The Most Comprehensive Portal on Indian Laws

1^st April, 2001

Dear User, 

We are once again with you with our Newsletter for April  2001.  As usual we have incorporated latest judgements, circulars etc received by us in the month of february in this newsletter.

At this site we have hosted following judgements (a) Hanuman Vitamin Foods Pvt. Ltd. v. State of Maharashtra (Supreme Court) (b) Cadell Weaving Mills Co. Ltd. (Bombay High Court) and (c) Coronet Investments Pvt. Ltd. (ITAT Mumbai), you can visit our section on the Latest Judgements and read the full text of these judgements.

We have covered many subjects in this newsletter. You may select only those subjects in which you are interested by clicking against the relevant subjects given below : -

Income Tax Law
Corporate Law
Securities and Exchange Board of India (SEBI)
Chartered Accountants Act
Foreign Exchange (Reserve Bank of India)
Stamp Duty
Consumer Protection Act
Monopolies and Restrictive Practices Act
Negotiable Instrument Act
Other Laws

Income Tax

Compensation received on surrender of Tenancy Rights (Bombay High Court)

The Bombay High Court in the case of Cadell Weaving Mills Co. Pvt. Ltd. reversed the decision of the Bombay ITAT and held that compensation received on surrender of tenancy rights is not taxable. The Court held that the amount received on surrender of tenancy rights is not a casual income referred to in Sec.10(3) nor can it be assessed as income from other sources u/s. 56 as it falls within the tax net u/s. 45. It may be noted that the law has been changed with effect from Asst. Year 1995-96. You may click here to get full text of this judgement.

Depreciation on Leased Assets

The ITAT ‘E’ Bench, Mumbai in the case of Coronet Investments Pvt. Ltd. v. JCIT SR 35 Mumbai in ITA No. 2103/Mum/99 vide its order dt. 7-3-2001 quashed the order u/s.263 passed by the CIT. The ITAT held that order of A.O. granting depreciation to electric meters taken on hire purchase by the assessee from ITC and leased to A.P. State Electricity Board who had earlier sold the goods to ITC is perfectly legal. You may click here to get full text of this judgement.

Section 80 IB - Scientific Research and Development

The CBDT has notified the Income Tax (First Amendment ) Rules, 2001 relating to approval of companies eligible to claim deduction under section 80 IB (8A). The following is the gist of the said rules :-

1. The prescribed authority for the purpose of section 80 IB ( 8A) shall be the Secretary, Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of India. The prescribed authority shall initially grant approval to a company carrying on scientific research & development for a period of three assessment years and may extend the approval for a further period of three years on satisfactory performance by the company such that the total period of approval is for ten consecutive assessment years beginning from the initial assessment year.
   
2. Such a company must satisfy the following conditions for being eligible :-

1. the company is registered in India
2. the company has as its main object, scientific and industrial research & development
3. the company has adequate infrastructure such as laboratory facilities, qualified manpower, scale of facilities and prototype development facilities for undertaking scientific research & development of its own
4. the company has a well formulated research & development programme comprising of time bound projects with proper mechanism for selection and review of projects or programmes
5. the company is engaged exclusively in scientific research & development leading to technology development, improvement of technology and transfer of technology developed by themselves
6. the company submits its annual return along with statement of accounts and annual report within eight months from the close of each accounting year to the prescribed authority.

3. Every approved company must :-

1. sell any prototype or output from its laboratory or private plants with the prior permission of the prescribed authority
2. intimate the change, if any, in its memorandum of association and articles of association relating to its main objects and forward the altered copy to the prescribed authority
3. apply for extension of approval at least three months prior to the date of expiry
4. have a system of monitoring the cost of research & development project

4. The prescribed authority may withdraw the approval if, at any stage, it is found that the approval was obtained to avoid payment of taxes by the group companies or companies related to its directors or majority of its shareholders or that any provisions of the Act or rules have been violated.
   
5. The company must make the application to the prescribed authority in the prescribed manner which shall be accompanied by the latest memorandum or articles of the company, annual report of the company for the last three years, photocopy of the memorandum of understanding relating to all ongoing and future sponsored research projects or programmes.
   
6. The prescribed authority may call for such other details as it may deem fit.
   
7. The prescribed authority shall grant approval within four months from the date of receipt of application. Where approval is not granted, the decision must be communicated to the applicant within the said period of 4 months. No approval shall be refused unless the applicant has been given an opportunity of being heard.

Finance Lease Agreements - Effect of publication of Accounting standards on allowability of depreciation

1. Under the Income Tax Act in all leasing transactions, the owner of the asset is entitled to the depreciation if the same is used in business. The ownership of the asset is determined by the terms of contract between the lessor and the lessee.
   
2. The Central Board of Direct Taxes vide Instruction No.1978 dated 31^st December, 1999 (F. No. 225/190/98/IT(A-II) has laid down the line of investigation in such cases. In cases where assets are factually non-existent, having been created by hawala transactions, the question of allowance of depreciation does not arise. In cases of sale and lease-back of assets without any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowell & Co Limited.
   
3. It has come to the notice of the Board that the New Accounting Standard on ‘lease’ issued by the Institution of Chartered Accountants of India requires capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income Tax Act.

(Circular No. 2 of 2001 dated 9-2-2001)

Filing of Audit Report under sections 44AD (6), 44AE(7) and 44AF(5) for A.Y. 1998-99

Sub-section (6) of section 44AD, sub-section (7) of section 44AE and sub-section (5) of section 44AF were inserted with retrospective effect from 1-4-1998 by the Finance Act, 1999. Accordingly, assessees were not in a position to file audit report for the assessment year 1998-99 before the specified date as on that date these sub-sections did not exist in the statute. Hence the default of assessees in complying with the requirement of filing audit report before the specified date for the assessment year 1998-99 was due to circumstances beyond the control of such assessees. To remove the genuine hardship in all such cases, the CBDT has directed that for the assessment year 1998-99, the audit report where called for under the provisions of sections 44AD(6),44AE(7) and 44AF(5) if not filed by the specified date as stipulated under section 44AB, could be filed anytime before the completion of assessment and in all such cases, the provisions of sections 44AD(6), 44AE)7) and 44AF(5) will be deemed to have been complied with.

(Circular No. 3/2000 dated 9-2-2001)

Deduction u/s 80 O

It was held that in view of the position that section 80AB was enacted to declare law as it always stood in relation to deduction to be made in respect of income specified under head ‘C’ of Chapter VI-A, inevitable conclusion would be that mode of computation as indicated in section 80AB has to be applied while working out deduction under section 80 O. Accordingly, section 80AB has to be applied while working out deduction under section 80 O and, hence deduction is allowable on net income : CIT v/s Chemical & Metallurgical Design Co Limited 114 Taxman 463 (Del)

Business Expenditure

The assessee’s claim for deduction of interest paid on conversion of acquisition of factory sheds from hire-purchase basis to outright purchase basis was disallowed by Assessing Officer as being of capital nature. It was held that interest paid in respect of asset which was purchased on outright basis was intimately linked with value of asset and was, therefore, of capital nature : CIT v/s Sharpedge Limited 114 Taxman 525 (Del)

Purchase of immovable property by Central Government

It was held that Chapter XX-C of the Income Tax Act, 1961 merely modified the contractual relationship between parties to the extent superseded by provisions of Chapter XX-C and rights and obligations of parties to contract are governed by ordinary law of land including provisions of Contract Act and Transfer of Property Act. It was further held that it is not correct to say that it is always the transferor / vendor alone who is entitled to receive consideration payable under an order or compulsory purchase unless otherwise agreed mutually and expressly between parties and consent terms filed with appropriate authority. It was also held that if there is no dispute between buyer and seller or a third person as to amount of purchase money having been paid or as to apportionment of amount forming part of purchase money, then amount must be tendered by Central Government to person or persons entitled thereto. The transferor entered into an agreement to sell a flat of a Housing Society for a consideration of Rs.45.50 lakhs in favour of six transferees. An amount of Rs.4.5 lakhs was paid by the transferees to the transferor. The Appropriate Authority made order under section 269UC. Out of consideration payable to the transferor, the Central Government paid Rs.42.73 lakhs to different parties on account of encumbrances / attachment. The transferees’ claim for refund of earnest money of Rs.4.50 lakhs was not considered by the Appropriate Authority. The transferor and transferees had entered into a specific agreement between themselves whereby they had agreed in the event of Appropriate Authority making an order for purchase by the Central Government of property forming the subject-matter of the agreement, firstly, the vendor was the person who shall be entitled to receive entire amount of consideration and the purchasers were consenting for it. The agreement further said that though the amount of Rs.4.50 lakhs paid by transferees to transferors as advance on date of execution of agreement shall be available to be claimed by the transferees from the Appropriate Authority, they had stipulated that in event of the Appropriate Authority not paying the said amount to the transferees, the transferees shall be entitled to recover amount from vendor. The court held no relief could be granted to the transferee under Article 226 of the Constitution : Asgar S. Patel v/s Union of India 114 Taxman 568 (SC)

Export Profits

The assessee was not an eligible export house under the EXIM Policy. The assessee, under an agreement with an export house, processed goods and shipped the same on account of the export house against purchase orders placed on export house by foreign buyers. In terms of the agreement, the export house was entitled only to benefits under the EXIM Policy and the assessee was entitled to sale proceeds realized and the assessee alone could claim all privileges available under other statutory provisions to an exporter, in addition to 2.25 % commission. It was held that notwithstanding any internal arrangement between the export house and the assessee, as far as income tax authorities were concerned, the export house was the exporter and as such, the assessee was ineligible to claim deduction under section 80HHC. It was also held that the question of title of property / ownership in goods exported is not relevant for purposes of section 80HHC. It was held that the phrase ‘sale proceeds … receivable by the assessee ‘ in section 80HHC(2) cannot be construed to mean sale proceeds ultimately received : Sea Pearl Industries v/s CIT 114 Taxman 618 (SC)

Government Subsidy

It was held that where assessee received Government subsidy in form of sales tax refund after production had commenced in its industry, such subsidy could not be treated as capital receipt : CIT v/s Chindwara Fuels – 14 Taxman 707 (Cal)

Payments to Non-Residents – Tax Withholding

In the case of CIT v/s Tata Engineering and Locomotive Co Limited (2000) 245 ITR 823 (Bom), the assessee approached the Assessing Officer for issuing a "No Objection Certificate" for remitting certain amount to a foreign company. The Assessing Officer was of the view that the amount spent by the assessee towards air-fare for the foreign technicians, their boarding and lodging and other local expenses formed part of the fees payable to the foreign company. Accordingly, the Assessing Officer directed the assessee to deduct tax on this amount before issuance of the "No Objection Certificate". The Assessing Officer was of the view that the above expense was in the nature of a constructive receipt in the hands of the foreign company and, therefore, the same was liable to tax under section 9(1)(vii) read with section 115A and section 44D of the Income Tax Act, 1961. Accordingly, the Assessing Officer directed the assessee to deduct tax at source on all payments irrespective of the fact whether they were remitted to the foreign company or were spent on the foreign technicians of that company in India. Being aggrieved the assessee preferred an appeal to the Tribunal which following its decision in the earlier years, held that the foreign technicians were required to travel only by Air India and they had no option of choosing the airline, that Air India was instructed to issue the tickets in USA on the advice received by Air India in India and they traveled to India since the technicians had to work at the site. It had also been held for the earlier years that in the matter of housing of the technicians in the guest-house, the employees had no say. The Bombay High Court held that no part of the payment could be treated as payment in lieu of fees. Moreover, in this case following the Supreme Court ruling in the case of Transmission Corporation of A.P. Limited v/s CIT (1999) 239 ITR 587, the Court held that the said provision under section 195 was only for tentative deduction of income-tax subject to regular assessment and the rights of the parties were not in any manner adversely affected.

Capital Gains – Land & Building

The Calcutta Branch of the ITAT in the case of ACIT v. Shri Sekhar Gupta (2001) 114 Taxman 122 held that the land is an independent and identifiable capital asset and it continues to remain as an identifiable capital asset even after construction of the building. In this case, the Bench approved the capital gains calculations separately for land and building after splitting up the sale consideration for the land and building.

Capitalization of Revenue Expense

In the case of CIT v/s Sea Lord Hotel (P) Limited (2001) 114 Taxman 346 (Ker), the assessee acquired a running hotel and incurred an expenditure of Rs.6.31 lakhs as compensation to the retrenched employees of the erstwhile employer. The assessee claimed such expenditure as capital in nature and claimed depreciation on the expenditure incurred and in the alternative claimed such amount as revenue expenditure. The Tribunal upheld the assessee’s plea for depreciation on the ground that it was incurred in connection with, or incidental to, the acquisition of the capital assets.

Depreciation

Following the Apex Court ruling in the case of Mysore Minerals Limited v/s CIT (1999) 239 ITR 775, the J. & K. High Court in the case of CIT v/s J. K. Tourism Development Corporation (2000) 114 Taxman 734 has held that the assessee was entitled to depreciation in respect of unregistered immovable properties.

Bad Debts

The amount advanced by the assessee to its subsidiary company became irrecoverable as it was wound up and entire amount realized went to secured creditors. The assessee’s claim for deduction of same as bad debt was disallowed by the Tribunal on the ground that said amount was shown after close of accounting year and assessee was not in the business of money lending. It was held that it is immaterial whether bad debt is shown after close of accounting year or during accounting year itself. It was also held that section 36(1)(vii), read with section 36(2)(i), clearly suggests that allowing bad debt to money-lender is not the only aspect of matter and it can be allowed as such when it comes into existence because of expenditure by assessee or because of advance to subsidiary company. It was further held that, therefore considering facts and circumstances of case, the assessee’s claim for bad debt was allowable : Turner Morrison & Co Limited v/s - CIT 114 Taxman 9 (Cal)

Kar Vivad Samadhan Scheme

The Assistant Commissioner re-determined tax, surcharge and interest pursuant to order of Settlement Commission. Aggrieved by calculation of interest, the petitioners filed revision petitions. Subsequently, they made declaration under KVSS. The Commissioner held that revision petitions were not maintainable. He further held that since no appeal or reference or writ was admitted and pending before any appellate authority or court on date of filing of declaration, declarations filed under KVSS would not be acted upon. It was held that since revision petitions were wrongly held as non-maintainable by Commissioner, such petitions could be said to be pending and as such assessee was entitled to benefit of KVSS. It was also held that to read the word "revision" in section 95 (c) of KVSS as "revision which was maintainable" or " revision in which relief could be granted" will be amounting to rewriting the section. Mrs. Leelamma John Thoppiil v/s CIT 114 Taxman 120 (Ker)

Plant

It was held that the law is settled that building in which business of a hotelier is carried on is not an apparatus for running such business but is a shelter or home for conduct of such business. It was therefore held that it would be wrong to treat hotel building owned by assessee as a plant within meaning of section 43(3) for purpose of entitlement to depreciation thereon as rate admissible on plant : CIT v/s Broadways Enterprises (P) Limited - 114 Taxman 458 (J & K)

Depreciation

Interest u/s. 201

Prospective Amendments / Repeals

TDS for Non Resident

Lease Rentals

Unregistered Transfer of Property

Sections 80AA and Section 80AB

Section 80 I – Manufacture

Deductibility of Accrued Expenses

Short deduction of tax

On facts of the case, the Tribunal held that the tax authorities had not proved that the action of the assessee in not deducting taxes on the disputed payments was a mala fide one, and the fact that the proceedings initiated by the assessing officer for the assessment years 1992-93 and 1993-94 in respect of the short deduction of tax at source were not further pursued, the assessee was under a bona-fide belief that the disputed payments were not taxable and therefore did not deduct taxes at source from the disputed payments and the assessee could not be deemed to be an assessee in default under section 201(1).

VDIS, 1997

The Court held that in absence of provision for condonation, the question of condoning the delay did not arise at all and, therefore, the Commissioner was justified in refusing to grant certificate under section 68(2) - Smt. Atamjit Singh v. Commissioner Of Income Tax (247 ITR 357) (Karnataka)

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Corporate Law

Wrongful Withholding of Company Property by Employee

It was held that all family members of an alive ‘officer’ or ‘employee’ of a company cannot be proceeded against and prosecuted under section 630 for wrongful withholding of company’s property. It was further held that the position of legal heirs of deceased employee cannot be equated with family members of erstwhile employee against whom criminal prosecution is launched and pending : J.K. (Bombay) Limited v/s Bharati Matha Mishra – 29 SCL 303 (SC)

Appointment / Removal of Auditors

Petitioners were statutory auditors of the respondent-company who were removed before completion of their term with approval of its shareholders and after taking prior approval of Government of India under section 224(7). It was held that in view of chequered history of litigation between petitioners and respondent-company, it was evident that petitioners had lost confidence in management and their objection with regard to certain transaction was raised only after they had fallen foul with management and in order to resist their removal. It was also held that the impugned removal of petitioners as statutory auditors was fully justified and in accordance with law and therefore, petition being with out merit had to be dismissed : Basant Ram & Sons v/s Union of India - 29 SCL 119 (Del)

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Securities and Exchange Board of India (SEBI)

Disclosure prior to Public Issue

The appellant proposed to issue shares at a heavy premium. The Lead Manager to the issue appointed by the appellant filed draft prospectus with SEBI. SEBI found the same deficient on several counts and in a letter written to the Lead Manager, asked it not to proceed with the public issue. The Lead Manager submitted its explanation but SEBI did not find the same satisfactory and closed the file. It was held that appeal by the appellant was maintainable even though impugned communication was addressed to the Lead Manager asking it not to proceed with the appellant’s public issue. It was further held that SEBI is empowered to ensure adequate disclosure by the issuer before accessing market and, hence the appellant’s contention that SEBI had power only to make observations and such an observation is purely a matter of individual assessment and there can be as many different assessments as there are individuals and hence its above observation had to be discarded, was untenable. It was also held that it is not the prerogative of the issuer company to decide as to whether it should make adequate disclosure of the basis of deciding the issue price. It was held that since SEBI is empowered to ensure adequate disclosure by the issuer before accessing the market, in absence of any charge of mala fides again SEBI, assessment of adequacy or inadequacy of disclosure in offer document made by SEBI would sustain : Eider-e-commerce Limited v/s Securities and Exchange Board of India – 29 SCL 283 (SAT, Mum)

Settlement System for Direct Delivery of Securities to Investors

The sub-group constituted under the chairmanship of Prof. J.R. Verma, Member, SEBI to work out the modalities to introduce the system to ensure that settlement is made directly to the investors decided the following :-

1. In order to ensure that securities are moved quickly to beneficiary accounts of investor, it has been decided that with effect from February 12, 2001 :-

1. Clearing member shall be required to transfer the securities from their respective CM Pool account to the respective beneficiary account of their clients within 6 calendar days after the pay-out day, instead of the existing time limit of 15 days.
   
2. Any balances lying in the Pool account beyond the above period would not be eligible for delivery in the subsequent settlement(s) and would also not be eligible for pledging or stock lending purpose.
   
3. The balances lying in the Pool account beyond the above period would also attract a penalty at the rate of 6 basis point per week on the value of securities lying in the CM Pool account. The penalty so collected shall be earmarked by the depository for defraying the expenses in connection with investors’ education and awareness.
   
4. Initially, the securities, which are lying in these accounts beyond the specified time period, shall be identified based on (First-in First-out) FIFO basis. However with effect from March 5, 2001, securities shall be identified based on the settlement number basis. The clearing corporation / house shall provide the settlement-wise details of securities to the depositories and the depositories shall maintain the settlement-wise records for the purpose

2. SEBI had already decided earlier that the system would be introduced to ensure that settlement is made directly to the beneficiary accounts of investors to the maximum extent possible. It has now been decided that this system shall be introduced by stock exchanges with effect from April 2, 2001, which means that securities in the pay-out shall not be credited to CM Pool Account except in exceptional circumstances. It has also decided that with effect from April 2, 2001, the time limit of 6 calendar days after the pay-out day shall be reduced to 4 calendar days or 2 working days, whichever is later. The penal provisions mentioned at point No.1 above shall be applicable on the balances lying in the pool account after this period.
3. The above decisions are not applicable to the securities lying in CM Pool Account maintained with Clearing Corporation / House for the purpose of vyaj badla and / or ALBM transactions.

(Press Release (Ref. No. PR 20/2001), dated 23-1-2001 issued by SMDRP Department, SEBI )

Disclosure of Interest by Intermediaries giving Public Investment Advice

Pursuant to the decision taken at the meeting of all the stock exchanges, on January 17, 2001 to require disclosure of interest in a particular security or investment proposal by intermediaries regulated by SEBI who give public investment advice, a Group was set up to work out the modalities of such disclosure. The following decisions were taken by the Group :-

1. The disclosure requirements would apply to investment advice :-

1. by a SEBI regulated intermediary or its employee,
2. related to a specific security, whether directly named or indirectly referred to with reasonable degree of identification, and
3. which is given over any media which is publicly accessible

The Group noted that this will also include index futures and other derivative products.

1. The person giving the investment advice shall be required to disclose in the media in which the recommendation is being made whether the person or the employer firm has a long or short position in the security.
   
2. The intermediaries must ensure that whenever any representative of the intermediary is giving such public investment advice, such advice must invariably be accompanied by the disclosure mentioned above.
   
3. Compliance officer of the intermediary shall be responsible for monitoring compliance with the above disclosure requirements.
   
4. Already some of the intermediaries are required by SEBI to have compliance officers. SEBI will now stipulate the appointment of compliance officers by other intermediaries.

To give effect to the above decision SEBI would bring about appropriate changes in various legislation.

(Press Release ( Ref. No. PR 23/2001), dated 1-2-2001 issued by Secondary Market Department, SEBI )

Meeting of all the stock exchanges on January 17, 2001

SEBI had convened a meeting of all the stock exchanges on January 17,2001. Pursuant to the discussions in the meeting, the following decisions have been taken:

1. Client Code : It was decided that all stock exchanges which have not implemented client codes at the broker level as per Circular No. SMDRP / Policy / CIR-33 / 2000 dated July 27, 2000 and Circular No. SMDRP / Policy / CIR-55 / 2000 dated December 6, 2000 would not be allowed to conduct Modified Carry Forward System (MCFS) or Automated Lending and Borrowing Mechanism (ALBM) sessions.
   
2. MCFS and ALBM margins : The Stock Exchanges must determine the ALBM and MCFS margins from the system itself instead of self-certification basis by brokers.
   
3. Voluntary Rolling Settlement and CFRS, ALBRS and CNS : The facilities of CFRS, ALBRS and CNS has been extended to voluntary rolling settlement segment of the exchanges for all scrips which are eligible for these products in the account period settlement.
   
4. Use of Secondary Market for Primary Issues : The guidelines for use of secondary market route for initial public offers have been partially amended. The stock exchanges will have the option to use the Trade Guarantee Fund / Settlement Guarantee Fund provided that this facility is extended to all issues on the exchange, aggregate exposure does not exceed 25 % of the TGF / SGF and minimum cash margin of 25 % of issue price is collected.
   
5. Margin on all trades : Auditor’s certificate must be obtained on a quarterly basis from all brokers, certifying that all clients excluding FIs, FIIs, and MFs have maintained a deposit with the broker of 10 % of net open position in cash, bank guarantees, FDRs or approved securities. Brokers must obtain a similar certificate from their sub-brokers.
   
6. Exit Route for members of stock exchanges : Stock exchanges will be allowed to buy back the membership rights of inactive members with the existing legal framework.
   
7. Disclosure in trading system of buy-back offer by companies : Stock exchanges must provide for a separate icon in the order window which would disseminate the buy-back position as of the previous trading day.

(SMDRP / Policy / CIR - 6 / 2001, dated 1-2-2001, issued by Secondary Market Department, SEBI )

Distribution of Share Holding

To bring about created transparency in respect of disclosure of shareholding pattern of companies, it has been decided that the listed companies shall be required to disclose the shareholding pattern on a quarterly basis within 15 days of end of the quarter in the prescribed format.

(SMDRP / Policy / CIR – 7 / 2001, dated 1-2-2001, issued by Secondary Market Department, SEBI )

Composition of Deposit with Subsidiary

As per circular No. SMD-II / ALLSE / CIR-02 / 2000 dated January 10, 2000, the separate deposit required to be maintained by the sub-broker of the subsidiary / company was required to be 25% in the form of cash and the balance 75% in irrevocable guarantees. SEBI has now decided that the non-cash component of the deposit to be maintained by the sub-broker with the subsidiary / company could also be in the form of FDR of the bank. These FDRs would be discharged in favour of the subsidiary / company and the subsidiary / company would be given a complete unencumbered and unconditional lien on these FDRs.

(SMDRP / Policy / CIR-8 / 2001, dated 7-2-2001, issued by Secondary Market Department, SEBI )

Substantial Acquisition of Shares and Takeovers Regulations

It was held that the provisions of regulation 3(4) would apply where substantial requirements of preferential allotment of shares, such as passing of requisite resolution by company’s general body, firm commitment by acquirer to buy shares, requisite approval from FIPB, etc. were effected before publication of 1997 Regulations but actual issue of share was after publication of the Regulations. It was further held that where application for condonation of delay in complying with provision of regulation 3(4) was filed along with application for exemption from compliance with requirement of regulation 11, grant of exemption would not amount to condonation of delay so as to avoid consequence of earlier act on non-compliance with regulation 3(4). It was also held that to fall under exemption provided in regulation 3(1)(c), two conditions, viz. sending relevant resolution to concerned stock exchanges and disclosure of identity of class of allottees and names, etc., who would be holding 5 per cent or more of post-issue capital and certain other information in notice of general meeting called for purpose of preferential allotment, must be fulfilled. It was held that where company informed the stock exchange, Registrar of Companies, etc, about issue by way of preferential issue and in fact SEBI was also aware of same, delay in submitting report to SEBI under regulation 3(4) being unintentional, penalty would be unwarranted. It was also held that section 15A did not require pre-existence of guilty mind to impose penalty. It was held that decision as to imposition of penalty for failure to perform statutory obligation is a matter of discretion left to the Adjudicating Officer but that discretion has to be exercised judicially and on a consideration of all relevant facts and circumstances : Cabot International Capital Corporation v/s Adjudicating Officer, SEBI – 29 SCL 399 (SAT, Mumbai)

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Chartered Accountants Act

Professional Misconduct – Disclosure of Confidential Information

The complainant-company made a complaint against the respondent alleging, inter alia that by writing a letter to the shareholders for sale of their shares in the company, the respondent had acted dishonestly in disclosing information which came within his knowledge because of professional engagement. On the basis of allegations made by the complainant-company, the Disciplinary Committee of Institute of Chartered Accountants of India (ICAI) came to conclusion that respondent was guilty of having violated provisions of clause 8, Part I of the Second Schedule for having failed to obtain sufficient information to warrant expression of his opinion about worth of the company’s assets and was also guilty of other misconduct within meaning of section 22. The Council, after considering representations made by the respondent, recommended removal of his name for 15 days from the Register of Members. It was held that disclosure of information which would not have otherwise come within his knowledge but for his professional appointment, without consent of his client, was an act of grave professional misconduct. However, it was also held that considering the background of the case, proposed punishment would be slightly disproportionate and reprimand to respondent would meet ends of justice : Council of Institute of Chartered Accountants of India v/s B. Ram Goel - 29 SCL 257 (Del)

Professional Misconduct - Negligence

On basis of the report of the Disciplinary Committee and after taking into consideration representations made, the respondent was held guilty of gross negligence for having signed and certified a statement of export of leather goods including those of other manufacturers, without verifying facts from relevant books / documents of the company concerned. On facts, it was held that the respondent was rightly found to be guilty of gross negligence, and recommendation of reprimand was reasonable and had to be accepted : Institute of Chartered Accountants of India v/s S.K.Jain – 29 SCL 265 (Del)

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Foreign Exchange (Reserve Bank of India)

Foreign Venture Capital Funds

In exercise of the powers conferred by clause (b) of sub-section (3) of section 6 and section 47 of the Foreign Exchange Management Act, 1999 and in partial modification of its notification No. FEMA 20/2000-RB, dated 3^rd May 2000, the Reserve Bank of India makes the following regulations to amend the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 :-

1. In regulation 2,

(i)after clause (iii), the following clause shall be inserted, namely :-

(iiia)"foreign venture capital investors" means an investor incorporated and established outside India which proposes to make investments in venture capital fund(s) or venture capital undertaking(s) in India and is registered with the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000;

(ii) after clause (v), the following clause shall be inserted, namely :-

(va) "Indian venture capital undertaking" means a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI;

(iii) after clause (xi), the following clause shall be inserted, namely :-

(ixa) "Venture capital fund" means a fund established in the form of a trust, a company including a body corporate and registered under the securities and exchange board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capital raised in manner specified under the said regulations and which invests in venture capital undertakings in accordance with the said regulations;

2. In regulation 5, after sub-regulation (4) the following sub-regulation shall be added :-

"(5) Foreign venture capital investor registered with Securities and Exchange Board of India may make investment in a venture capital fund or an Indian venture capital undertaking, in the manner and subject to the terms and conditions specified in schedule 6"

3. Addition of new schedule

In the Principal Regulations, after schedule 5, schedule 6 shall be added, giving details on the following :-

Investment by foreign venture capital investor

1. A registered foreign venture capital investor (FVCI) may, through the Securities and Exchange Board of India, apply to the Reserve Bank for permission to invest in Indian Venture Capital Undertaking (IVCU) or in a VCF or in a scheme floated by such VCFs. Permission may be granted by the Reserve Bank subject to such terms and conditions as may be considered necessary.
   
2. The registered FVCI permitted by Reserve Bank under sub-paragraph (1) may purchase equity / equity linked instruments / debt / debt instruments, debentures of a IVCU or of a VCF through initial public offer or private placement or in units of schemes/funds set up by a VCF.
   
3. The amount of consideration for investment in VCFs / IVCUs shall be paid out of inward remittance from abroad through normal banking channels or out of funds held in an account maintained with the designated branch of an authorized dealer in India in accordance with para 2.

Maintenance of account by the registered FVCI

The Reserve Bank may, on application permit a FVCI which has received ‘in principle’ registration from the Securities and Exchange Board of India to open a foreign currency account and / or a rupee account with a designated branch of an authorized dealer with the following permissible transactions :

1. Crediting Inward remittance received through normal banking channels or the sale proceeds (net of taxes) of investments.
   
2. Making investment in accordance with the provisions of paragraph 1 above.
   
3. Transferring funds from the foreign currency or rupee account subject to payment of applicable taxes.
   
4. Remitting funds from the foreign currency or rupee account subject to payment of applicable taxes.
   
5. Meeting local expenses the eligible cover.

Forward Cover

Authorized dealers may offer forward cover to FVCIs to extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments will be deducted from the eligible cover.

Valuation of Investments

The FVCI may acquire by purchase or otherwise or sell shares / convertible debentures / units or any other investment held by it in the IVCUs or VCFs or schemes / funds set up by the VCFs at a price that is mutually acceptable to the buyer and the seller / issuer. The FVCI may also receive the proceeds arising of the liquidation of VCFs or schemes/funds set up by the VCFs.

Adherence to SEBI guidelines

FVCIs shall abide by the relevant regulations/guidelines issued by SEBI.

(FEMA 32/2000-RB dated 26-12-2000 issued by the Exchange Control Department, RBI)

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Stamp Duty

STAMP DUTY ON TRANSFER OF SHARES IN A SOCIETY (S.C.)

In the case of Hanuman Vitamin Foods Pvt. Ltd. & Ors. v. The State of Maharashtra & Anr. in Civil Appeal No.3707 of 1990 – the Supreme Court dismissed the appeal filed by a member of Co-Op. Housing Society against the decision of the Bombay High Court and held that the transfer of shares in a Co-Operative Society linked to occupancy rights is subject to levy of stamp duty on the basis that it is a conveyance. The Supreme Court relied on its earlier decision in the case of Veena Hasmukh Jain and Another v. State of Maharashtra and Ors. (JT 1999 (1 ) SC 186 – (1999) 5 Sec. 725). You may click here to get full text of this judgement.

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Consumer Protection Act

Appeal

The appellant advocate was found guilty of professional negligence by the District Forum in conduct of litigation of respondent-complainant and ordered to pay compensation and cost to him. The appellant had, in a written statement before the District Forum claimed that the complainant did not wish to pursue contempt proceedings and had also agreed to abide by directions of High Court in subject litigation. It was held that in view of the fact that respondent had not denied or converted said claim of appellant nor had District Forum considered it, complainant-respondent had failed to establish his case of professional misconduct and negligence against appellant and, therefore, finding of District Forum was unsustainable : R.A. Thorat v/s Govindan Gopinathan – 29 SCL 315 (MSCDRC – Mum)

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Monopolies and Restrictive Trade Practices Act

Principles of Natural Justice

It has been held that where there is no categorical finding that a trade practice alleged to have been carried on had resulted in preventing, distorting or restricting competition amongst dealers and might have effect of imposing unjustified costs or restrictions on consumers, cease and desist order against such practice would be unsustainable. It was further held that show-cause notice, which is issued, either itself must provide, or an accompanying or subsequent document, must indicate the person to whom notice is served and the case which is required to be met. Certain complaints by erstwhile stockists of the appellant were received by the commission. These stockists used to sell detergents, soaps, chemicals, etc manufactured by the appellant and their grievance had arisen by reason of their agreements having been terminated by the appellant. A preliminary inquiry was conducted by the Director General of Investigation & Registration whereupon a Restrictive Trade Practices Inquiry Notice was issued to the appellant. This notice was issued by the commission acting suo motu. The said notice did not indicate that any document or complaint or report was furnished to the appellant along with the said notice. In reply to the show-cause notice, the appellant had stated that there had been a denial of principles of natural justice because all information and material which was available with the commission on the basis of which the notice had been issued had not been furnished to the appellant. However, appellant was held to be indulging in a restrictive trade practice. A cease and desist order was passed against it and it was directed to restore stockistship of certain dealers. It was held that since name of stockists who had complained against the appellant was not mentioned in the notice issued by the commission to the appellant, on this ground alone, no order could be passed against the appellant in relation to termination of its agreement with such stockists : Hindustan Lever Limited v/s Director General (Investigation & Registration ) – 29 SCL 270 (SC)

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Negotiable Instrument Act

Dishonour of Cheque

The appellant-complainant issued statutory notice for dishonour of cheque. The respondent replied that only an empty envelope was received. The reply was received on the date on which time limit to file complaint was to expire. The appellant-complainant again presented cheque and on dishonour issued fresh notice and filed complaint within time limit. The receipt of fresh notice was not denied by the respondent. It was held that the respondent-accused could be said to have received notice when he received fresh notice and as such complaint was within time limit : Dalmia Cement (Bharat) Limited v/s Galaxy Traders & Agencies Limited 29 SCL 333 (SC).

Other Laws

Sales Tax

It was held that where the sales tax law provides for recovery of sales tax arrears, penalty and other amount in the same manner as of land revenue, State acquires precedence over secured creditors for recovery of such arrears / penalty of sales tax. - Dena Bank v. Bhikhabhai Prabhudas Parekh (247 ITR 165) (SC)

CBEC Circulars – Binding Nature

The Supreme Court held that circulars issued by the Central Board of Excise and Custom in exercise of its powers under section 37B of the Central Excise Act, 1944 are binding on the department and that the department is precluded from challenging the correctness of the said circulars even on the ground that the same is being inconsistent with the statutory provision. - Paper Products Ltd. v. CIT (247 ITR 128) (SC)