Legislation UpdatesNotifications

In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on tax payable at special rate on income arising from the transfer of equity share/unit referred to in Section 111 A and Section 112 A of the Income-tax Act,1961 (the ‘Act’) from the current FY 2019-20. The following capital assets are mentioned in Section 111A and Section 112A of the Act:

i) Equity shares in a company;
ii) Unit of an equity-oriented fund; and
iii) Unit of a Business Trust

The derivatives (Future & options) are not treated as a capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for a normal rate of tax. However, in the case of Foreign Institutional Investors (FPI), the derivatives are treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and subjected to a special rate of tax as per the provisions of Section 115 AD of the Act. Therefore, it is also decided that the tax payable on gains arising from the transfer of derivatives (Future & options) by FPI which are liable to a special rate of tax under Section 115 AD of the Act shall also be exempted from the levy of the enhanced surcharge.

Therefore, the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term & short-term capital gains arising from the transfer of equity share in a company or unit of an equity-oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under Section 115 AD by the FPI on the capital gains arising from the transfer of derivatives. However, the tax payable at the normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge.

[Notification dt. 24-08-2019]

Ministry of Finance

Central Board of Direct Taxes

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: G. Mahalingam (Whole Time Member) partly modified its order against Religare Finvest Limited (RFL) in the matter of Fortis Healthcare by allowing the firm to dispose of its assets subject to certain conditions.

The securities market regulator vide its order dated 19-03-2019, had barred Singh brothers – Shivinder Mohan Singh and Malvinder Mohan Singh (former promoters of Fortis Healthcare) – from selling any of their assets till they, along with seven other companies associated with them pay back Rs 403 crore that they had taken out from the hospital chain. The said order was passed when it came to notice that Fortis Hospitals had entered into multiple structured transactions from 30-06-2016 to 30-06-2017, which were prima facie fictitious and fraudulent in nature as the ultimate beneficiaries of these transactions were Singh brothers. The Board had also directed RFL (of which Singh brothers were the promoters) to not dispose of, alienate or divert any of its assets except for complying with a corrective action plan as stipulated by Reserve Bank of India (RBI).

The instant order was passed in an application filed by RFL on 20-06-2019, whereby it sought relaxations from SEBI in order to execute revival plan for the betterment of the company by taking required steps, including the restructuring of loans and securitization/ assignment of its assets to Asset Reconstruction Companies (ARCs) to reduce its standing liability.

SEBI noted that RFL was a Non-Banking Financial Company (NBFC) registered with RBI, and functioned under its overall regulatory supervision. Further, RFL’s current cash flows were insufficient to meet the immediate one-year debt obligations; banks had the first charge over all its assets and coercive steps of a bank for recovery of dues were highly possible. Also, RFL was prohibited from the expansion of credit/ investment portfolios other than investment in government securities.

In view of the above, it was opined that RFL was under severe financial strain and was staring at the possibility of default in meeting its debt obligations to the lender banks. Thus, proposed measures like the restructuring of RFL’s debt with lender banks, assignment of its SME gross NPAs to ARCs and raising of capital to meet capital adequacy norms were essential for survival and revival of the company.

Thus, the Board modified the directions contained in its 19-03-2019 order holding that RFL shall not dispose of or alienate funds assets without the prior permission of SEBI, “except for meeting expenses of day-to-day business operations and taking all measures as it deems fit for revival of RFL (including restructuring of its debts/loans, assignment of its financial assets to ARCs, raising of capital, borrowing, etc.), subject to strict adherence to the terms of “Corrective Action Plan”.[Fortis Healthcare Ltd., In Re, 2019 SCC OnLine SEBI 55, decided on 28-06-2019]

Case BriefsHigh Courts

Bombay High Court at Goa: C.V. Bhadang, J., discharged the petitioner (proprietor of the defendant Company) of the notice served upon him in an execution case.

The respondent filed a civil suit against one Harshad Trading Company a company incorporated under the Companies Act. As per the suit title, the Company was not shown to be represented by any person. The suit was decreed ex-parte against the defendant company. Thereafter, the respondent filed an application for execution of the decree pursuant to which a notice was served on the petitioner. He filed for discharge on the ground that he was neither a Director nor an employee of the Company. It was contended that he was the proprietor of the Company, which are two separate entities. However, Executing Court dismissed the petitioner’s application.

The High Court noted that the decree was passed against  Harshada Trading Company alone. It was well settled:  “where the decree is against the Company, which is an independent entity, the decree cannot be executed against any individual, being a Director or a person responsible for the conduct of the business of the Company.”

On the factual score, the Court said, “It was for the respondent to point out as to what are the assets of the Company, against which the decree can be executed. Such details can be obtained by the decree-holder from the office of the Registrar of Companies (RoC). Without doing any such exercise, the respondent is trying to execute the decree against an individual and that too, without showing that the petitioner is in anyway related to the Company-Harshada Trading Company.”

In such view of the matter, the impugned order of the Executing Court was set aside and the petitioner was discharged. [Belarmina Gowda v. Ranjith Nath, 2019 SCC OnLine Bom 588, Order dated 04-04-2019]

Legislation UpdatesRules & Regulations

S.O. 1023(E)—In the exercise of the powers conferred by Section 169 read with Section 33 of the Representation of People Act, 1951 (43 of 1951), the Central Government after consulting the Election Commission hereby makes the following rules further to amend the Conduct of Elections Rules, 1961, namely:––

1. (1) These rules may be called the Conduct of Elections (Amendment) Rules, 2019.
(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Conduct of Elections Rules, 1961 in FORM 26,––
I. in PART A—
(i) for paragraph (4) and the Table thereunder, the following shall be substituted, namely:—
“(4) Details of Permanent Account Number (PAN) and status of filing of income tax return:

[Refer link for detailed notification: Notification]

Ministry of Law and Justice

Note: In accordance to the amended Form 26, five years’ returns are to be furnished, along with details of offshore assets. Along with this,  it would also require details under various heads of the candidate’s spouse, members of the Hindu Undivided Family (if the candidate is a ‘karta’ or coparcener) and dependents.

Case BriefsHigh Courts

Patna High Court: The Division Bench of Amreshwar Pratap Sahi, CJ and Anjana Mishra, J. dismissed an appeal challenging election of a village mukhiya.

Appellant herein had filed an election petition assailing the election of Respondent 3 as mukhiya of a village on the ground of non-disclosure of his assets and liabilities as per the Bihar Panchayat Raj Act, 2006. This petition was dismissed and the writ petition challenging Election Commission’s order was also dismissed. Hence, the present appeal.

Counsel for the appellant contended that nomination paper of Respondent 3 was improperly accepted as he had not filled up details of his assets and liabilities. An affidavit was filed later declaring such assets and liabilities to supplement respondent’s nomination papers but the same was a manipulated document inasmuch as it had been manually stamped while other documents were stamped through a franking machine.

Learned counsel for the respondent objected to the maintainability of election petition for not being verified in accordance with Rule 108 of the Bihar Panchayat Raj Rules, 2006. Further, the sole ground raised in the petition was non-disclosure of assets; no challenge was raised in relation to the affidavit filed by the respondent. The subject affidavit was accepted with the nomination papers before the Assistant Returning Officer who scrutinized the same and thereafter declared Respondent 3’s nomination valid. The nomination could not have been declared to be valid in the absence of requisite declaration and therefore there was a valid presumption under the law regarding the existence of this fact.

The Court observed that the casual manner in which petition had been verified was a serious defect. Argument regarding the non-existence of affidavit could not have been appreciated without a petition being verified on the basis of records available. Further, once the defense of supplemental affidavit had been raised, then the burden lay on the election petitioner to dislodge the same by summoning the Assistant Returning Officer.  It was held that the acceptance of affidavit by the Returning Officer without any objection from the appellant or election petitioner provided a clear presumption of fact regarding the validity of nomination of Respondent 3. Lastly, since the issue regarding stamping of an affidavit was not pleaded or advanced either before the learned Single Judge or the Election Tribunal, therefore it could not be raised at this juncture.

In view of the above, the appeal was dismissed for being bereft of merits.[Ram Roop Devi v. State of Bihar, 2019 SCC OnLine Pat 44, Order dated 11-01-2019]

Case BriefsForeign Courts

Supreme Court of Pakistan: A Three-Judge bench comprising of Umar Ata Bandial, Faisal Arab and Sajjad Ali Shah, JJ. while hearing an appeal in relation to disqualification of a parliamentarian, ruled that a parliamentarian can be disqualified under Article 62 (1)(f) of the Constitution of Islamic Republic of Pakistan only when he has dishonestly concealed his assets.

Petitioner’s appointment to public office was challenged by the respondent before the Islamabad High Court alleging that while holding office in Pakistan, petitioner was serving a UAE based company as its full-time employee. Respondent’s constitution petition for quo warranto was allowed by the High Court and the petitioner was disqualified as a member of the National Assembly. This order was challenged in the instant petition.

Petitioner submitted that he only rendered advice on the phone to the company and was not required to be physically present in UAE. Also, since the salary received from the company had already been spent by him, therefore its details were not mentioned in his nomination paper.

The Supreme Court observed that the entire purpose behind seeking details of assets and liabilities under election laws is to discourage persons who have wrongfully acquired assets, from contesting elections. Therefore, in a proceeding brought under Article 62 (1)(f) of the Constitution, Court must first call upon the elected member to explain the source from which the alleged undisclosed asset was acquired. Where no satisfactory explanation is forthcoming from him and the undeclared asset is not commensurate with his known sources of income, a presumption of unlawful means having been used in relation to that asset arises. Relying on its decision in Muhammad Hanif Abbasi v. Imran Khan Niazi (PLD 2018 SC 189) the Court held that unless a member is found guilty of dishonest concealment of assets in appropriate judicial proceedings, Article 62(1)(f) cannot be invoked to disqualify him for life.

It was observed that though it was highly inappropriate for a parliamentarian to take a full-time job in a foreign country, but it seemed highly improbable that a person holding such a position would actually be rendering his services as a full-time employee elsewhere. Thus, the petition was allowed holding that since no undeclared proceeds from UAE company existed at the time of filing of petitioner’s nomination papers, therefore no case of concealment of assets was made out. [Khawaja Muhammad Asif v. Muhammad Usman Dar, Civil Petition No.1616 of 2018, decided on 19-10-2018]

High Courts

Delhi High Court: Answering the question, whether the transaction of sale and purchase of shares of an overseas company deriving only a minor part of its value from assets located in India, would be taxable in India, the Court held that after amendment of S. 9(1)(i) Explanations 4, 5 Income Tax Act, 1961, post the “Vodafone case” Vodafone International Holdings BV v. Union of India: (2012) 6 SCC 613, any share/interest in a company registered outside India, shall be deemed to be situated in India, if such share derives (directly/indirectly) its value “substantially’” from assets located in India. The Court further clarified that as per the Shome Committee report on retrospective amendment relating to indirect transfer of assets and Direct Tax Code Bill, 2010, the gains arising from sale of shares of a company incorporated overseas, deriving less than 50% of its value from assets situated in India, would not be taxable u/S. 9(1)(i) of the Act r/w Explanation 5. 

In this case the Copal group (an overseas company) sold shares of an Indian company, to Moody’s Cyprus and shares of a US company (having an Indian subsidiary) to Moody’s USA. The group sold 67% of its shareholding in Copal-Jersey (the ultimate holding company) to Moody UK for $93,509,220. While 33% stake was held by banks and financial institutions. This purchase price was not inclusive of any value in Indian companies as 100% economic interest in these companies was already acquired by Moody’s group. On applications filed by these companies for above transactions, the Authority of Advance Rulings (AAR), ruled that such transactions were not taxable in India and Moody’s group, as buyers, had no obligation to withhold tax. This ruling was challenged by the Revenue. 

Agreeing with AAR’s view, the Court reasoned that since, value of shares derived from assets outside India was $93,509,220, and that from assets situated in India was $28,530,435.8, only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of shares of the Indian companies. Such transactions would not attract tax in India and Moody’s group did not have any withholding tax obligations. Director of Income Tax (International Tax) v. Copal Research Limited, Mauritius, W.P.(C) 2033/2013, decided on 14-08-2014

To read the full judgment, refer SCCOnLine