Inter Corporate Loans and Investment under New Companies Act 2013

Introduction: Inter corporate loans and investments play a vital role in the growth of Industries since they result in flow of funds to group companies or other companies in need of funds. In the Companies Act, 1956 Section 372-A deals with inter corporate loans and investments. In 1998 to give free hand to industries drastic changes were made by merging section 370 and 372 into a new Section 372-A enabling more flexibility and dispensing with approval of central Government. The Companies Act, 2013(CA2013 or new Act) incorporated Section 186 which deals with loans and investments and corresponds with Section 372-A of the Companies Act, 1956(CA1956 or Old Act). The focus of the article is to compare Section 186 of CA 2013 with Section 372-A of CA1956. 

Section 372-A

Section 372-A is one of the most important sections which is be used by every company in the ordinary course of its business. Every company has to plan to deploy its surplus funds in a productive manner and within the legal frame work of Section 372-A. Since Section 186 of CA 2013 has not been notified, Section 372-A applies to Public Limited companies. Let us see the permissions/restrictions imposed by this section.

1. Applicability: This section is applicable only to public Ltd companies and not to private Ltd companies.

2. Transactions: Section 372-A is applicable to following type of transactions

-       loans given to another body corporate( Loans include ICDs  and debentures)

-       Guarantees given by the company as a back up for any loan given by any other person to any other body corporate.

-       Investment in shares of another body corporate by way of subscription or by purchase of shares.

3. Approvals: Unanimous consent of all directors present at the meeting of Board is required for passing a resolution for approving inter corporate loans or investments. Resolution must specify the limits.

4. Limits: Board of directors can exercise their power for making inter corporate loans or investments up to 60% of paid up capital and free reserves of the company or 100% its free reserves which ever is higher. {Free reserves means for this section, reserves free for distribution as dividends and share premium but excluding shares application money}.  Prior approvals offinancial institutions (if any loans are subsisting) if there is default in repayments of interest/installments as per terms. For granting loans or making investments or giving guarantees exceeding the limits permissible for Board, approval of shareholders by a special resolution has to be obtained.

5. Guarantees in emergency: In case of urgency, guarantees exceeding the limits can be given subject to the condition that such urgent approval is justified and approval of shareholders has to be obtained within 12 months from the date of board meeting or on the date of next AGM held after board meeting which ever is earlier. This relaxation is only to facilitate business transactions in the interests of the company.

6. Other restrictions:

-       Loans shall not be made at a rate below the prevailing bank lending rate

-       If any default u/s 58-A is committed, Company is prohibited from giving making ICDs and investments/guarantees.

7. Register of inter corporate loans/investments: A register must be maintained showing the details of ICDs and investments made during the year such name of the body corporate, date and amount of loan/investment/guarantee, purpose, entries have to be made within 7dyas of  making investment or  giving of loan or guarantee

8. Exemptions: The restrictions of 372-A are not applicable to loans, investments etc  made by

-       A Banking company, insurance or housing financing company, in the ordinary course of their business;

-       Company established with the object of financing industrial enterprises or of providing infrastructural facilities.

-       Company whose principal business is the acquisition of shares, stock, debentures or other securities.

-       Private company unless it is a subsidiary of public Ltd company

-       Investments in wholly owned Subsidiary, Loans made/ guarantees given by a holding company to its wholly owned subsidiary co

-       Investment made in rights shares allotted in pursuance of section 81(1)

Provisions of Section 186:

This section corresponds to section 372-A of Old Act. Having seen the requirements of Section 372-A, let us now analyse Section 186. This section has not been brought into force and as such Section 372-A is to be followed by the companies till this section is notified for compliance.

Significant changes:

1. Restriction on layers: Firstly this section prohibits investment through more than 2 layers of investment companies. However this restriction is not applicable for investment in company incorporated out side India which has investment subsidiaries beyond two layers as per laws of that country. What is the meaning of layer? Let us find out the reason for this stipulation. If a holding company wants to invest funds, then it can invest directly in another two subsidiaries of it which are investment companies. This restriction is obviously for preventing siphoning of funds through subsidiaries which are investment companies. This could also be for easy tracking of funds and bring out transparency. Whether this restriction applies only for direct investment? Can the investment company create layers? There is some ambiguity and clarifications are expected from MCA in this regard for clear understanding and to avoid violation of the section.{Section 186(1)}
2. Limits: The same limits as in Section 372-A have been retained for exercising power by the board of directors and prior approval of shareholders is mandatory for any limits beyond 60% of paid up capital + free reserves+ securities premium account  or 100% of free reserve. However this limit not only covers the transactions with bodies corporate but also transactions with any person. This is a significant change. {Section 186(2) and (3)}
3. Disclosure: This is a new requirement. Section 186(4) stipulates that a disclosure has to be made in the financial statement about the full particulars of loans given, investments made or guarantees or security given and the purpose for which the recipient is going to utilise the loans/guarantees/security. This disclosure ensures good governance and transparency. This change is welcome.
4. Approvals: There is no change in the manner of seeking approvals for granting of loans or investments. Like in 372-A, unanimous consent of Board of directors for limits up to 60% is required. Prior approval of institutions is required only, if loans are subsisting and default is made in payment of either interest or installments as per terms of loan. Prior approval of shareholders is to be obtained in case company wants to sanction loans/guarantees/investments exceeding the limits fixed for sanction by board of directors. {section 186(5) and 186(3) }
5. Restriction on companies registered with SEBI:  This is also a new requirement to protect the shareholders interest. The central government may notify such class of companies which will be prohibited from taking inter corporate loans or deposits exceeding the prescribed limit and shall make a disclosure  of loans or deposits taken in its financial statement.{Section 186(6)}
6. Rate of Interest: There is change in this provision also. The rate of interest on loans given can not be less than the prevailing yield rate on 1 year,3 year, 5 year or 10 year government securities closest to the tenor of the loan.{section 186(7)}
7. Penalty: The fine for violation of Section 186 has been increased. Fine levied can be  any sum  between Rs.25,000 to 5.00 lakhs on defaulting company  and  every defaulting  officer  can be punished with imprisonment for a term  up to 2 years besides the  fine ranging from Rs.25,000 to 1.00  lakh.
8. With drawl of exemption: This section is applicable to both private and public Ltd while section 372-A is applicable only to public Ltd companies. Similarly loans given/ Investments made by a holding company in its wholly owned subsidiary also comes under the purview of Section 186 while it is specifically exempted by Section 372-A of CA1956.

Other requirements/restrictions such as maintaining a register of inter corporate deposits/ loans/ guarantees and keeping it open for inspection by any member, exemptions(excepting layers) as mentioned in section   372- A above remain the same.

Clarifications of MCA: On 14th February 2014 MCA issued a clarification vide its General Circular No 03/2014 as section 185 (as this section was notified on 13.09.2013 and comes into force) prohibits giving of guarantees or any security by a holding company for any loans availed by  its subsidiary except in the ordinary course of its business. This circular had clarified that exemption provided by Section 372A is applicable for such transactions. This clarification is surprising. Even without clarification section 372-A is applicable as section 186 has not been notified yet. This clarification however does not resolve the restriction imposed by section 185(Loans to directors) on guarantees to be given by holding company for loan availed by its subsidiary which is an unintended drafting error. Similarly in November, 2013 Circular no.18 of 2013 was issued which clarifies that Section 372-A remains in force till section 186 is notified.

Conclusion: There is always an apprehension that the flexibility given by Section 372-A or Section 186 for loans or investments can be misused to siphon of funds. The law makers must have obviously kept in mind some fraud cases wherein inter corporate investments and loans are used as a tool for siphoning of funds to group companies or director related firms or companies. This apprehension may be the reason for bringing in restriction on layers of investment. Let us hope that other sections in the new act too act as checks and balances for preventing misuse of position of directors

Source: Companies Act, 2013, Companies Act,1956, Circulars issued by MCA

New Forms filing in MCA from 1-4-2014

1. The Companies Act, 2013 is being rolled out very soon. In order to ensure smooth roll out, facility the Ministry is going to introduce new forms pertaining to new Act probably from 01-04-2014. The Ministry shall close down the front office after 25-03-2014. The Ministry has directed that all work items should be cleared on or before 25-03-2014 because these work items shall not work on new system, being in old format.

Ascertained liability allowable under the mercantile system of accounting (Principle of Consistency)

Court : INCOME TAX APPELLATE TRIBUNAL

Brief : : The assessee is a Company and is engaged in the business of manufacturing of white crystal sugar. It filed its return of income on 25.11.2006 declaring total income of Rs.1,01,251/-. The Ld.AO complete the assessment u/s 143(3) on 31.12.2008 determining the total income of the assessee at Rs.1,47,49,159/- and allowed set off of this amount from brought forward losses. Aggrieved at the additions made to the returned income the assessee filed an appeal before the Ld.Commissioner of Income Tax (Appeals)- XVI, New Delhi. The First Appellate Authority granted part relief. Aggrieved with the relief given by the First Appellate Authority the Revenue has filed this appeal on the following grounds.

Citation : ACIT, Circle 10(1) New Delhi (Appellant) Vs. Dewan Sugar Ltd. Surya Plaza, 1st floor K 185, Sarai Jullena, New Friends Colony New Delhi PAN: AAACD 3465 H (Respondent)

Judgment :

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES: “B” New Delhi

BEFORE SHRI A.D. JAIN, JM AND

SHRI J.SUDHAKAR REDDY, AM

ITA no. 1901/Del/2011

Assessment Year: 2006-07

ACIT, Circle 10(1)

New Delhi

(Appellant)

Vs.

Dewan Sugar Ltd.

Surya Plaza, 1st floor

K 185, Sarai Jullena, New Friends Colony

New Delhi

PAN: AAACD 3465 H

(Respondent)

Appellant by: Ms. Shumana Sen, CIT, D.R

Respondent by: Sh. Sanjay Sood, C.A. and Sh. N.K.Chadha, Adv.

O R D E R

PER J.SUDHAKAR REDDY, AM

This is an appeal filed by the Revenue directed against the order of the Ld.CIT(A)-XVI, New Delhi dated 9.12.2010 pertaining to the Assessment Year 2006-07.

2. Facts in brief:- The assessee is a Company and is engaged in the business of manufacturing of white crystal sugar. It filed its return of income on 25.11.2006 declaring total income of Rs.1,01,251/-. The Ld.AO complete the assessment u/s 143(3) on 31.12.2008 determining the total income of the assessee at Rs.1,47,49,159/- and allowed set off of this amount from brought forward losses. Aggrieved at the additions made to the returned income the assessee filed an appeal before the Ld.Commissioner of Income Tax (Appeals)- XVI, New Delhi. The First Appellate Authority granted part relief. Aggrieved with the relief given by the First Appellate Authority the Revenue has filed this appeal on the following grounds.

“1. On the facts and circumstances of the case and in law, the Ld.Commissioner of Income Tax (Appeals) has erred in allowing relief of Rs.40,81,730/- on account of addition made in respect of provisional liability for expenses outstanding when assessee itself admitted for non payment of provisional liability.

2. On the facts and circumstances of the case and in law, the Ld.Commissioner of Income Tax (Appeals) has erred in allowing relief on account of addition made in respect of UP Trade Tax and Interest on Excise Duty of Rs.14,05,285/-.”

3. We have heard Ms.Shumana Sen, the Ld.Sr.D.R. on behalf of the Revenue and Mr. Sanjay Sood, the Ld.Counsel on behalf of the assessee.

4. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and orders of the authorities below, case laws cited, we hold as follows.

6. The first issue is regarding the deletion of an addition of Rs.40,81,730/- being provisional liability for expenses outstanding. The Ld.AO dealt with the issue at page 2, para 3 of his order in the following words.

“3. In the details of creditors, the assessee company has claimed provisional liability of Rs.40,81,730.60. In the explanation submitted by the assessee company, it has been submitted that the liability has been booked for the material procured by the company for its sales commission, electric stores purchased and expenditure on Repairs& Maintenance. The purchase bills were received but cleared on later dates and paid on subsequent year. The liability was booked in view of giving the true and fair picture of the balance sheet.

Therefore the same should not be disallowed. As the assessee company has itself admitted of having not made payment of this provisional liability, this amount of Rs.40.81 lacs cannot be allowed and is accordingly added to the total income of the assessee company.”

7. The Ld.Commissioner of Income Tax (Appeals) followed the decision of his predecessor for the Assessment Year 2004-05 and deleted the addition made. Before us the Ld.D.R. submits that the Ld.Commissioner of Income Tax (Appeals) has not applied the law to the facts of the case. She submits that there is no finding that the expenditure in question crystallized during the year. The Ld.Counsel for the assessee on the other hand points out that the decision of the Ld.Commissioner of Income Tax (Appeals) on the very same issue for the Assessment Year 2004-05 was accepted by the Revenue. He submits that this is ascertained liability.

8. The Ld.Commissioner of Income Tax (Appeals) while adjudicating this issue for the Assessment Year 2004-05, came to a conclusion that the liability in question is ascertained liability and hence allowable under the mercantile system of accounting. The Ld.Counsel for the assessee made a statement at the Bar that these liabilities were discharged in the immediately succeeding Assessment Year. This is a timing issue i.e. the year of allowability of the expenses is in dispute. On the principle of consistency, we are of the considered opinion that the order of the First Appellate Authority has to be upheld as in the earlier Assessment Year the finding of the Ld.Commissioner of Income Tax (Appeals) on the year of allowability has not been challenged by the Revenue. In the result this ground of the Revenue is dismissed.

9. Ground no.2 is on the issue of allowability of interest on late deposit of excise duty and interest on late deposit of trade tax. We hold that the First Appellate Authority was right in relying on the decision of Hon’ble P&H High Court in the case of CIT vs. Hoshiarilal Kewal Krishan, 202 taxmann 441 (P&H) and holding that the payments in question are compensatory in nature and hence allowable. We find no infirmity in the same.

10. In the result the appeal of the Revenue is dismissed.

Order pronounced in the Open Court on 12th July, 2013.

Sd/- Sd/-

(A.D. JAIN) (J.SUDHAKAR REDDY)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: the 12th July, 2013

*manga

Copy of the Order forwarded to:

1. Appellant;

2. Respondent;

3. CIT;

4. CIT(A);

5. DR;

6. Guard File

By Order

Asst. Registrar

1. Date of Dictation:

2. Draft placed before the Author on:

3. Draft proposed and placed before Second Member on:

4. Draft discussed/approved by the Second Member on:

5. Approved draft came to Sr.P.S. on:

6. Date of Pronouncement:

7. File sent to Bench Clerk on:

8. Date on which file given to Head Clerk on:

9. Date of dispatching the Order on:

Service Recipient Should Not Be Burdened With Demand When Reverse Charge liability paid by Service Provider

Brief : : Issue Under the laws governing the payment of service tax, Section 68(2) of the Finance Act, 1994, in respect of certain services, provides for shifting the liability to pay service tax to government to the service receiver instead of service provider. There are instances where the service receiver, instead of depositing the service tax to government, pays the same to the service provider. In such cases, the Service tax Department often takes the stand that the liability of service receiver is not extinguished and accordingly demands for payment of service tax and penalties are levied and are generally confirmed upto CCE level. As a result a lot many queries are received asking for solutions to situations where the service provider has discharged the liability and service receiver is unsure of how to mitigate his liabilities and penalty exposures. Resolution In Income-tax Act 1961, for long there was the debate on liability of deductor where the deductee/receiver of payment has discharged the income tax liability. No relief was provided under the Act and the deductor was treated and penalized as assessee in default and burderned with penalties and interest. The anomaly was later corrected vide insertion of proviso to section 201(1) of the Act. However, no such relief has been given or proposed to service tax recipients in service tax laws. Nevertheless, the various benches of CESTAT have taken a liberal view in this situation and offered adequate relief to the service recipients. In recent case, Mumbai bench of CESTAT in case of Umasons Auto Compo Pvt. Ltd. Vs. Commissioner of Central Excise & Customs, Aurangabad reported at 2014 - TIOL - 126 - CESTAT MUM, provided relief to the service recipient. Umasons Auto Compo Private Limited (Umasons), received the services of a Goods and Transport Agent. Instead of discharging the service tax liability on its own under Reverse Charge Mechanism. In the adjudication order, demand of service tax was raised. The same was confirmed by Commissioner (Appeals). Providing relief to Umasons, CESTAT held that there is no dispute regarding payment of service tax by the provider of GTA service. Once the amount of service tax is accepted by the Revenue from the provider of GTA service, it cannot be again demanded from the recipient of the GTA service. We have also shared below additional judgments by various benches of Central Excise & Service Tax Appellate Tribunal (CESTAT) ruling in favor of the assessee on the similar grounds. In Navyug Alloys Private Limited Versus CCE & C, Vadodara-II reported at 2008 (8) TMI 100, Ahmedabad Bench of the CESTAT ruled Once tax already paid on the services, it was not open to the Department to confirm the same against the appellant, in respect of the same services. In M/s. Cronimet Alloys India Limited Versus Commissioner of Central Excise Visakhpatnam-I Commissionerate Visakhapatnam, reported at 2013 (7) TMI 593 Bangalore bench of the CESTAT commented that it cannot be said that there was intention to evade payment of duty when the transporter had paid the service tax and in any case as a recipient, appellant was eligible for the benefit of CENVAT Credit also. Thus ruling out any case for alleging that assessee had the intention to evade service tax. Way Forward The above judgments can be used to defend positions where under reverse charge mechanism, the clients have paid the service tax to the service provider and the same has been deposited by the service provider with the government. The emphasis here is on service tax has been deposited by the service provider with the government. In absence of the same, the above case laws should not be relied upon by the service receiver. Citation : Umasons Auto Compo Pvt. Ltd. Vs. Commissioner of Central Excise & Customs, Aurangabad reported at 2014 - TIOL - 126 - CESTAT – MUM Judgment : UMASONS AUTO COMPO PVT LTD Versus COMMISSIONER OF CENTRAL EXCISE & CUSTOMS 2014 (2) TMI 100 - CESTAT MUMBAI ST/326/10 Dated - 28 November 2013 Head Note Demand of service tax - Recipient of GTA service - Appellant had paid the service tax to the provider of GTA service and the provider has paid to the Revenue and the appellant has availed credit of the same - Held that:- there is no dispute regarding payment of service tax by the provider of GTA service. Once the amount of service tax is accepted by the Revenue from the provider of GTA service, it cannot be again demanded from the recipient of the GTA service - Decided in favour of assessee. Judgment / Order S S Kang, J. For the Appellant : Mr A P Kolte, Adv. For the Respondent : Mr D D Joshi, Superintendent, AR PER : S S Kang Heard both sides.   Appellant filed the appeal against the impugned order passed by Commissioner (Appeals), whereby the Commissioner (Appeals) upheld the adjudication order whereby the demand of service tax was confirmed. The demand is confirmed on the ground that the appellant being recipient of GTA service is liable to pay service tax.   The contention of the appellant is that the appellant had paid the service tax to the provider of GTA service and the provider has paid to the Revenue and the appellant has availed credit of the same. As the service tax has already been paid by the provider of GTA service and Revenue is demanding the same tax from the recipient. Therefore, the demand is not sustainable. The appellant also relies upon the decision of the Tribunal in the case of Navyug Alloys Pvt. Ltd vs CCE & C, Vadodara II reported in 2009 (13) STR 421 (Tri-Ahmd).   Revenue relies upon the finding of the lower authorities and submitted that as per the provisions of the Finance Act, recipient is liable to pay service tax in respect of GTA service and if the same has been paid by the service provider, he can seek refund of the amount.   I find that there is no dispute regarding payment of service tax by the provider of GTA service. Once the amount of service tax is accepted by the Revenue from the provider of GTA service, it cannot be again demanded from the recipient of the GTA service. In view of this, the impugned order is set aside and the appeal is allowed. (Dictated in Court) M/s. Cronimet Alloys India Limited Versus Commissioner of Central Excise Visakhpatnam-I Commissionerate Visakhapatnam 2013 (7) TMI 593 - CESTAT BANGALORE Appeal No: ST/285/2012 Dated - 13 June 2013 Head Note Recovery of service tax – as per Notification No.35/2004-ST assessee should have discharged the service tax as a recipient - proceedings were initiated for recovering service tax on GTA service received by the assessee - Held that:- Extended period could not have been invoked since it cannot be said that there was intention to evade payment of duty when the transporter had paid the service tax and in any case as a recipient assessee was eligible for the benefit of CENVAT Credit also – court relied upon decisions of the Tribunal in Navyug Alloys Pvt. Ltd. vs. CCE, Vadodara-II: (2008 (8) TMI 100 - CESTAT AHEMDABAD) - Stay application – as there was no point in postponing the final issue court granted the stay – appeal decided in favour of assessee. Judgment / Order SHRI B.S.V. MURTHY, J. For the Appellant: Mr. K. Kumaresan, Advocate For the Respondent: Mr. S. Teli, Deputy Commissioner (AR) Appellants are engaged in the manufacture of High Carbon Ferro-chrome and they paid transportation charges and service tax to the transporter of anthracite coal, which is a raw material. There is no dispute that transporter had paid the service tax. Taking the view that as per Notification No.35/2004-ST dated 3.12.2004, appellant should have discharged the service tax as a recipient, proceedings were initiated for recovering service tax on GTA service received by the appellant during the period from September 2006 to March 2007.   The learned counsel submits that there were several Tribunal decisions wherein a view has been taken that if the transporter had paid the service tax, on the same service, tax cannot be demanded from the recipient also. The following decisions were relied upon: (i) Navyug Alloys Pvt. Ltd. vs. CCE, Vadodara-II: 2009 (13) S.T.R. 421 (Tri.-Ahmd.); (ii) Mandev Tubes vs. CCE, Vapi: 2009 (16) S.T.R. 724 (Tri.-Ahmd.); (iii) Sakthi Masala P. Ltd. vs. CCE, Salem: 2009 (15) S.T.R. 314 (Tri.-Chennai); (iv) Deccan Chromates Ltd. vs. CCE, Hyderabad: 2011 (22) S.T.R. 440 (Tri.-Chennai); and (v) CST, Meerut-II vs. Geeta Industries P. Ltd.: 2011 (22) S.T.R. 293 (Tri.-Del.). Further, he submits that extended period could not have been invoked in this case.   I have considered the submissions. I find that the decisions of the Tribunal cited above are applicable to the facts of this case. Further, as submitted by the counsel, extended period could not have been invoked since it cannot be said that there was intention to evade payment of duty when the transporter had paid the service tax and in any case as a recipient, appellant was eligible for the benefit of CENVAT Credit also.   Matter was heard for some time and the issue is squarely covered by the decisions, there is no point in postponing the final issue and granting stay. Accordingly the stay application as well as the appeal are allowed. (Pronounced and dictated in open Court). NAVYUG ALLOYS PVT. LTD. Versus CCE & C, VADODARA-II 2008 (8) TMI 100 - CESTAT AHEMDABAD ST/66/2008 Dated - 19 August 2008 Head Note Appellant availing the GTA services, for the period January, 2005 to September, 2006 - service tax on the said services stands paid by the transporters - Revenue’s contention that it was the liability of the appellant to pay the tax, is not acceptable – held that once the tax is already paid on the services, it was not open to the Department to confirm the same against the appellant, in respect of the same services Judgment / Order Smt. Archana Wadhwa, Member (Judicial) Shri V.B. Tayal, Director for Appellant. Shri Sameer Chitkara, SDR for Respondent. [Order per Archana Wadhwa Member (Judicial)] – Service tax of Rs. 51,385/- stands confirmed against the appellant who are availing the goods transport agency services, for the period January, 2005 to September, 2006. It is on record that the service tax on the said services stands paid by the transporters.  The Revenue's contention is that it was the liability of the appellant to pay the tax and the service tax paid by the transporter providing services cannot be treated as a valid payment. However, the Revenue has not refunded the service tax paid by the transporter to them.   Once tax already paid on the services, it was not open to the Department to confirm the same against the appellant, in respect of the same services. I accordingly set aside the impugned order and allow the appeal with consequential relief to the appellant. (Dictated & pronounced in Court.)