social impact as determined by the Social Impact Assessment that has been carried out;

(d) the Collector of the district, where the acquisition of land is proposed, has explored the possibilities of—

(i) acquisition of waste, degraded or barren lands and found that acquiring such waste, degraded or barren lands is not feasible;

(ii) acquisition of agricultural land, especially land under assured irrigation, is only as a demonstrable last resort.

Acquisition Process

Whenever it appears to the Government that land in any area is required or likely to be required for any public purpose, a preliminary notification to that effect along with details of the land to be acquired in rural and urban areas shall be published.

The notification shall also contain a statement on the nature of the public purpose involved, reasons necessitating the displacement of affected persons, summary of the Social Impact Assessment Report and particulars of the Administrator appointed for the purposes of rehabilitation and resettlement.

No person shall make any transaction or cause any transaction of land specified in the preliminary notification or create any encumbrances on such land from the date of publication of such notification till such time as the proceedings under this Chapter are completed.

Where a preliminary notification u/s. 11 is not issued within 12 months from the date of appraisal of the Social Impact Assessment report submitted by the Expert Committee, then, such report shall be deemed to have lapsed and a fresh Social Impact Assessment shall be required to be undertaken prior to the acquisition proceeding.

Where no declaration is made u/s. 19 within twelve months from the date of preliminary notification, then such preliminary notification shall be deemed to have been rescinded.

Any person interested in any land which has been notified, may object within 60 days from the date of the publication of the preliminary notification.

The decision of the Government on the objections made shall be final.

Upon the publication of the preliminary notification by the Collector, the Administrator for Rehabilitation and Resettlement shall conduct a survey and undertake a census of the affected families.

The Administrator shall, based on the survey and census, prepare a draft Rehabilitation and Resettlement Scheme as prescribed, which shall include particulars of the rehabilitation and resettlement entitlements of each land owner and landless whose livelihoods are primarily dependent on the lands being acquired. The same shall be open to suggestions /objections in a public hearing. The Administrator shall, on completion of public hearing submit the draft Scheme for Rehabilitation and Resettlement along with a specific report on the claims and objections raised in the public hearing to the Collector.

The Collector shall review the draft Scheme submitted by the Administrator with the Rehabilitation and Resettlement Committee at the Project level. He shall submit the draft Rehabilitation and Resettlement Scheme with his suggestions to the Commissioner Rehabilitation and Resettlement for approval of the Scheme.

When the Government is satisfied that any particular land is needed for a public purpose, a declaration shall be made to that effect, along with a declaration of an area identified as the ‘resettlement area’ for the purposes of rehabilitation and resettlement of the affected families. The declaration shall be conclusive evidence that the land is required for a public purpose and, after making such declaration, the appropriate Government may acquire the land in such manner as specified under this Act.

The Collector shall thereupon cause the land to be marked out and measured, and if no plan has been made thereof, a plan to be made of the same. The Collector shall also make an award of—

(a) the true area of the land;

b) the compensation as determined along with Rehabilitation and Resettlement award as determined; and

The Collector shall make an award within 2 years from the date of publication of the declaration and if no award is made within that period, the entire proceedings for the acquisition of the land shall lapse.

Market value of land

The Collector shall adopt the following criteria in assessing and determining the market value of the land, namely:

(a) the minimum land value, if any, specified in the Indian Stamp Act, 1899 for the registration of sale deeds or agreements to sell, as the case may be, in the area, where the land is situated; or

(b) the average sale price for similar type of land situated in the nearest village or nearest vicinity area. The average sale price shall be determined taking into account the sale deeds or the agreements to sell registered for similar type of area in the near village or near vicinity area during immediately preceding 3 years of the year in which such acquisition of land is proposed to be made. For this purpose, 50% of the sale deeds in which the highest sale price has been mentioned shall be taken into account.

whichever is higher:

The market value calculated as per sub-section (1) shall be multiplied by a specified factor. For instance, it is 2 in rural land, 1 in urban area land, etc. Thus, only value in rural areas is doubled.

The Collector having determined the market value of the land to be acquired shall calculate the total amount of compensation to be paid to the land owner (whose land has been acquired) by including all assets attached to the land. For determining the market value of the building and other immovable property attached to the land, the Collector may use the services of an Engineer/Other Specialists. Similarly, for assessing the value of crops, trees, plants, attached to the land, the Collector can use the services of an experienced person in the field of agriculture, etc.

The Collector having determined the total compensation to be paid, shall, to arrive at the final award, impose a ‘Solatium ’ amount equivalent to 100% of the compensation amount. The solatium amount shall be in addition to the compensation payable to any person whose land has been acquired. Thus, it is like an additional compensation.

The provisions of the Income- tax Act are also relevant in this respect. Section 45(4) of the Act provides that where capital gains arises from the compulsory acquisition of a capital asset under any law, then the compensation awarded in the first instance shall be taxable in the year of award. If the same is enhanced subsequently, then the enhancement amount would be taxable in the year of receipt by the assessee.

R&R Provisions

The Bill contains provisions for Rehabilitation and Resettlement of Project Affected People (PAP) in case of an acquisition.

The Government may appoint an Administrator for carrying out the R&R provisions. The Government may also appoint a Commissioner for R&R. He may be appointed for supervising the formulation of R&R Schemes and for their proper implementation.

In case the land is purchased privately and is more than or equal to 100 acres within rural areas or is more than or equal to 50 acres in urban areas, then the permission of the Commissioner is required. Thus, the obligation to rehabilitate for private acquisition is only if the area acquired is 50 acres or more.

A Land Acquisition and Rehabilitation and Resettlement Authority would be established for settling any disputes relating to acquisition, compensation and R&R. This would be headed by a sitting/retired High Court Judge.

Temporary Acquisition

Whenever it appears to the Government that the temporary occupation and use of any waste or arable land are needed for any public purpose, or for a company, the appropriate Government may direct the Collector to procure the occupation and use of the same for such terms as it shall think fit, not exceeding 3 years from the commencement of such occupation.

The compensation may be either in a gross sum of money, or by monthly or other periodical payments, as shall be agreed upon in writing between him and such persons respectively.

In case the Collector and the persons interested differ as to the sufficiency of the compensation or apportionment thereof, the Collector shall refer such difference to the decision of the Land Acquisition and Rehabilitation and Resettlement Authority

Other Important Provisions

Any award for land acquisition is exempt from stamp duty.

If any land or part thereof acquired remains unutilised for a period of 10 years from the date of taking over the possession, the same shall return to the Land Bank of the Government by reversion. Whenever the ownership of any land acquired under this Act is transferred to any person for a consideration, without any development having taken place on such land, 20% of the appreciated land value shall be shared amongst the persons from whom the lands were acquired or their heirs, in proportion to the value at which the lands.

Comparison with the Act

A broad comparison of the Act vis-à-vis the Bill reveals the key differences as shown in the table:

Conclusion

The Bill is one of the most important recent laws in the real estate sector. It would have far reaching implications and consequences. Hence, it becomes essential to carefully study and understand this Law.

Nirav Shah

Transmission Formalities (Part II)

(Last Month, we looked at some transmission formalities which the deceased’s family has to carry out. We continue with some more such procedures in this Concluding Part.)

Death claim for Bank Accounts

Pursuant to the RBI’s Circular, all nationalised and private banks now have simplified processes in case of death claims for bank accounts of deceased. The salient features in this respect are as follows:

(a) Bank Accounts/Lockers with survivor/nominee clause

In the case of deposit accounts/lockers where the depositor had utilised the nomination facility or where the account was opened with the survivorship clause, the payment of the balance in the deposit account can be made to the survivors/nominee of a deceased deposit account holder provided:

(i) the bank verifies the identity of the survivors/nominee and the fact of death of the account holder, through appropriate documentary evidence;

(ii) there is no order from the competent court restraining the bank from making the payment from the account of the deceased; and

(iii) it has been made clear to the survivor(s)/ nominee that he would be receiving the payment from the bank as a trustee of the legal heirs of the deceased depositor, i.e., such payment to him shall not affect the right or claim which any person may have against the survivor(s)/nominee to whom the payment is made.

(b) Bank Accounts/Lockers without the survivor/ nominee clause

In cases where the deceased depositor/locker holder had not made any nomination or for accounts other than those styled as ‘either or survivor’, and if the legal heirs of the deceased customer are identifiable and there is no dispute amongst the legal heirs, then banks generally settle the claims without insisting for obtaining Succession Certificate/Letter of Administration etc. These claims are generally settled after obtaining an Indemnity with or without Surety in favour of the bank. In case only one of the legal heirs wants to claim/receive the amount or contents of locker etc., then he must obtain a Power of Attorney in his favour from the other legal heirs.

(c) Premature Termination of term deposit accounts

In the case of term deposits, banks incorporate a clause in the account opening form itself to the effect that in the event of the death of the depositor, premature termination of term deposits would be allowed. Such premature withdrawal would not attract any penal charge.

(d) Treatment of flows in the name of the deceased depositor

With regard to the treatment of pipeline flows in the name of the deceased account holder, banks generally adopt either of the following two approaches:

(i) The bank could be authorised by the survivor(s)/nominee of a deceased account holder to open an account styled as ‘Estate of Mr.X, the Deceased’ where all the pipeline flows in the name of the deceased account holder could be allowed to be credited, provided no withdrawals are made.

(ii) The bank could be authorised by the survivor(s)/nominee to return the pipeline flows to the remitter with the remark ‘Account holder deceased’ and to intimate the survivor(s)/nominee accordingly. The survivor(s)/nominee/legal heir(s) could then approach the remitter to effect payment through a negotiable instrument or through ECS transfer in the name of the appropriate beneficiary.

(e) Time limit for settlement of claims

Banks generally settle the claims in respect of deceased depositors and release payments to survivor(s)/nominee(s) within a period not exceeding 15 days from the date of receipt of the claim subject to the production of proof of death of the depositor and suitable identification of the claim(s), to the bank’s satisfaction.

PPF of the Deceased

A nomination can be made even in respect of a person’s balance standing in the Public Provident Fund or PPF. If such a nomination has been made, the nominee or nominees may make an application in Form G together with proof of death of the subscriber and on receipt of such application, all amounts standing to the credit of the subscriber after making adjustment, if any, in respect of interest on loans taken by the subscriber shall be repaid by the Accounts Office itself to the nominee or nominees.

Where there is no nomination in force at the time of death of the subscriber, the amount standing to the credit of the deceased after making adjustment, if any, in respect of interest on loans taken by the subscriber, is repaid by the legal heirs of the deceased on receipt of application in Form G in their behalf, from them.

A balance of upto Rs. 1 lakh may be paid to the legal heirs on production of (i) a letter of indemnity, (ii) an affidavit, (iii) a letter of disclaimer on affidavit, and (iv) a certificate of death of subscriber.

Jewellery/Bullion of the Deceased

The Executor should distribute the jewellery/bullion belonging to the deceased in accordance with his Will. While making such distribution, the beneficiaries should also be given copies of the bills of the jewellery/bullion so that they can keep a record of the cost of acquisition and period of holding since both of these relate back to that of the deceased.

Art and Antiques of the Deceased

The Executor should distribute the Art/Sculptures/ Antiques belonging to the deceased in accordance with his Will. One element to consider when inheriting a work of art or any antiques is the provenance, or the actual history of ownership. This lays down precisely who was the original owner of the work, i.e., the title history. A provenance is very valuable during a resale and fetches a higher price than a work without one. Internationally, sellers of antiques who can provide ownership proof of the items with ancestors can demand a higher price. Again the original purchase bill/proof would help.

Digital Assets of the Deceased
While most people prepare a Will for their assets, how many people prepare a Digital Will? A Digital Will bequeaths a person’s online assets, such as, email accounts, online photos, Facebook account, cloud data, passwords, etc. There are no specific laws in India for a Digital Will and even the Information Technology Act, 2000 does not deal with this situation.

Hence, what happens to a person’s digital assets and online records when he dies is largely controlled by the Terms of Service that ac-company the different websites or companies with which a person has accounts. The terms of some of the popular service providers are as follows:

• Gmail does not delete a deceased’s account and states that in “rare cases,” it may be able to provide the account content to an authorised representative of the deceased user. The applicant would have to prove his identity, a death certificate and proof of relationship.

• Hotmail sends a copy of any email messages that may be stored on a deceased’s account, along with any existing contact lists, and will ultimately close the account upon request. It will not provide the password to an account or transfer owner-ship of the account. In most cases, email account contents are deleted after nine months of inactivity, and the account itself is deleted after an additional three months; for a total of one year.

• Yahoo permanently deletes all content and terminates the account upon receipt of a copy of a death certificate. It will not provide access to user’s accounts or email. The Yahoo! account is non-transferable and any rights to the Yahoo! ID or contents within the account terminates upon your death.

• Facebook prepares a memorial of the deceased’s account to allow friends and family to write on his wall. The account may be closed upon a formal request from his next of kin or upon a legal request.
• LinkedIn removes a deceased’s account, after receiving a Death Certificate and the alternative email address registered in the deceased member’s account.

• Twitter allows family members to remove the deceased’s account and/or save a backup of his public tweets.

• PayPal allows the Executor of the Estate to close the account.

• iTunes provides that when a person buys music, movies and books, he is acquiring a non-transferable license for personal use. It does not provide for anything on the death of an account holder.

Foreign Assets of the Deceased
With the introduction of the Liberalised Remittance Scheme of the RBI, residents are now able to acquire foreign securities, immovable property, foreign assets, etc. The bequest/transmission of these foreign assets would be in accordance with the provisions of the applicable foreign law in this respect. The FEMA Regulations provide that a person resident in India may acquire foreign securities by way of inheritance from a person resident in or outside India. However, there is no provision under the FEMA Regulations as to whether foreign immovable property can be inherited by another person resident in India from a person who has acquired it under the LRS.

HUF of the Deceased

On the death of the deceased, his/her eldest child, whether a son or a daughter, would become the Karta of the deceased’s HUF. Necessary steps should be taken for inducting the new Karta as authorised signatory of all bank accounts, demat accounts, etc., of the HUF.

On the death of a Hindu, his/her interest in an HUF passes by any one of the following two modes:

(a) As per the Hindu Succession Act, a Hindu can make a testamentary disposition of his interest in an HUF. Thus, if he has included his HUF interest in his Will then its disposition would be in accordance with his Will.

(b) If no will is prepared in respect of the undivided share, then it passes on the legal heirs of the deceased and is governed by the succession rules laid down under the Hindus Succession Act.
Thus, if a father dies, leaving behind his mother, wife, son and daughter and there are three other members in his own HUF, then his interest will devolve by intestate succession upon his legal heirs, i.e., the mother, wife, son and daughter. Thus, the mother would also stand to get a share in her son’s HUF. Prior to 2005, it would have devolved only upon the HUF members and hence, their interest would have increased from ¼ each to 1/3 each. This is an important change brought about by the Hindu Succession Amendment Act of 2005.

Son liable for Father’s Debts?

Under the Hindu Law, a son was personally liable for the debts of his deceased father. This was known as the son’s pious obligation. It was considered that without clearing the debts, his father would not rest in peace. The Supreme Court in the case of Pannalal vs. Mt. Naraini, AIR 1952 SC 170, also upheld this theory but held that the liability of the son is limited only to his share in the joint family property or the property inherited by him from his father.

Section 6(4) of the Hindu Succession Act has been amended in 2005 to do away with the theory of pious obligation. Thus, now a Hindu son’s share in the joint family property or the property inherited by him from his father is not liable for recovery of debts. However, debts prior to 9th September, 2005 (the date of amendment of the Act) would yet be covered by the old law.

No Objection Certificate

In several cases of transmission, the entities may require the legal heirs of the deceased to furnish a No Objection Certificate in favour of the person receiving the asset on transmission. For instance, if a deceased leaves behind a wife and two children and the transmission of an asset is in favour of the wife, then an NOC may be required from the children. An NOC can be executed on a plain paper.

In some cases, an Indemnity is also required. An Indemnity protects the entity which allows the transmission from any legal claims/loss. An Indemnity is to be executed on a stamp paper of Rs. 200 in Maharashtra and requires to be notarised.

Taxation of the Deceased

In the year of death, there would be two assessments in respect of the deceased. U/s. 159 of the Income -tax Act, the Legal Representative of a de-ceased assessee would be liable to pay tax in the like manner and to the same extent as that of the deceased. Section 2(29) of the Act defines the term Legal Representative to mean a person who in law represents the estate of the deceased person. There could be more than one legal representatives but compliance may be practically done by any one legal representative.

The Legal Representative would be liable to pay tax on the income of the deceased received/accruing to him up to the date of his demise. In respect of income, such as interest which accrues on a yearly basis, the income would have to be apportioned between the period up to date of death and thereafter.

A separate procedure is prescribed for e-filing of Return of Income by legal representative. The procedure is available on the Income-tax Department’s Website. As per the procedure, the PAN of legal representative is required to be registered with the Income-tax Department. Based thereon, a legal representative will be able to file return of income by mentioning in verification part, the details and PAN of legal representative, while the form of the return of income may carry the PAN of the deceased. To file a return of income with digital signature, the legal representative is also required to register his digital signature.

In respect of the period commencing from the date of death until the period when the deceased’s Estate is fully executed, his Executors would be liable to tax u/s. 168 of the Act. U/s. 168(3), a separate assessment would be made on the Executor commencing from the date of death up to the date of complete distribution of the Estate to the beneficiaries. In addition to the Return filed by the Executor in his representative capacity u/s. 168, he would also file a Return in his own personal capacity. A PAN may be obtained in the name of the Estate of the deceased.

If there is only one Executor, then he is taxed as if he were an individual. However, if there is more than one Executor, then all of them are taxed as if they were an Association of Persons (AOP). Further, the residential status of the Executor would be that of the deceased during the previous year in which he died. Thus, if the deceased was a non-resident, then the Executor would also be a non-resident.

The assessment in the hands of the Executor shall be made for each completed previous year which begins from the date of the death of the deceased and continues till such time as a complete distribution is made to the beneficiaries according to their several interests. While computing the income of the Executor, any distribution which has already been effected to a specific legatee shall be excluded from the income of the Executor. The same would be taxed in the hands of the specific legatee to whom the distribution was made.

The Full Bench of the Madras High Court in the case of P. Manonmani, 245 ITR 48 (Mad), has held that these provisions apply only when a person dies after leaving a will, i.e., they do not apply to intestate deaths.

Taxation of the Beneficiaries

In respect of any asset received under a Will or by succession, inheritance or devolution, the cost of the asset to the beneficiary and the period of holding to the beneficiary would be the same as that to the deceased. Similarly, for claiming depreciation, the actual cost in case of an asset acquired by inheritance is the actual cost to the previous owner. Recent High Court decisions have held that the benefit of indexation is also available to the beneficiary from the date on which it would have
been available to the deceased – Arun Shungloo Trust vs. CIT, (2012) 205 Taxman 456 (Delhi); CIT vs. Manjula J.Shah (Mumbai), (2012) 204 Taxman 691 (Bom).

The provisions of section 56(2)(vii) of the Income-tax Act do not apply to gifts received without consideration if they are received under a will or by way of inheritance. Thus, even if a Will leaves everything to a person who is not a “defined relative” under section 56(2) of the Income-tax Act, say, a friend, then the recipient is not liable to tax on the gift so received by him by virtue of this express exemption.

FEMA and Transmission

The FEMA, 1999 and its Regulations contain certain provisions for legacies involving a resident testator and a non-resident legatee or vice-versa. These are as follows:

(i) A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such asset was inherited from a person who was resident outside India.

(ii) A person resident outside India may hold, own, transfer or invest in Indian currency, Indian security or any immovable property situated in India if such asset was inherited from a person who was resident in India.

(iii) A foreign national of non-Indian origin who is not a Nepalese or a Bhutanese may have inherited assets in India from a person resident in India who acquired the assets (being immovable property, securities, cash, etc.) when he was an Indian resident. Such a Person of Indian Origin or a Foreign Citizen can remit an amount not exceeding $ 1 million per year if he produces documentary proof in support of the legacy, e.g., a will, and a tax clearance/no-objection certificate from the Income-tax Department. “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.

(iv) 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 $ 1 million per year if he produces documentary proof in support of the legacy, e.g., a will, and a tax clearance/no-objection certificate from the Income-tax Department. The meaning of the term “Assets” is the same as that under (iii) above.

(v) In case of a remittance exceeding that specified in (ii) and (iii), an application can be made to the Reserve Bank of India in Form LEG.

(vi) A Person of Indian Origin may acquire any immovable property in India by way of inheritance from a person resident in India or a person resident outside India who acquired the property in accordance with the prevailing foreign exchange law, i.e., FEMA or FERA.

Takeover Regulations
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 apply in case of certain transfers in listed companies. If the prescribed threshold limits are breached, then the acquirer of the shares has to make a public offer, i.e., an offer to acquire shares from the public. However, the provisions relating to making of an open offer do not apply to an acquisition of shares of a listed company received by way of transmission, succession or inheritance. The Acquirer is required to file a Report with the stock exchanges where the shares are listed within four days of the acquisition.

Chartered Accountant’s Role
Normally, a CA in his capacity as an Auditor is not directly involved with succession/transmission issues. Nevertheless, a CA can provide a lot of value added services to his clients if he is aware of the law in this respect. He can be of great assistance to his clients in complying with various transmission formalities. It is an area where he can assist his client and avoid unnecessary problems.

Nirav Shah

Limited Liability Partnerships Part-III

1. Winding-up of an LLP:

1.1 There are two ways in which an LLP can be wound-up, by an order of the Court or voluntarily.

1.2 An LLP can be wound-up by an order of the High Court under any of the fall owing circumstances:

a) If the LLP decides that it should be wound-up by a Court Order.

(b) If the minimum number of partners reduces to less than two and remains sa far mare than 6 months,

c) If it is unable to pay its debts. The Act does not prescribe any minimum amount of debts or any conditions under which an LLP is deemed to be unable to pay its debts. All these are contained in the draft Concept LLP (Winding-up and Dissolution) Rules.

d) If it has acted against the interests of the sovereignty and integrity of India, security of the State or public order.

e) If it has made a default in filing the Statement of Account and Solvency or the Annual Return far any 5 consecutive years.

f) If the Court is of the opinion that it is just and equitable to wind-up the LLP.

1.3 The above section is similar in its operation to S. 433 of the Companies Act. However, unlike the Companies Act, the LLP Act does not contain any provisions far the compulsory or voluntary winding-up of an LLP. All these provisions are contained in the draft Concept LLP (Winding-up and Dissolution) Rules. The final Rules have yet not been notified. It is interesting to note that while normally Rules only contain the procedures and the substantive portion is contained in the Act, the Winding-up Rules, even deal with the substantive portion of winding-up of LLPs. One would expect that such an important provision is passed by the Parliament rather than notified by the Ministry of Corporate Affairs.

1.4 S. 51 of the Act also provides that if an LLP’s affairs are under investigation if, based an an inves-tigatian report made u/s.49, the Central Covernment is of the view that it is expedient to do sa, then the Gavernment may present a winding-up petition to the High Court, The petition may be presented an the ground that it is just and equitable to wind-up the LLP.

2. Investigation of an LLP:

2.1 S. 43 of the Act empawers the Central Government to appoint an inspector to investigate the affairs of an LLP in any of the following circumstances:

a) If partners having at least 20% voting pawer apply to the Tribunal far an investigation and the Tribunal passes an order to that effect. An application should be accompanied with a security of an amount calculated based an the turnover. The amount of security ranges from Rs.2 to 25 lakhs.

b) If the Tribunal sua moto passes an order far an investigation into the affairs of an LLP.

c) Any Court passes an Order that the affairs of an LLP should be investigated.

d) If in the opinion of the Central Gavernment, there are circumstances suggesting that the business of the LLP is being conducted :

with an intent to defraud creditors, partners
otherwise far a fraudulent/unlawful purpase
in a manner .oppressive or unfairly prejudicial to its partners

e) If in the opinion of the Central Gavernment, there are circumstances suggesting that the LLP was farmed far any fraudulent or unlawful purpase.

f) If in the opinion of the Central Gavernment, there are circumstances suggesting that the LLP’s affairs are not being conducted in accordance with the provisions of the Act.

g) If in the opinion .of the Central Gavernment, there are circumstances suggesting that, based an a rep art of the RaC, there are sufficient reasons that the affairs of the LLP should be investigated.

2.2 The inspector may make interim reports and on conclusion of the investigation make a final report.

2.3 If based on this report, the Central Government is of the view that any person named in the report is guilty of any offence, then it may launch crimi-nal prosecution against him. The Government may also initiate proceedings:

a) for the recovery of damages; or

b) for the recovery of any property of the LLP/ any entity which has been misappropriated or wrongfully retained.

3. Defunct LLPs :

3.1 The RoC may strike off the name of an LLP from its register. It can do so, where an LLP is not carrying on any business or operation:

a) For a period of 2 years or more and the RoC has reasonable cause to believe the same, for taking suo moto action for striking off the LLP’s name; or

b) For a period of 1 year or more and it has made an application to the RoC in Form 24 with the consent of all the partners for striking off its name from the register.

3.2 The RoC shall in all cases of suo moto action provide an opportunity of being heard to the LLP. After that if the RoC is satisfied that the name should be struck off then it will publish a notice in the Gazette and from that date, the LLP shall stand dissolved.

4. Offences and penalties:

4.1 The LLP Act lays down various penalties and prosecutions for non-compliance with the provisions of the Act. It also lays down penalties for various procedural offences such as not filing forms on time. Further, where any document or return is required to be filed and if it is not so done on time, then it may be filed within 300 days from the original date of filing along with a daily fine of Rs. 100 for every day of delay.

4.2 In offences where no penalty has been pre-scribed, the punishment shall be a fine ranging from Rs.50,000 to Rs.5 lakhs along with a further fine which may extend to Rs.50 per day for every day after which the default continues.

4.3 A petition for compounding of offences can be made in From 31 to the RoC. Only those offences can be compounded for which the punishment is only a fine. Thus, offences which are punishable with imprisonment are not compoundable. This is different from the provisions of S. 621A of the Companies Act. Under this Act, offences for which the punishment is a fine or imprisonment are compoundable. One reason for the same is that there are no offences under the LLP Act for which the punishment is a fine or an imprisonment. The punishments under the Act are in the form of fines and imprisonment. Where any offence by an LLP is compounded no prosecution would be launched against the offender.

4.4 Offences in relation to the Incorporation Document, carrying on of a fraudulent business, making of false statements under the Act, matters arising out an Inspection Report and non-compliance of any Order of the Tribunal, are offences under the Act which also attract imprisonment as a punishment.
Thus, these offences would not be compoundable.

4.5 Where any offence by an LLP is proved to be because of the consent or connivance of a partner or attributable to the neglect of any partner, then such person shall be proceeded against and punished under the Act.

5. Whistle blowers:

5.1 A Court or Tribunal is empowered to reduce or waive any penalty leviable against any partner or employee of an LLP who is a whistle blower, if :

he provided useful information during the investigation of the LLP; or

he provided some information which lead to the LLP or its partner / employee being convicted under any Act.

5.2 The Act also contains a safeguard against harassment of such a whistle blower by providing that he would not be discharged, demoted, suspended, threatened, harassed or discriminated against merely because he provided the above information.

Nirav Shah

Journal

Brieficles

Resources

About

Reach Us