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1^st July, 2001

Dear User, 

We are once again with you with our monthly Newsletter.  As usual, in this newsletter, we have incorporated latest judgements, circulars etc. received by us in the previous month.

At this site we have added another feature i.e."INVEST ONLINE"  from where you can download various application forms for mutual funds and Government of India Bonds (RBI). Click here for "INVEST ONLINE"

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

Income Tax Law
Corporate Laws
Foreign Exchange (Reserve Bank of India)
Securities and Exchange Board of India
Other Laws
Calendar for the Month (important dates to remember)

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Income Tax

Cost Inflation Index for Financial Year 2001-2002 has been notified at 426.

Guidelines for Taxation of Perquisites

The Finance Ministry has come out with draft guidelines for taxation of perquisites in the hands of salary earners. The value of free housing accommodation will be taken to be 10% of salary. Rent free accommodation in remote areas will be tax free. Remote area has been defined to be a place with population between 20,000 and 1,00,000/- with the nearest habitation being 40 kms away. Rent free accommodation provided to employee in mines, petroleum and other exploration field would be exempt. The value of rent free accommodation for govt. employees will also be taken to be 10% of salary. Accommodation provided in 5 star hotels would be subject to tax @2% per month. In case of car provided by employer to employee a sum of Rs.1200 per month will be treated as taxable perquisites in respect of cars below 1800 cc and Rs.1600 per month in case of cars above 1800 cc. If the car is owned by the employee but expenses are made by employer, the taxable value will be Rs. 400 and Rs.600 per month, respectively. Concessional loans upto Rs.20,000/- will be tax exempt. If the loan is for professional purposes, or for housing, the loan will be taxable @ 6%. If it is a car/scooter loan, it will be taxable @ 12% and in respect of other loans at @ 15%. Fees for education of children of teachers will be tax exempt upto Rs.500/-. Free meals upto Rs.50/- would be tax exempt, However meal vouchers would be subject to tax.

Condonation of delay in filing refund claim and claim of carry forward of losses

1. The Board’s order under section 119 (2) (b), dated 12^th October, 1993 and Circular No. 670 dated 26^th October, 1993 [ F.No. 225 / 208 / 93 / IT (A - II ) ] lay down the procedure for condonation of delay in belated claims of refunds. These provide that the CIT has power to condone delay in case of genuine hardship of refund claims up to Rs.10,000 and CCIT up to Rs.1,00,000. The power of condonation in cases of refund claims of more than Rs. 1,00,000 as well as power of rejection in all cases lie with the Board.

2. Under the existing circular, apart from the conditions prescribed under earlier orders dated 5-2-1988 and 17-8-1988 issued from [ F.No. 225 / 201 / 87 / IT (A-II) ], the following conditions are required to be fulfilled before the condonation of delay in filing belated refund claims can be considered.

1. the refund arises as a result of excess tax deducted at source, collected at source and payments of advance tax under the provisions of Chapters XVII-B, XVII-BB and XVII-C, respectively and the amount of refund does not exceed Rs.1 lakh for any assessment year

2. the returned income is not a loss where the assessee claims the benefit of carry forward of the loss

3. the refund claimed is not supplementary in nature, i.e., claims for additional amount of refund is made after the completion of the original assessment for the same assessment year; and

4. the income of the assessee is not assessable in the hands of any other person under any of the provisions of the Act.

3. The Karnataka High Court in the case of Associated Electro Ceramics v/s Chairman, Central Board of Directs Taxes [1993] 201 ITR 501 held that the Board has power to condone the delay in cases having claim of carry forward of losses. The department did not file special leave petition against this order. Subsequently the matter was taken up with the Ministry of Law who also agreed with the view that the Board has power to condone the delay in filing the return under section 119(2) (b) of the Income-tax Act, 1961, in a case having claim of carry forward of losses.

4. Hence, conditions at Serial No. (ii) of order under section 119(2) (b) dated 12^th October, 1993 stipulating that the delay cannot be condoned in cases where returned income is a loss and assessee claims benefit of carry forward of the loss, is not legally tenable.

5. In view of the the legal position, the Board hereby clarifies that delay in making refund claim as well as claim of carry forward of losses, both, can be condoned in cases where returned income is a loss, provided other conditions are satisfied. The monetary limits prescribed for condonation of delay in making refund claims, by different IT authorities, will apply to condonation of delay in cases of claim of carry forward of losses as well.

(Vide Circular No. 8/ 2001, dated 16-5-2001)

Interest Rates on Deposits – Capital Gains Accounts Scheme, 1988

It has been decided to reduce the minimum maturity period for deposits under Account "B" to 7 days from the present 15 days at the discretion of individual banks. But, this facility will be available only in respect of single term deposit of Rs.15 lakhs and above where banks have the freedom to offer differential rate according to size of deposits. Accordingly, Notification DBOD No. Dir. BC. 108/13.03.00/2000-01, dated April 19, 2001 is given below :-

The Reserve Bank of India, has specified that the interest paid by the banks on deposits in Account "A" and "B" under the Capital Gains Accounts Scheme, 1988 shall be as hereunder :

Category of Account Per cent per annum

(i) Account "A" 4.0

(ii) Account "B"

1. Below Rs.15 lakhs, 15 days and above Free

2. Rs.15 lakhs and above, 7 days and above Free

(Vide DBOD No. DIR BC 109 / 13.03.00 / 2000-01, dated 19-4-2001, issued by the RBI )

Revised Rates of Interest under National Savings Certificates

The year for which interest Amount of interest (Rs.) accruing on accrues certificate of Rs.100 denomination

( Vide Notification No. GSR 156 (E) dated 1-3-2001, issued by the Department of Economic Affairs )

Cash Credits

It was held that when cash credit is found in assessee-firm’s books and assessee has established that amount has been invested by a particular person, responsibility of firm is over and there is no requirement on part of assessee-firm to further show whether amount invested has been properly taxed in creditor’s hands :

CIT v/s Metachem Industries – 116 Taxman 572 (MP)

Additional tax u/s 143 (1A) prior to1-6-1999

It was held that where as a result of prima facie adjustments assessee’s returned net loss was reduced, additional tax under section 143 (1A) should be levied :

ACIT v/s J K Synthetics 116 Taxman 598 (SC)

Reference to High Court - Question of Law

It was held that where High Court allowed application under Section 256 (2) for reference of a question of law for a previous year but declined to entertain an appeal on identical issue for next year, order of High Court should be set aside :

JCIT v/s Reliable Carriers (Pvt) Ltd – 116 Taxman 603 (SC)

Exemption u/s Section 5(1) (iii) of the Wealth-tax Act, 1957

It was held that question as to whether assessee, an ex-ruler, was, entitled to exemption under section 5(1) (iii) in its entirety for part of official residence which was let out, was a question of law :

CWT v/s Lokendra Singh – 116 Taxman 605 (SC)

Contingent Liability

Show cause notices for excise duty were served on the assessee. The assessee did not admit any liability and showed cause accordingly. Cause shown by the assessee was accepted by the excise authority and, accordingly, proceedings were dropped. It was held that liability claimed by assessee as a liability on account of excise duty as merely a contingent liability and would not constitute expenditure for purposes of Income Tax :

Indian Smelting & Refining Co. Ltd v/s CIT – 116 Taxman 606 (SC)

Deductions from Income from other Sources

The assessee had a term deposit with a bank and had also taken a loan on security of the said fixed deposit. It was held that the assessee was to be assessed on gross amount of interest received by him on his fixed deposit, not on interest received as reduced by the amount of interest paid on loan taken on security of such deposit :

CIT v/s Dr.V P Gopinathan – 116 Taxman 489 (SC)

Income from other Sources

It was held that following the decision in CIT v/s Trustees of H.E.H. The Nizam’s Miscellaneous Trust [1986] 160 ITR 253 (AP), the High Court was right in dismissing the revenue’s application under section 256(2) and holding that 7.5 % of net receipts of income of trust after deducting from its total income, remuneration paid to trustees, constituted reasonable expenditure for administering trust under sections 57(i) and 19 (i) :

CIT v/s Trustees of H.E.H. Nizam’s Miscellaneous Trust – 116 Taxman 10 (SC)

Assessment u/s Section 143 of the Income-tax Act, 1961

It was held that assessment order must be made after assessee has been given a reasonable opportunity of setting out his case :

Tin Box Co v/s CIT – 116 Taxman 491 (SC)

Deduction u/s 80 HH

The assessee was engaged in the business of mining of limestones and marble blocks and thereafter cutting and sizing same before being sold. It was held that activities carried on by the assessee did not amount to manufacture or production so as to entitle it to benefit of section 80 HH :

Lucky Mineral (P.) Ltd v/s CIT 116 Taxman 1 (SC)

Deductions u/s 80 HHC

It was held that where assessee is a 100 % exporter, interest income can only fall under ‘business income’ and, hence, entire profits including interest income will be entitled to deduction under section 80 HHC :

CIT v/s Punit Commercial Ltd – 116 Taxman 191 ( Bom)

Section 80 HH read with Section 80-I

It was held that assessee engaged in business of rearing and development of chicks into broilers, could not be said to be "manufacturing" a product :

Indian Poultry v/s CIT – 116 Taxman 489 (SC)

Deduction u/s 80-I

The Tribunal upheld the order of the Commissioner (Appeals) in directing the Assessing Officer to include interest income in gross total income while computing relief under section 80- I. It was held that a question of law arose from the Tribunal’s order : :

CIT v/s Jaiswal Chemicals (P.) Ltd – 116 Taxman 328 (SC)

It was held that question as to whether interest income is includible in gross total income while computing deduction under section 80-I is a question of law :

CIT v/s Abhijit Iron Processors (Pvt) Ltd – 116 Taxman 4 (SC)

Export Markets Development Allowance u/s 35B

It was held that a question of law arose out of the Tribunal’s order that assessee was entitled to weighted deduction under section 35 B on expenses on sea freight and insurance charges incurred by it, whether in India or outside :

CIT v/s Roadmaster Industries of India – 116 Taxman 496 (SC)

CBDT Instructions to sub-ordinate authorities

It was held that pursuant to CBDT’s Instruction No.1962 dated 12-2-1999, instant appeals and special leave petitions relating to block assessments to be made in search cases and jurisdiction of Settlement Commission in relation thereto, should be withdrawn :

CIT v/s Ashok G Karia (HUF) – 116 Taxman 495 (SC)

Investment Deposit Account u/s 32 AB

The Tribunal upheld the order of the Commissioner (Appeals) in directing the Assessing Officer to treat interest income as eligible profits of business while computing deduction under section 32AB. It was held that a question of law arose from the Tribunal’s order. It was also held that where the Tribunal upheld the order of Commissioner (Appeals) in granting relief to the assessee under section 32 AB on interest component of income earned out of monies invested in short-term deposits, is a question of law would arise :

CIT v/s Jaiswal Chemicals (P.) Ltd – 116 Taxman 328 (SC)

Valuation of Shares

It was held that for purposes of computation of intrinsic value of unquoted shares under rule 1D of Wealth Tax Rules, amount of advance tax paid by the company and shown on asset side of balance sheet has to be deducted from tax payable in determining whether provision for tax was in excess over tax payable :

CWT v/s T. S. Santhanam (HUF) – 116 Taxman 363 (SC)

Rectification of Mistake

It was held that a question on which there is difference among two judges of the High Court cannot be rectified by invoking provisions of section 154 :

CIT v/s South India Bank Ltd – 116 Taxman 364 (SC)

Business Expenditure

It was held that Tribunal’s order in which it upheld dis-allowance of assessee’s claim of sum on account of demurrage and wharfage recovered from assessee by railways merely because a claim against contractor was pending for arbitration, gave rise to question of law :

Punjab Small Industries Corporation Ltd v/s CIT – 116 Taxman 366 (SC)

It was held that in view of decision of the Supreme Court in CIT v/s Venugopal Inani [1999] 239 ITR 514 and ITO v/s Smt. N.K. Sarada Thampatty [1991] 187 ITR 696, interest payments made to co-parceners on amounts lent by them to HUF are not deductible :

CIT v/s Gopal Bansilal Inani – 116 Taxman 7 (SC)

The assessee-company while participating in share capital of a foreign company, had to sell its shares at a loss since the foreign company also incurred huge losses. It also had to pay certain penalties to RBI for not complying with terms of repaying loan taken from a bank abroad. It was held that assessee-company could not have been said to have carried on any business abroad and as such expenditure incurred was not allowable as business expenditure or loss :

Parry Confectionery Ltd v/s CIT – 116 Taxman 163 (Mad)

Business Expenditure u/s Section 5(j) of the Agricultural Income Tax Act,1950

It was held that, in view of decision of the Supreme Court in CAIT v/s Plantation Corporation of Kerala Ltd. (2001) 1 SCC 207, order of High Court that expenditure incurred by way of court fee and advocate fee in filing a suit against Government was an expenditure incurred wholly and exclusively for purpose of deriving agricultural income and, therefore, was an allowable expenditure, was to be set aside and matter should be remanded back for fresh disposal:

CAIT v/s Emerald Valley Estates – 116 Taxman 602 (SC)

Valuation of Assets

It was held that Tribunal’s order of holding that market value of assessee’s right in property could not be assessed by WTO on the basis of Valuation Officer’s report gave arise to question of law :

CWT v/s Hari Shankar & Bros – 116 Taxman 367 (SC)

Depreciation

The assessee claimed depreciation in respect of mills it purchased. It was held that since facts of the case did not indicate that the assessee had acquired dominion over mills, assessee was not entitled to depreciation in respect of the mills

Tamil Nadu Civil Supplies Corporation Ltd v/s CIT – 116 Taxman 369 (SC)

It was held that retrospective amendment to section 35(2) (iv) by the Finance (No.2) Act, 1980, providing that where deduction is allowed for any previous year under section 35, no depreciation shall be allowed under section 32 in respect of same asset for any previous year, is valid. It was therefore held that the Tribunal was not justified in allowing depreciation to the assessee in respect of assets even though deduction under section 35 had been given to the assessee in respect of the same assets during the previous year :

CIT v/s Hico Products ( Pvt ) Ltd – 116 Taxman 373 (SC)

Depreciation & Extra Shift Allowance

It was held that Tribunal’s order that computer was eligible for extra shift allowance despite fact that Appendix – I, III (O) (3) of Income-tax Rules, 1962, clearly prohibit granting extra shift allowance on it, gave rise to any question of law. It was also held that question of law would arise out of the Tribunal order that assessee was entitled to investment allowance on data processing machine / computer even though assessee was not engaged in any of activities mentioned in Section 32A(2) but only acting as intending agent for foreign companies. :

CIT v/s E Merck Services & Agencies – 116 Taxman 371 (SC)

Exemptions u/s 10(29) for Marketing Authorities

It was held that in view of decision of the Supreme Court in Orissa State Warehousing Corporation v/s CIT [1999] 237 ITR 589 / 103 Taxman 623, there is a conflict of opinion in decisions of Supreme Court, particularly with regard to interest income earned by State Warehousing Corporations, and therefore, matter had to be placed before a larger Bench of Supreme Court :

CIT v/s Gujarat State Warehousing Corporation Limited -116 Taxman 5 (SC)

Rectification of Mistakes

It was held that a question of law arose out of the Tribunal’s order of allowing investment allowance under section 32A to the assessee, engaged in contract work, on excavator and where the Assessing Officer could not verify which machinery was used for contract work in proceedings under section 154 :

CIT v/s Bhooratnam & Co – 116 Taxman 8 (SC)

Penalty for late filing of return

It was held that a question of law could arise out of the Tribunal’s order that lack of knowledge of provisions of law constituted a reasonable cause for filing return beyond time-limit and it cancelled penalty under section 18(1) (a) imposed on assessee for not filing return within time :

CWT v/s Lloyd Insulation (I) (P) Ltd – 116 Taxman 12 (SC)

Industrial Company

It was held that the assessee, which was carrying on business of providing technical and industrial consultancy on basis of computers and also undertaking electronic data processing jobs, was an ‘industrial company’ within meaning of section 2(7) (c). It was also held that on the basis of facts, under head ‘Industrial company’, the assessee was entitled to investment allowance in respect of generator installed by it :

CIT v/s Peerless Consultancy & Service (P) Ltd

Collection and Recovery of Tax

The sale of property in question was held on 11-1-1980 but the TRO was injuncted by writ of civil court from confirming sale. Interim order issued by the civil court ceased to operate on 12-1-1998. In the meanwhile, demand against assessee stood reduced to nil and ITO as also TRO had been informed about that through letter dated 22-11-1996. However, order of confirmation of sale was passed on 25-3-1998 by TRO ignoring this important event. It was held that between date of sale and actual passing of order confirming sale, if an event happens or a fact comes to the notice of the TRO which goes to the root of the matter, TRO may refuse to pass order confirming sale. It was further held that in view of facts within knowledge of department, TRO was unjustified in confirming sale on 25-3-1998 and he was obliged to annul the same. It was further held that further service of notice of demand on assessee under section 156 is mandatory before taking steps for recovery under Second Schedule and a sale held in recovery proceedings initiated without serving notice of demand shall be invalid. It was also held that since in the instant case, finding of fact recorded by Tribunal was that notice of demand was not served on assessee, assessee could neither have been deemed to be in default nor any proceedings for recovery of tax could have been initiated against him :

Mohan Wahi v/s CIT – 116 Taxman 63 (SC)

Salaries

It was held that a question of law arose arose out of Tribunal’s order that further deduction @ 40 per cent was admissible from the incentive bonus received by Development Officers of LIC when same was assessable under the head ‘Salaries’, in addition to specific deduction allowable under section 16 :

CIT v/s Anil Hazarika – 116 Taxman 241 (SC)

Interest during project construction

The assessee borrowed certain amounts from IDBI and deposited the same in banks till it was used either in purchase of plant and machinery or in installing them or in running establishment. The assessee’s case was that interest earned on such deposits did not constitute assessee’s income but was going to reduce overall cost of project. The assessing officer treated such interest as income of assessee from other sources. It was held that interest income was assessable to tax in assessee’s hands :

CIT v/s Autokast Ltd – 116 Taxman 244 (SC)

Capital Gains

It was held that capital gain that arose to assessee on sale of immovable property was a long-term capital gain and would depend on a correct interpretation of various clauses in purchase agreement of particular property entered into by assessee with vendors, and, therefore, it would be a question of law :

CIT v/s Vimal Lalchand Mutha – 116 Taxman 242 (SC)

Transfer for Capital Gains

It was held that question of law arose out of Tribunal’s order that by passing book entries showing sale of "Malba" to "M", ownership of godowns could in law be claimed to have been transferred to her :

CIT v/s Hiralal Mittal – 116 Taxman 247 (SC)

Adventure in the nature of trade

The assessee entered into an agreement with a builder to get a multi-storeyed residential complex constructed on plot of land where he resided in a single storeyed house. The Tribunal held that the transaction did not constitute an adventure in nature of trade and observed that entire exercise of assessee was for realization of a capital asset and intention and conduct of assessee left no room for doubt that transaction resulted only in capital gain. It was held that as no question of law arose and above findings of fact by Tribunal were not challenged, revenue’s petition deserved to be dismissed :

CIT v/s B K Bhaumik – 116 Taxman 189 (Del)

Deemed Gift

It was held that finding as to inadequacy of consideration is a sine qua non for application of provisions of deemed gift. It was further held that where transaction involves transfer of certain property in lieu of certain other property received, then process of evaluation of two items of property should be similar and on such evaluation if it is found that there is appreciable difference between value of two properties, then transaction will be taken as a ‘deemed gift’ to extent as provided in the relevant section. The assessee-company transferred jewellery to its twelve wholly-owned subsidiary companies and in return those companies transferred to the assessee fully paid-up equity shares of Rs.5,69,400/-. Jewellery was only the asset in those companies and shares transferred to the assessee were the entire shareholding of the twelve companies. It was held that whatever was the value of jewellery was in fact the value of shares transferred in consideration. Therefore, it was held that since value of jewellery was in fact value of shares transferred in consideration, there was no gift involved in the transaction :

Reva Investment (Pvt) Ltd v/s CGT – 116 Taxman 498 (SC)

Valuation of Gifts

It was held that since High Court had proceeded upon a factual basis that was not indicated anywhere in the orders of the Tribunal to hold that market value of unquoted equity shares had to be determined as per rule 1D, matter should be restored to High Court to be heard and disposed of afresh :

Madan Lal Patodia v/s CIT – 116 Taxman 197 (SC)

Gift

It was held that transfer of land by assessee to his three minor daughters to meet obligation under law, could not be regarded as a gift within the meaning of the Gift Tax Act :

CGT v/s B S Apparao – 116 Taxman 202 (SC)

Charitable or Religious Trusts

It was held that the assessee-trust was entitled to exemption under section 11 at 25 % of its total income derived, not on amount remaining after expending money on charitable purposes out of its total income :

CIT v/s Programme for Community Organisation – 116 Taxman 608 (SC)

It was held that where the Tribunal without examining whether assessee satisfied or not requirements of section 11(4A), allowed assessee’s claim of exemption under section 11, matter should be restored to Tribunal for fresh consideration :

CIT v/s Dharmodayam Co – 116 Taxman 204 (SC)

Tax Liability of Predecessor Company

Tax Liability relating to a predecessor Company, whose assets and liabilities were taken over by the assessee would from part of purchase consideration and will be treated as capital expenditure in the hands of the assessee

CIT v Hyderabad Race Club 116 Taxman 650 AP

Foreign Technician

Applicant was a US resident holding masters degree with 25 years experience in IT. She was an employee of SAP Singapore. She was deputed for a period of 2 years to SAP India as president to co-ordinate customisation of SAP software & training personnel on high-end technology.

The Authority for Advance Rulings gave a finding that the applicant will qualify as Technician for the purpose of Sec. 10(5B) and taxes paid by her employer on her behalf is exempt from tax for a period of 48 months from the date of her arrival in India.

[ Rut Kanoli v CIT AAR New Delhi - 116 Taxmann 711 ]

Interest on Compensation for acquisition of Land

The compensation awarded to the assessee for acquisition of land was enhanced by the High Court and the State Govt. had filed appeal against the said enhancement.

It was held that assessee was liable to tax on interest accrued spread over the period for which it accrued

[ CIT v Smt. M. Sarojini Dev 116 Taxman 613 Ap ]

Chapter XX-C

Assessee a retired Govt Servant from Delhi wanted to settle in Bangalore and entered into an agreement to buy property there. His Delhi property which he tried to dispose of was purchased by Govt. The purchase order was set aside as :-

1. property is being sold under special circumstances
2. While considering sale instances weightage was not given to factors such as availability of parking space and servant's Quarters.

Appropriate Authority v. Ms. Shahi Sehgal 116  Taxman 636 SC

Property was under litigation initiated by the step brother of tranferor challenging title. The fact was ignored by Govt  while passing order u/s. 269UD. It was held that the order is vitiated.

Appropriate Authority v. R.C. Chawla 116 Taxman 640 SC

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Corporate Laws

Ceiling on rate of interest on Fixed Deposits

The Reserve Bank of India has amended the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 with immediate effect as follows. In paragraph 4, sub-paragraph (7) shall be substituted by the following :-

"(7) On and from April 1, 2001 no non-banking financial company shall invite or accept or renew public deposit at a rate of interest exceeding 14 %. Interest may be paid or compounded at rest which shall not be shorter than monthly rests."

(Vide Notification No. DNBS 146 / CGM (RS)-2000 dated 31-3-2001, issued by the Department of Non-Banking Supervision, RBI)

The Reserve Bank of India has also amended the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 with immediate effect as follows. In paragraph 9A, in sub-paragraph (a), on and from April 1, 2001, the words "15 %" shall be substituted by the words "14 %".

(Vide Notification No. DNBS 147 / CGM (RS)-2000 dated 31-3-2001, issued by the Department of Non-Banking Supervision, RBI)

Companies (Acceptance of Deposits) Amendment Rules, 2001

The Central Government, in consultation with the Reserve Bank of India, has fixed the ceiling of interest on fixed deposits falling under the Companies (Acceptance of Deposits) Rules, 1975 at 14 % from the earlier 15 % to come into effect on the date of their publication in the Official Gazette.

( Vide Notification No. GSR 385 (E) dated 24-5-2001 issued by the Department Of Company Affairs )

Oppression and Mismanagement

A family agreement provided that four sisters, namely, the petitioner and respondent Nos. 2 to 4, would jointly manage the affairs of the company and in case any of them desired to sell her shares, the same would be offered to remaining three in equal proportion. An MOU was entered into among the shareholders incorporating the said terms. Later, company "H" agreed to invest in the equity share capital and was allotted certain shares which were subsequently transferred to "RG". Certain loans given by IFCI as well as promoters were also converted into equity shares. The second and third respondents, desiring to sell their shares, offered the same to the petitioner and fourth respondent but, in absence of positive response, they sold their shares to outsiders. The fourth respondent also did the same thing. The petitioner’s main grievances were that respondent sisters sold their shares to an outsider group in contravention of the MOU, that new Directors were appointed without notice to her, that further shares were issued to new shareholders and that she had been sidelined from management of the company’s affairs. It was held that even though company was a public company with 40 per cent shares held by non-family members, in view of the fact that company was started as a family company and that family members held 60 per cent shares, appropriate relief as in case of a closely-held family company could be granted provided acts of oppression were established. It was also held that private agreement among sisters regarding pre-emption rights, which was not part of articles of company, could not bind the company. It was further held that articles of company contained no provision relating to pre-emption rights and, therefore, it was impermissible to consider sale of shares by respondents without offering the same to the petitioner as an act of oppression. It was further held that an act to be construed as oppressive, has to be either burdensome or wrongful or it should involve an element of lack of probity and fair dealing to a member in matters of his / her proprietary right as a shareholder and, therefore, in the instant case, section 111A being applicable to company, there could be no fetters on the right of a shareholder to transfer his / her shares. It was also held that in view of the fact that financial difficulties faced by company prompted all four sisters to invite financial institutions as well as initially ‘H’ and later ‘R’ to become shareholders for additional funds, respondent sisters’ stand that they were not in a position to induct further funds and to ensure that company’s interests were protected they parted with their shares to DS group, had substance. It was also held that thus neither in law nor in facts or in equity, petitioner had established that by selling their shares in breach of MOU, the respondent sisters had acted in a manner oppressive to petitioner. It was further held that even though board’s decision to allot further shares to DS group on a preferential basis without approval of general body was for a bona fide purpose and in interest of company, non-compliance with statutory provisions by which a shareholder’s right had been affected was an act of oppression, more so when petitioner was a promoter shareholder / director. It was held that since funds brought in, in respect of new shares, had been utilized for benefit of company, instead of canceling allotment, petitioner should be offered such number of shares that would bring her holding to 14.7 per cent. It was also held that petitioner being a promoter / director and only family member who was left out as a shareholder, her interests in management needed to be protected, and, accordingly, as long as she held 14.7 per cent shares, she would continue to be a director not liable to retire by rotation. It was further held that with a view to prevent any allegation of oppression in future, petitioner would have option to part ways with the company by selling her shares to DS group or its nominees at a mutually agreed price :

Mrs. Pushpa Katoch v/s Manu Maharani Hotels Ltd – 31 SCL 97 (CLB-N Delhi)

Amalgamation

It was held that where ratio of exchange of shares between transferor and transferee-company in scheme of amalgamation has been fixed by expert Chartered Accountants upon consideration of various factors and same has been approved by majority of shareholders in meeting, court would decline to disturb it. It was further held that in absence of any challenge from shareholders, who were primarily and exclusively interested, as to question of ratio of exchange of shares, court would decline to interfere on question of ratio of exchange of shares at instance of Regional Director :

Sidharth Construction Co. (P.) Ltd - 31 SCL 150 (All)

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Securities and Exchange Board of India

Practice of granting conditional listing permission

It has been brought to SEBI’s notice that some stock exchanges have been granting conditional listing permission to the companies. Section 73 of the Companies Act, 1956 does not envisage any qualified conditional listing permission. Section 73 of the Companies Act, 1956 envisages a final decision of granting / refusing to grant listing permission. The stock exchanges are, therefore, advised by SEBI to desist from the practice of granting conditional listing to the companies.

( Vide SMDRP / POLICY / CIR – 29 / 01, dated 22-5-2001 issued by Secondary Market Department, SEBI )

Renewal of recognition of Ludhiana Stock Exchange Association Ltd, Ludhiana

Vide Notification No. SO 372 ( E ) dated 28-4-2001, issued by SEBI the recognition of Ludhiana Stock Exchange Association Ltd, Ludhiana has been renewed for a period of I year commencing on 28 April 2001 and ending on 27 April 2002.

Amendment to Listing Agreement Non-promoter holding on a continuous basis and minimum number of shareholders

The matter of requirement of quantitative continuous listing conditions to be complied by the listed companies to maintain a minimum floating stock post listing was discussed in the meeting of the Secondary Market Advisory Committee. The recommendations of the Committee were considered by the SEBI Board in its meeting held on December 22, 2000. The Board approved the requirements of quantitative continuous listing conditions as a measure of investor protection as it would ensure availability of floating stock on a continuous basis. It was also decided to delete the requirements of minimum number of shareholders in proportion to capital offered.

Accordingly, the stock exchanges are directed to amend their Listing Agreement as under :-

1. The existing clause 40 A shall be substituted by following

"40A. Conditions for continued listing

1. The company agrees that in the event of the application for listing being granted by the Exchange, the company shall maintain on a continuous basis, the minimum level of non-promoter holding at the level of public shareholding as required at the time of listing.

2. Where the non-promoter holding of an existing listed company as on April 1, 2001 is less than the limit of public shareholding as required at the time of initial listing, the company shall within one year raise the level of non-promoter holding to at least 10%. In case the company fails to do so, it shall buy back the public shareholding in the manner provided in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

3. The company agrees that it shall not make preferential allotment or an offer to buy back its securities, if such allotment or offer result in reducing the non-promoter holding below the limit of public shareholding specified under the SEBI (Disclosure and Investor Protection) Guidelines, as applicable at the time of initial listing or the limit specified in sub-clause (ii) for the existing listed company, as the case may be.

4. The conditions stipulated in sub-clauses (i), (ii) and (iii) shall not apply to the companies referred to BIFR.

5. The Company agrees that the following shall also be the condition for continued listing.

When any person acquires or agrees to acquire 5% or more of the voting rights of any securities, the acquirer and the company shall comply with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

When any person acquires or agrees to acquire any securities exceeding 15% of the voting rights in any company or if any person who holds securities which in aggregate carries less than 15% of the voting rights of the company and seeks to acquire the securities exceeding15% of the voting rights, such person shall not acquire any securities exceeding15% of the voting rights of the company without complying with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997."

2. SEBI vide its Circular No. SMD / RCG / JJ / 1819 / 96 dated May 15, 1996 and Circular No. SMDRP / Policy / Cir-30 / 98 dated October 16, 1998 had introduced the requirements of at least 5 public shareholders for every Rs.1 Lakh capital issued. This requirements is being withdrawn. You are advised to modify the listing agreements as above and monitor the level of non-promoter holding on a half yearly basis from the returns submitted by the companies in specified formats.

( Vide SMRDP / Policy / Cir- 28 / 01, dated 2-5-2001, issued by the Secondary Market Department, SEBI )

Section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992

It was held that interest falling due within notified period would be distributed on basis of priority contemplated under section 11 (2) (b) and claim for interest falling due outside notified period can be entertained by Custodian only under section 11 (2) (c). It was further held that secured creditors are entitled to recover amounts due to them (principal and interest) from property secured in their favour without taking recourse to section 11 but if security is not large enough to extinguish their debt they can seek payment of shortfall only under section 11(2) (c) :

Standard Chartered Bank v/s Custodian – 31 SCL 199 (SC)

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Foreign Exchange (Reserve Bank of India)

Payment to a person resident outside India on invocation of guarantee

1. In pursuance of the provisions of section 3 of the Foreign Exchange Management Act, 1999 and in partial modification of its Notification No. FEMA / 16 / RB- 2000 dated 3^rd May, 2000*, (hereinafter referred to as ‘the said Notification’), the Reserve Bank hereby directs that the said Notification shall with immediate effect be amended as under.

2. After paragraph (2) of the said Notification, the following paragraph shall be added, namely :-

"(2A) A person resident in India being the principal debtor, to make payment to a person resident outside India being a guarantor, such payment being by way of reimbursement of the payment made to the resident creditor by the non-resident guarantor under the guarantee furnished by him on behalf of the principal debtor :

Provided that the amount payable by way of reimbursement by the resident principal debtor shall not exceed the rupee equivalent of the amount paid by the non-resident guarantor under the guarantee :

Provided further that where the payment of the amount is made by the guarantor out of funds held in NRNR / NRO / NRSR account/s maintained with an authorized dealer in India, the amount paid by way of reimbursement shall not be remitted outside India or credited to NRE / FCNR account of the non-resident."

( Vide Notification No. FEMA / 29 / RB – 2000 dated 26-9-2000, issued by the Exchange Control Department, RBI )

Deletion of condition of export obligation – Condition of Export obligation exempted from operation

1. A number of items are reserved for exclusive production in the small scale sector. For production of such items in the non-small scale sector units, an industrial license is required to be obtained under the provisions of the Industries (Development and Regulation) Act, 1951. Industrial license in such cases is granted subject to export obligation of 50 per cent of annual production in terms of Notification No. SO 881(E) dated 18^th October, 1997.

2. The list of items reserved for small scale sector is reviewed from time to time. Taking into account various factors, items are considered for de-reservation. After de-reservation, the condition of export obligation becomes redundant and has to be deleted, for which holders of industrial license (IL) / letter of intent (LOI) have to approach Secretariat for Industrial Assistance (SIA).

3. In order to avoid reference by holders of IL / LOI on a case by case basis for an item(s) which has/have been de-reserved by a notification published in the Gazette of India, it has been decided that after issue of this Press Note IL / LOI issued by Secretariat for Industrial Assistance (SIA) in the past which carry the condition of export obligation will be deemed to have been exempted from the operation of this condition for items which stand deserved by an appropriate notification. No separate amendment / endorsement deleting the condition of export obligation in IL / LOI would be necessary. It will be sufficient to attach a copy of this Press Note and the relevant notification on de-reservation of an item for the purpose of obtaining exemption from the condition of "export obligation".

4. It is also open to entrepreneurs to file an industrial entrepreneurs’ memorandum (IEM) in lieu of IL / LOI held by them, if they so desire, and if the IL / LOI has not been granted in relaxation of locational policy or when any variation from the condition and parameters stipulated in the IL / LOI is contemplated.

( Vide Press Note No. 3 (2001 Series), dated 25-4-2001, issued by the Department of Industrial Policy and Promotion )

Overseas business acquisition through ADR / GDR Stock swap put under automatic approval

Guidelines were issued on 27^th December, 1999 by the Government under the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipts Mechanism) notified in November 1993 to liberalize the operational norms including approval mechanism for overseas business acquisition by the Indian software companies through American depository receipts (ADR) / Global depository receipt (GDR) stock swap. These guidelines were amended on 23^rd March, 2000 to expand the scope of companies entitled to such overseas business acquisition through ADR / GDR stock swap to Indian companies engaged in areas / activities of (i) information technology and entertainment software (ii) pharmaceuticals, (iii) biotechnology and (iv) any other sector as notified by the Government from time to time. In terms of these guidelines, overseas business acquisitions through ADR / GDR stock swap by Indian companies engaged in the specified activities have been put under automatic approval subject to the specified parameters including the conditions of previous listing, adherence to foreign direct investment (FDI) policy and the value limit for the transaction not to exceed $100 million or 10 times the export earnings during the preceding financial year. As had been provided in these guidelines, the feasibility of expanding the eligible categories of companies had been reviewed. Pursuant to the announcement made by the Finance Minister in his Budget Speech 2001-2002, the restriction on the eligible categories of companies to specified activities in the knowledge based sector has been removed. Accordingly, all companies which have made an ADR / GDR issue earlier and listed abroad would be entitled to the facility of overseas business acquisition through ADR / GDR stock swap under the automatic route. The companies would be entitled to such business acquisition engaged in the same core activity as defined in the Reserve Bank of India Regulations under the Foreign Exchange Management Act, 1999. Consequently the definition prescribed for specified sectors / areas in Department of Economic Affairs guidelines 27^th December, 1999 and 23^rd March, 2000 would no longer be operative. All other criteria for automatic route and other norms prescribed in the guidelines of 27^th December,1999 (as amended on 23^rd March, 2000) including the mandatory requirement of conforming to the FDI policy, an existing ADR / GDR listing abroad, reporting requirement, etc., would continue to be operative.

The above policy/guidelines issued under the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipts Mechanism) notified in November 1993 will be subject to review as considered necessary by the Government.

( Vide Press Note dated 17-4-2001, issued by the Department of Economic Affairs )

Foreign Contribution

A society registered under section 6 of Foreign Contribution (Regulation) Act, 1976 can receive Foreign Contribution only through a particular branch of a bank indicated by it in Sr. No.5 of FCI Form. If the society deposited the foreign contribution in another bank without intimating the Central Govt., it violates seciton 6(i)(b) and attracts penalty u/s. 23 of the Act.

[State by CBI v. M. Kurien of the Cross  - 4 SCC 29]

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Other Laws

Forgery

Forgery remains null and void for ever. It cannot acquire legal sanctity by any process of sanctification whatsoever including renewal by Statutory Authority.

[New India Assurance Co. V. Kanda 4 SCC 342]

Termination of Employment

A minority institution within the ambit of Article 30 of the Constitution terminated the services of certain employees. Allahabad High Court had hold the termination invalid under UP intermidiate Education Act. On appeal the Supreme Court held that :

"it is difficult for us to hold that an order of termination of an employee of Minority Institution cannot be given to unless approved by the Inspector"

[ St. John Inter College v. Girdhari Singh. (4 SCC 296)

Indian Succession Act

A christian residing in the state of Kerala owning properties therein, if dies after making a will, the legatee thereto need not obtain a probate in terms of section 213 of Indian Succession Act, 1925 before establishing their right while those residing in other parts of the country are required to do so. Held section 213 and 57 not discriminatory against Indian Christian

[ Clarence Pais v. Union of India 4 SCC 325]

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Calendar for July, 2001

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