Filing of Annual Return for LLPs in Form 11

Khushi Surana
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Filing of Annual Return for LLPs in Form 11

All LLPs registered under Limited Liability Act, 2008 have to annually file two forms Form 11 and Form 8.

Annual Return: Form 11 is to be submitted within 60 days of closure of the financial year i.e 30th May 2018. (Financial year closes on 31st March.) Form 11 is due on 30th May , 2020.

Statement of Account and Solvency: Form 8 is to be submitted within 30 days from the expiry of six months from the closure of the financial year i.e 30th October 2018.

What is Form 11 and How to file it?

Form 11 is an Annual return that is to be filled by all LLPs irrespective of turnover during the year. Even when an LLP does not carry out any operations or business during the financial year, Form 11 needs to be filed.

Apart from Basic information about Name, Address of LLP, details of Partners/ Designated Partners, other details that need to be declared are :

  1. Total contribution by/to partners of the LLP
  2. Details of notices received towards Penalties imposed / compounding offenses committed during the financial year

It must be e-filed on the MCA portal. The e-form has to be downloaded and filled in an offline mode. The pre-fill option is available to minimize your efforts and the Pre-scrutiny button is present to validate the data filled in. This is done before you submit the form online.

What are the prerequisites?

  1. LLPIN (Limited Liability Partnership Identification number) allotted to the LLP is needed to pre-fill the basic data.
  2. Total obligation of contribution of partners of the LLP
  3. Total contribution received by all partners of the LLP
  4. Get DSC of your Designated Partner ready!

What are the Documents to be submitted along with Form 11?

  1. Details of LLP and/ or company in which partners/designated partners (DP) are directors/ partners (It is mandatory to attach these details in case any partner/ DP is a partner in any LLP and/or director in any other company)  
  2. Any other information can be provided as an optional attachment to the e-Form.

Signing of LLP Form 11

The LLP Form 11 must be digital signed with the digital signature of one of the Designated Partners of the LLP. In case total obligation of contribution of partners of the LLP exceeds Rs. 50 lakhs or turnover of LLP exceeds Rs. 5 crores, then LLP Form 11 needs to be certified by a Company Secretary in whole time practice.

In case total obligation of contribution of partners of the LLP does not exceed Rs. 50 lakhs and turnover of LLP does not exceed Rs. 5 crores, then LLP Form 11 must be certified by the designated partner of the LLP.

What are the consequences of late filing Form 11?

Late Fees: Penalty of Rs. 100 per day is chargeable till the date of filing. As there is no cap on the penalty, the amount would increase over time. Hence, it is important to file the on time to avoid heavy penalty.

Aspects to note

Points to be noted regarding closing of Financial Year in respect of filling of forms before due date is mentioned as below

  1. LLP’s registered upto 30th September of any year : have to mandatorily close their financial year as on immediate 31st March
  2. LLP’s registered between the period starting from the 1st October to 31st March of that year, have an option either to close financial year as on immediate 31st March or next year 31st March .

Steps to be followed to fill Form 11

STEP 1:- Download the form with instruction kit from mca.gov.in.

STEP 2:- Find out your LLPIN

LLPIN (LLP Identification Number) can be obtained from mca.gov.in,under MCA services. Write your LLP name and all LLP registered to MCA containing words you have provided, will be displayed. Choose your LLP and get the LLPIN corresponding to it.

STEP 3:- Pre-fill the Details of LLP form-11

Fill Year for which this form relates and Start date of financial year for which annual return is being filed for the Year 2015 it must be 01.04.2014 and after that mention your Limited Liability Partnership identification number (LLPIN) and then click on Pre-Fill button.All details upto Point no. 8 will be displayed automatically.

Total monetary value of obligation of contribution (Capital Contribution) as on above date will be automatically appearing and it will be as per Form 11 – Annual Return as filed by you.

STEP 4: Mentioned Amount

After using Pre-Filing Button now Come to point no. 8 (d) that is Total contribution received by all partners of the LLP (in Rs.) in that dialogue box mention the amount of Contribution received by All partners say for example Rs. 50,000/-, then mentioned the same.

In Point No. 9 do not mentioned any thing

STEP 5 : Details of individual(s) as partners

Now Come to Point Number 10 that is Details of individual(s) as partners

In that point Designation will automatically captured along with Designated Partner Identification number (DPIN)/ Income tax permanent accountnumber (Income-tax PAN)/ Passport number.

STEP 6 : Details of individual(s) as partners

So now just click on Pre-Fill button all the details of partner will automatically captured.

STEP 7 : Details of individual(s) as partners

The above mentioned Contribution received and accounted for (in Rs.) dialogue box, this is the amount which is required to be filled by you. Practice caution while filling out Individual contribution amount of all the partners as it should ultimately add up to Total Contribution mentioned in point 8 of Form 11. Same process shall be required to be done for all Partners.

STEP 8 : Details of bodies corporate as partners

In Point no. 11 the details of bodies corporate as partners required to be mentioned. If an partner is a body corporate, Corporate identity number (CIN) or Foreign company registration number (FCRN) or Limited liability partnership identification number (LLPIN) or Foreign limited liability partnership identification number (FLLPIN) or any other identification number DPIN, and click on pre-file button all the details of partner will be auto captured.

STEP 9 : Summary of designated partner(s)/partner(s) as on 31st March of the period for which annual return is being filed.

The details in point 12 are pre-filled.

STEP 10 : Particulars of penalties imposed on the LLP as well as Partners :

In point no. 13 (i) if any penalty is imposed on LLP and in point no. 13 (ii) if any penalty is imposed on partners then it should be required to be mentioned otherwise keep it as blank.

STEP 11: Particulars of compounding offences :

Fill in the details of Compounding offences, if any.

STEP 12: Whether turnover of the LLP exceeds 5 crores :

Tick box Yes/No to provide if your turnover exceeds 5 crores or not. This is one of the criteria to determine if your LLP Annual Return would require a DSC of a Company Secretary or not.

Now attach the details of company(s)/ LLP(s) in which partner/ designated partner is a director/ partner, as the case may be,in the required format as an attachment.

STEP 13 : Verification :

After making necessary attachment now comes to the verification in that case make click on button saying “To the best of my knowledge and belief, the information given in this form and its attachment is correct and complete”

 Attach the Digital Signature of Designated Partner along with their DPIN.

STEP 14 : Certification

After making verification to the certification, click on button saying “I certify that Annual Return contains true and correct information”

 Attach the Digital Signature of Designated Partner along with their DPIN.

STEP 17 : Company Secretary Certification:

If:

  • Turnover of the LLP exceeds Rs. 5 crores or;
  • Partner’s Total Contribution exceeds Rs. 50 lacs

Then in either of the cases the LLP would be required to get their Form 11 Digitally signed by a Company Secretary.

STEP 18:- Pre-scrutiny

Use Check Form utility to see if any more information is required for form completion. On no error message, including the digital signature of person who is verifying the furnished details. Perform Pre-scrutiny. If everything is correct, a pop up-window saying “No Pre-scrutiny errors have found” will be displayed.

Author’s Note: No additional fees shall be charged for late filing during a moratorium period from 1st April to 30th September 2020, in respect of any document, return,statement etc., required to be filed in the MCA-21 Registry, irrespective of its due date, which will not only reduce the compliance burden, including financial burden of companies/ LLPs at large, but also enable long-standing non-compliant companies/ LLPs to make a ‘fresh start‘.

Disclaimer: This article doesn’t constitute professional advice. The author does not represent that the said information is correct and complete in all regards. The views contained in this article are personal views of the author and may change depending upon underlying facts and circumstances. Judicial and legal authorities may not subscribe to the views of author and can take different view. Readers of this article are advised to take professional advice before taking any course of action or decision. The author does not assume any responsibility or liability in respect of the information contained in this article or for any decision/ course of action readers may take based on information contained in this article.

Understanding scope of Rule 27 of ITAT Rules, 1963 via Delhi High Court Judgement

CA Shashank Mehta
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Understanding scope of Rule 27 of ITAT Rules, 1963 via Delhi High Court Judgement

Parties: Sanjay Sawhney vs. PCIT

Decision of: Hon’ble Delhi High Court

Date of Order: May 18, 2020

ITA No. 834/2019

Issue relating to: Rule 27 of ITAT Rules, 1963 – Sec. 253(4)

FACTS OF THE CASE:

During first appeal, CIT(A) had rejected jurisdictional legal grounds raised by the assessee. However, ultimately the matter was decided in favour of the Assessee based on merits. Department filed appeal before ITAT but no cross objection was filed by the assessee. However, during the course of hearing, Assessee raised the said jurisdictional legal grounds [which were rejected by CIT(A)] by resorting to Rule 27 of the ITAT Rules, 1963. Only oral application was made in this respect.

ITAT held that Rule 27 cannot be resorted without making proper application for it.

[Rule 27: The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.]

QUESTION BEFORE THE HON’BLE HIGH COURT:

What is the scope of Rule 27 of the ITAT Rules, 1963?

FINDINGS AND DECISION OF THE HON’BLE TRIBUNAL:

Hon’ble High Court held that:

a) Rule 27 does not mandate an application to be made in writing, hence oral application cannot be refused.

b) The word ‘thereon’ used in section 254 (1) implies that the tribunal has to confine itself to the ‘subject matter’ of appeal only. However, the ‘subject matter’ is comprehended so as to encompass the entire controversy between the parties which is sought to be got adjudicated upon by the Tribunal.

c) Rule 27 cannot to be applied narrowly. Assessee cannot be precluded to challenge that part of CIT(A) which is against him. It cannot be said that by resorting to such grounds, the scope of ‘subject matter of appeal’ was being violated.

d) In case an assessee having succeeded before CIT (Appeals) but opts not to file cross objection even when an appeal has been preferred by the department, from that it cannot be inferred that the assessee has accepted that part of the order which was against him.

e) When order of the CIT(A) is at large before the Tribunal, and as the assessee had taken the jurisdictional legal ground before CIT(A), the respondent (here assessee) would be entitled to defend the order of the CIT(A) on all grounds including on those held against him. He can rely upon Rule 27 and advance his arguments, even though it had not filed cross objections against the findings which were against him.

Accordingly the matter was remanded back to ITAT for fresh adjudication.

To view full text of the judgment: Click Here

Disclaimer: This article doesn’t constitute professional advice. The author does not represent that the said information is correct and complete in all regards. The views contained in this article are personal views of the author and may change depending upon underlying facts and circumstances. Judicial and legal authorities may not subscribe to the views of author and can take different view. Readers of this article are advised to take professional advice before taking any course of action or decision. The author does not assume any responsibility or liability in respect of the information contained in this article or for any decision/ course of action readers may take based on information contained in this article
 

Microfinancing and Poverty Alleviation

Anjali Garg
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Microfinancing and Poverty Alleviation

Microfinance is a specific business category of services, which includes microcredit. Micro-credit is a loan service to poor clients. Micro-credit is one of the microfinance aspects and the two sometimes get mixed. The microfinance revolution in India is as a strong instrument for soothe deprivation. Microfinance is financial resources for low-income clients include retailers and the self-employed employees, who historically neglect banking connections and related facilities.

More importantly, it’s a trend that object is “a society where the poor and the near-poor are alike households provide as much direct exposure as possible to a suitable selection of high-quality financial facilities, not just loans but also investments, taxes, and transfers of money. The ones promoting microfinance typically speaking think such exposure would benefit disadvantaged citizens who can come out of deprivation. The complex growth of the  microfinance market was not only encouraged by market forces but also by national conscious actions

Governments, Non-Governmental Organizations (NGOs), and those donors who see microfinance as a successful poverty eradication method.  The powerful push behind this huge and increasing support for microfinance indicated that national economic and social impacts are significant and it needs to be examined closely.

Substantial Micro Finance features and Principles:

Microfinance is used as an appropriate tool for the financing of small-scale/technical operations in rural areas requirements regardless of the following property.

(a) Revolving loans to small-scale business activities chosen for the weak.

(b) Inspiring vulnerable people to develop self-confidence in me might do it.

(c) Will compensate interest received on itself.

(d) Creating incentives to grow for oneself jobs of underserved men.

(e) For the highest utility and the lowest cost per operation recipient.

Microfinance role in reducing poverty:

Microfinance concerns the provision of financial services for the soft people that aren’t treated conventional, structured financial entities-the topic is extending limitations on the delivery of financial services. These financial resources include the availability of delivery networks and groundbreaking methodologies. The financial services needs which enable people to both take advantage of opportunities and better management of their resources.

Microfinance may be an efficient one tool for alleviating poverty amongst many. Yet it does caution should be used-despite recent claims, the microfinance-to-poverty alleviation method it’s not straightforward, for poverty is a complex phenomenon and other conditions under which the weak consider themselves public must cope with that.

National Agricultural Bank For Rural Development (Nabard), Small Industries Development Bank Of India (Sidbi), Housing Development Finance Corporation (Hdfc), Commercial Banks, Regional Rural Banks, The Credit Cooperative Societies, etc., are some of the mainstream financial institutions involved in extending microfinance. 

Petition for initiation of insolvency proceedings by Home Buyers

Shubham Agarwal
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Petition for initiation of insolvency proceedings by Home Buyers

Insolvency and Bankruptcy Code 2016 is the law relating to insolvency and bankruptcy in India. This code was enacted with a view to consolidate and amend the law relating to insolvency and to remove the problem of overlapping legal framework in various laws. It provides the single window resolution of the insolvency and provides that NCLT (National Company Law Tribunal) will be adjudicating authority in case of insolvency of corporate persons and Debt Recovery Tribunal in case of other. This law also barred the jurisdiction of civil courts and other authorities in the insolvency process and section 231 of the code provides that no injunction will be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority under this Code.

Petition for insolvency can be filed by the following:

  1. Financial creditor u/s. 7 of the code.
  2. Operational creditor u/s. 8 and 9 of the code.
  3. Coronate debtor himself u/s. 10 of the code.

The Financial creditor is defined as u/s. 5(7) of the code as “person to whom financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.

Further Section 5(8) defines the meaning of Financial debt.

Original code as passed in parliament does not contain any provision of initiation of insolvency proceedings by an allottee under a Real Estate project. However, clause (f) of section 5(8) of the code, which includes the meaning of financial debt provides that “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing” will be treated as financial debt.

Now the question arises that whether the amount paid by the allottee in the Real Estate Project can be treated as financial debt by invoking the provision of section 5(8)(f) because advance paid by allottee have a commercial effect of borrowing and such advance is paid for acquisition of property in future.

The said question was answered by the National Company Law Tribunal in the case of Nikhil Mehta and Sons (HUF) vs AMR Infrastructure Ltd. [ Company Appeal (AT)(Insolvency) no.  7 of 2017], wherein it was held that amounts raised by developers under assured return schemes had the “Commercial effect of borrowings” which became clear from the developer’s annual return in which the amount raised was shown as “commitment charges” under the head “financial cost”. As a result, such an allottee was held to be “Financial Creditors” within the meaning of section 5(7) of the code.

A Similar view was expressed by the Insolvency Law Committee in its report submitted in March 2018. The committee in its recommendation at para 3 of the report state that “it has been recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Honourable Supreme Court in ongoing cases. Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code”.

The recommendation made by Insolvency Law committee was accepted by Central Government and thereafter an explanation to 5(8)(f) was inserted vide Insolvency and Bankruptcy Code (Amendment) Ordinance 2018, which is read as under

                “’Explanation.—For the purposes of this sub-clause,—

  • any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
  •  the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016;

Thereafter a large number of writ petitions that have been filed in the Supreme Court challenging the constitutional validity of amendments made to the Insolvency and Bankruptcy Code, 2016, in pursuance of the report of Insolvency Law Committee. The amendments so made deem allottee of real estate projects to be “financial creditors” so that they can initiate insolvency proceedings under section 7 of the code, against the real estate developer. In addition, being financial creditors, they are entitled to be represented in the Committee of Creditors by authorized representatives.

Thereafter Honorable Supreme Court in case of Pioneer Urban Land and Infrastructure Ltd and Anr. vs Union of India & Ors. [Writ Petition no. 43 of 2019] made the following observations:

  1. The explanation added to Section 5(8)(f) of the Code by the Amendment Act does not, in fact, enlarge the scope of the original Section as home buyers/allottees would be subsumed within Section 5(8)(f) as it originally stood as has been held by us hereinabove [Para 85, page 183]
  2. We, therefore, hold that allottees/home buyers were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen [ Para86, page 183]
  3. Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law [para (iii) of conclusion, page 184]

Therefore Supreme Court upheld the constitutional validity of the amendment made in section 5(8)(f) stating that said amendment is only clarificatory in nature.

Thereafter initiation of insolvency by allottee has been again amended by Insolvency and Bankruptcy Code (Amendment) Act 2020, which provides the minimum threshold for filing of insolvency petition by allottees under section 7 of the code. It is to be noted that said threshold is not applicable to other Financial Creditors. The said amendment is read as under:

In section 7 of the principal Act, in sub-section (1), before the Explanation, the following provisos shall be inserted, namely:

“Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less”

This amendment has limited the scope of imitation of insolvency by home buyers. The said amendment was also applicable to all the petitions for insolvency pending before Adjudication Authority but has not been admitted. This Amendment Act provides a period of 30 days for modification of applications pending before the Adjudication Authority in compliance with the above amendment, failing which the application will be withdrawn.

Thereafter many homebuyers approached the Supreme Court pleading that Amendment made in section  7 of the code is unconstitutional. Home Buyers were more concerned about the condition of compliance with minimum threshold by the pending petitions before NCLT within 30 days. Homebuyers said that it is very difficult for them to meet the minimum threshold within 30 days.

Supreme Court in case of Manish Kumar vs Union of India [Writ Petition no. 26/2020] held that “Status quo, as of today, with respect to the pending applications, shall be maintained in the meanwhile”. And therefore all the pending petitions before Adjudication Authority has not been withdrawn.

Conclusion:

Homebuyers are Financial Creditors and can initiate the Corporate Insolvency Resolution Process in the manner provided in section 7 of the code in case of default by Builder. However, their right has always been the subject matter of litigation and amendment. Further, their right has also been restricted by the Insolvency and Bankruptcy Code (Amendment) Act 2020.

Penalty u/s. 270A and 271(1)(c)

Shubham Agarwal
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Penalty u/s. 270A and 271(1)(c)

Before the introduction of S. 270A, Section 271(1)(c) of the Income Tax Act was in place being penalty on concealment of income and or furnishing inaccurate particulars of income. However this section always caused litigation between revenue and taxpayers due to the decision of quantum of penalty at the discretion of assessing officer. Now the said section is replaced by Section 270A inserted vide Finance Act 2016 with effect from AY 2017-18 for imposition of penalty for underreporting of income or for misreporting of income. Let’s discuss certain important aspects of both the sections.

Amount of penalty:

 Section 271(1)(c) provides for the imposition of a penalty for furnishing inaccurate particulars of income or for concealing the particulars. The amount of penalty ranges from 100% to 300% of the tax sought to be evaded at the discretion of assessing officers.

Section 270A(7) provides that penalty shall be imposable @ 50% of the tax payable in case of underreporting of income and 200% in case of misreporting of income. Therefore the new provision brings certainty to the quantum of penalty by prescribing a fixed percentage of penalty. Further section 270A(9) provides the cases of misreporting of income. They are as follow.

  • misrepresentation or suppression of facts; failure to record investments in the books of account;
  • claim of expenditure not substantiated by any evidence;
  • recording of any false entry in the books of account;
  • failure to record any receipt in books of account having a bearing on total income; and
  • failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply

Therefore, if the under-reporting of income arises out of cases mention above penalty imposable shall be 200% of the tax payable on under-reported income.

What is Underreporting of Income?

Section 270A(2) provides the cases where a person is said to be underreported his income. A person is said to be underreported his income when,

Normal Provisions

Section 270A(2)(a): Return of income is filed.

Amount of income assessed is greater than the income assessed determined after processing of return of income u/s. 143(1).

Section 270A(2)(b): No return of income is filed or ROI is filed for the first time in response to notice u/s. 148.

The amount of income assessed is more than the maximum amount not chargeable to tax.

For example: Mr. X has not filed the return of income within the time allowed u/s. 139(1). Thereafter notice u/s. 148 was issued to Mr. X for making the reassessment u/s. 147. Mr.X has filed the return of income declaring the total income at Rs. 10 lakh. Assessment in case of Mr. X was finalized after accepting the return filed in response to notice u/s. 148 determining total income at Rs. 10 lakh. Even though no addition has been made by assessing officer in the assessment u/s. 147, then also Mr.X is said to be underreported his income because income determined to exceed the maximum amount not chargeable to tax and Mr. X has filed the return of income for the first time.

Note: A recent amendment has been made by the Finance Act(no.2) of 2019 in section 270A with retrospective effect from AY 2017-18. Accordingly the cases where the person the not filed their return of income even though their income was liable to be taxed but subsequently on receipt of notice u/s. 148 they made full disclosure of income are also treated as a case of underreporting of income.

Therefore in the example referred above Mr. X will not be liable to the penalty for underreporting of income as per the earlier position of law that is a prior amendment.

Section 270A(2)(c) Previous reassessment or reassessment has been made.

Amount of income assessed is more that amount of income determined in the immediately preceding assessment or reassessment.

MAT Provisions.

Section 270A(2)(d): Return of Income is filed

The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, is greater than the deemed total income determined in the return processed u/s. 143(1)

Section 270A(2)(e): No return of income is filed or ROI is filed for the first time in response to notice u/s. 148.

The amount of deemed total income assessed as per the provisions of section 115JB or section 115jc is greater than the maximum amount not chargeable to tax.

Section 270A(2)(f) Previous reassessment or reassessment has been made.

The amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, is greater than the deemed total income assessed or reassessed immediately before such reassessment.

In case of Loss:

Section 270A(2)(g) Income assessed or reassessed has the effect of reducing the loss or converting such loss into income

Amount of underreported income.

Section 270A(3) prescribes the calculation of the amount of underreported income.

Case1: Return of income is filed and there is no previous assessment
Income assessed XX
Less: Income determined on processing of return u/s. 143(1) (XX)
Amount of Underreported income XX
   
Case 2: Return of income is not filed or filed for the first time in response to notice u/s. 148
Income assessed XX
Less: Maximum Amount not chargeable to tax [Not applicable in case of Company, Firm, and local authority because their income is taxable at flat rates. (xx)
Amount of underreported income XX
   
Case 3: Previous Assessment has been made
Income assessed XX
Income assessed in previous assessment (XX)
Underreporting of income XX

Determination of amount of underreported income where MAT/AMT is applicable.

Amount of underreported income will be calculated  by using the following formula:

(A — B) + (C — D)

where,

A = the total income assessed as per general provisions (Other than Section 115JC/115JB)

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 11

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

It is to be noted that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Circumstance where penalty could not be levied.

Example 1: Let’s assume that assessment in the case of XYZ Pvt. Ltd. was finalized after making the addition of ₹1,00,000/- on account of low gross profit. Assessing officer has estimated gross profit @ 5% as against 4% as declared by the assessee. However the books maintained by the assessee are correct and to the satisfaction of assessing officers and are in conformity with provisions of the Act. Now the issue arises whether the penalty is leviable.

Earlier Regime: Section 271(1)(c).

Section 271(1)(c) does not provide any exceptional cases where the penalty could not be levied. However various Judicial and Appellate authorities in various rulings decided the cases where penalty u/s. 271(1)(c) could not be levied. They are:

  1. CIT vs. Reliance Petroproducts (P) Ltd [322 ITR 0158] (SC): It was held by Honorable Supreme Court that where assessee makes any claim of expense in the return of income, however, the said claim was disallowed by assessing officer, the in such case penalty u/s. 271(1)(c) will not be attracted if no information furnished in the return of income is incorrect or inaccurate.
  • CIT vs Aero Traders Pvt. Ltd. [322 ITR 0316] (Delhi HC): It was held by Honorable Delhi High Court that estimated the rate of profit applied to the turnover of the assessee which in does not amount to concealment or furnishing inaccurate particulars.

Therefore no penalty u/s. 271(1)(c) can be levied in the example mentioned above after relying on the decision of Delhi High Court in the case of CIT vs Aero Traders Pvt. Ltd (Cited Supra)

New Regime: Section 270A

Section 270A(6) provides the cases which do not amount to underreporting of income. They are as follow:

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

 (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

 (c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

 (d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed u/s. 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

 (e) the amount of undisclosed income referred to in section271AAB.

Therefore no penalty could be levied in the example mentioned above as per section 270A(6)(b).

Example2:  Mr. Y, resident of Surat while filing his return of income has claimed the expense of certain items after relying on the decision of Jurisdictional High Court (Gujarat High Court). Case of Mr. Y was selected for scrutiny. In the Meantime decision of Gujarat High Court was reversed by Supreme Court on an appeal before the Supreme Court. Assessing officer while framing the assessment disallowed the said expense claimed by the assessee on the basis of the ruling of Gujarat High Court. Now the question arises that whether the penalty could be levied.

Alternative 1: Section 271(1)(c) Since the claim of expenditure is a debatable one and there is a failure on part of MR Y to furnish any inaccurate particulars of income, therefore penalty u/s. 271(1)© could not be levied. Reliance is placed upon CIT vs Electrolux Kelvenatro (Del. HC) [44 taxmann.com369]

Alternative 2: Section 270A: Mr. Y has offered a valid explanation in respect of the claim and the explanation offered by his also bona fide. And therefore no penalty u/s. 270A can be imposed as per section 270A(6)(a).

Immunity From Imposition of Penalty (Section 270AA)

Section 270AA provides for the immunity against imposition of penalty u/s. 270A or initiation of prosecution proceedings u/s. 276C and 276CC on an application made by the assessee in this regard after payment of interest and tax as specified in the notice of demand, provided that no appeal is filed against the order of assessment or reassessment.

To Whom Application is to be made?

To assessing officer within one month from the end of the month in which the order u/s. 143(3) or 147 is received by the assessee.

Note: Where underreporting of income arises due to cases of misreporting, immunity u/s. 270AA will not be granted.

Conclusion

Section 270A aims to bring certainty in the law of penalties by removing the discretion of assessing officers in deciding the quantum of penalty. Further section 270AA provides the immunity from imposition of penalty. Thus it clearly seems that the Government of India is focusing on reducing the tax litigation and the introduction of these two sections was one of those steps which our government had taken. However, since these sections are effective from AY 2017-18, whose scrutiny assessment has just completed in the last year and many of those cases are pending in appeal before CIT(A), the result of the implementation of theses sections will appear only after the passage of some time.

Finance Act 2020: NRI can stay in India only for 119 days, if his taxable income is more than Rs.15 lakhs.

CA Shristi Barmecha
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Finance Act 2020: NRI can stay in India only for 119 days, if his taxable income is more than Rs.15 lakhs.

During the Budget 2020, Finance Minister proposed changes in the criteria for determining residential status for Non Residents Indians for tax purpose. On March 23, 2020, the proposal was accepted in Lok Sabha with certain amendments, granting relaxation in the criteria originally proposed. Finance Bill 2020 was then passed in Rajya Sabha and later ratified by President on March 27, 2020 which is brought in force as Finance Act, 2020.

Let us have a concise and brief walk through of the proposed amendment and the assented amendment to have clear idea of actual changes in the Act.

Proposed amendment as per Finance Bill, 2020:

“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,

(a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty two days”, the words “one hundred and twenty days” shall be substituted;

(b) after clause (1), the following clause shall be inserted, namely:
“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

(c) for clause (6), the following clause shall be substituted, namely:  
“(6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is—
(a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or
(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.’.”

Approved amendment as per Finance Act, 2020:

“4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,

(a)  in clause (1), in Explanation 1, in clause (b), for the words “substituted” occurring at the end, the words “substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year,” for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted;

(b)  after clause (1), the following clause shall be inserted, namely:

“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;

(c)  in clause (6), in sub-clause (b), for the words ‘‘days or less’’ occurring at the end, the following shall be substituted, namely:—

‘‘days or less; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).”

After amendment , the overall provisions of Section 6 stands as under:

6. For the purposes of this Act,—

 (1) An individual is said to be resident in India in any previous year, if he—  
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty- two days or more ; or
 (b) [***]
 (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;

Explanation. 1—In the case of an individual,—

 (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

 (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and twenty days” had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year.

Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.

………

(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or

(d) a citizen of India who is deemed to be resident in India under clause (1A).

Explanation.—For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Highlights of amendments are explained below:

  1. New criteria introduced to determine residential status:

As per the Act, an individual is considered as a ‘Resident’ in India during a tax year, if he meets any of the following criteria:

(a) has been in India for an overall period of 182 days or more in the relevant tax year; or
(b) has been in India for 60 days or more in the relevant tax year and for 365 days or more during four tax years preceding the current tax year.

An individual who does not meet both the above criteria qualifies as a ‘Non-Resident’. The tax laws recognize that Indian citizens or Person of Indian Origin (PIO) ( now PIO and OCI are merged ) who stay outside India often visit India to take care of their assets, families or for other purposes. Therefore, relaxation is provided to Indian citizens/ PIOs, allowing them to visit India for longer duration, without qualifying as a ‘Resident’ of India. Under the existing tax laws, Indian citizens/ PIO visiting India shall qualify as a ‘Resident’ only if they are in India for at least 182 days in the tax year.

However, the government believes that some individuals misuse the relaxed provisions to avoid qualifying as a ‘Resident’ in India, by managing their period of stay in India as less than the specified limit of 182 days and thereby escaping the payment of tax on their Global income in India, even while they may be carrying out significant economic activities within India. Therefore, in order to curb potential tax loss, the Finance Bill 2020 proposes to reduce the threshold to 120 days in the tax year coupled with 365 days in previous four tax years in order for an Indian citizen/PIO visiting India.

As per the amendment in the Bill, applicable from April 1st, 2020, which was passed by Parliament subsequently, it is enacted that any individual (covers Indian citizen and Indian origin) will be considered as resident for tax purposes if he stays in India for 120 days or more in that financial year and 365 days or more in the immediately preceding 4 years to that financial year only if he has total taxable income, excluding foreign income, exceeding Rs.15 lakhs in that financial year. The first condition of stay for 182 days or more remains intact. Thus, if the taxable income of NRI in India is up to Rs.15 lakhs during the financial year, then he can stay in India for less than 182 days to maintain his status as Non-resident.

Thus, from now on, besides monitoring the number of days present in India, the visiting Indian is also required to keep a tab of his Indian taxable income. This is because once the total taxable income exceeds Rs.15 lakhs, then provision related to stay exceeding 120 days will become applicable.

The next question arises that if the NRI is considered as resident as per Section 6(1), will his global income become taxable? The Answer is prima facilely No.

This is because a resident is further categorized between ‘ordinary resident’ or ‘not-ordinary resident’. It is important to note here that an ‘ordinary resident’ is taxable in India on his global income as against a ‘not-ordinary resident’ whose income from sources outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India.

As per the current tax laws, an individual would qualify as a ‘not-ordinarily resident’ if he has been a ‘Non-Resident’ in India in at-least nine out of the ten previous tax years or has been in India for an overall period of 729 days or less during the seven previous tax years. An individual exceeding these limits would qualify as an ‘ordinary resident’ and therefore be required to pay taxes in India on his global income.

The new criteria for residential status will restrict the NRI’s visit to India for longer period as per Section 6(1) however relaxation is given as per Section 6(6) that if they fall in this category they will be treated as Resident but not ordinary resident (RNOR). This comes out as sigh of relief for NRIs because their foreign sourced income (income accrued outside India) will not be taxable in India solely because they have stayed for 120 days or more in that financial year.

2. Introducing the concept of deemed resident

A new clause is added to the Section, wherein if any individual, being a citizen of India, having total income exceeding Rs.15 lakhs during financial year, will be deemed to be resident of India, if he is not liable to tax in any other country by reason of his domicile or residence or any criteria of similar nature.

Till FY 2019-20, there was no such provision in the Act. The introduction of new provision of making certain Indian citizens a ‘deemed resident’ was done only to curb and bring those citizens under the tax net who had been traveling from country to country merely to maintain their non-resident status and ended up being a ‘resident’ of no country.

However as per clause (d) of Sub Section 6, deemed resident will be covered under Resident but Not Ordinary Resident and taxed accordingly. Although such ‘deemed resident’ may not have immediate tax implication on their global income due to being considered as Not Ordinary resident while they continue to visit India for less than 182 days but may stand to lose on the benefit of Not Ordinary Resident subsequently if their stay in India is for 182 days or more as another condition for not ordinary resident of being non-resident resident for 9 years out of 10 years immediately preceding that year may not be fulfilled.

3. Criteria for Resident but not Ordinary Resident (RNOR) liberalized

Up till now, there were two conditions for a person to be qualified as Resident but not ordinary resident under sub-section 6;

  1. An individual must have been NRI for 9 out of 10 years in immediately preceding financial year or;
  2. He has stayed in India for upto 729 days or less during 7 years immediately preceding financial year.

The proposal in the Budget was to have only one condition for a person to be treated as RNOR, that the individual must have been NRI for 7 out of 10 years in immediately preceding that financial year.

However, as per the amendment in the Act, the two existing conditions mentioned have been retained and the scope of applicability has been widened further to include the above two criteria of deemed resident and 120 day applicability for NRIs as explained.

Few examples below would help to bring more clarity in the modalities of amendment brought in the definition of residential status.

Case-1

Aman works in USA and visits India after 5 years and stays for a period of 150 days and his total taxable income in India exceeds Rs.15 lakhs during that financial year. In this situation, Aman does not automatically become resident because of his stay in India for more than 120 days, as he does not qualify for the cumulative condition of 365 days in the immediately preceding 4 years from the financial year. Thus, he will be Non-resident during that year and hence there is no need to ascertain the status as not ordinary resident.

Case-2

Let’s say Aman stays in India for 130 days during the year and had been in India for 365 days in 4 years immediately preceding that year. His total taxable income in India is Rs.16 lakhs. Now as he qualifies both the conditions as per the amendment, he will be treated as Resident as per Section 6(1) but not ordinary resident as per Section 6(6) and hence his global income will not be taxable.

Case-3

Karan, an Indian citizen, works in Dubai (tax free country) and also earns income from India exceeding Rs.15 lakhs. Not considering the DTAA agreement with UAE, Karan will qualify as deemed resident under clause (1A) of Section 6 of Income Tax Act, and will be treated as Resident but not ordinary resident for the purpose of taxation.

Case-4

Suppose Karan, being NRI was non-resident for 10 years and had been visiting India for only 100 days in a year but has completely shifted back to India during the year on 05.10.2020. Now for the FY 2020-21, as he has stayed in India for more than 120 days but less than 182 days, he shall qualify as resident but not ordinary resident as per clause (c) of Section 6(6) newly inserted.  In the second year i.e. FY 21-22, he stays in India for 365 days and hence he will qualify as resident as per Section 6(1) but will not be an ordinary resident as he had the status of non-resident in 9 out of 10 preceding years and hence for FY 2021-22 also, his global income will not be taxable. It will only be in FY 2022-23 that he would be considered as resident and ordinary resident wherein his global income shall be taxable.

Conclusion: NRIs need to carefully consider the total Indian income and plan their travel itinerary based on the amendment for their period of stay. The positive aspect is that in most cases, where the period of stay in India is 120 days or more (and also 365 days or more in preceeding 4 years) or in case of Indian citizens who are not tax residents of any other country and are deemed to be tax residents of India, the status would be RNOR and hence foreign income shall not be taxable in India.

Editor’s Note : Considering the situation of Lockdown during COVID19 , there shall be a lot of NRIs who could not go back abroad because of lockdown or even NRI who voluntarily came to India considering it more safe and homely during these stressed times. These NRIs should consult their respective Chartered Accountant or expert to plan their taxes and residential status. Alternatively, if you are an NRI and if the amended tax provisions concerns you, you may place a request on https://www.itatorders.in/case-research and get on a Free Consultation Call from our team of legal experts to discuss the issue.

Related-Party and its Reporting Requirements

Anjali Garg
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Related-Party and its Reporting Requirements

Meaning of related party

So what does the term ‘Related Party’ mean.? How important this is to companies and individuals. What are the conditions to be recorded or understood before any transaction takes place? When and How it is to state in the books of account? When will the transaction be called as related party transaction? What if all the requirements required are not followed?

Well.., As per IndAs 24;

A related party is an individual or entity connected to the reporting entity;

  • An individual or a close member of the family of that individual is connected to a reporting agency where that person has authority, shared authority or substantial influence over the organization or is a member of its key management staff.
  • An entity is linked to a reporting entity’s parent, subsidiary, fellow subsidiary, partner, or joint venture, or is owned jointly owned, or substantially affected or operated by a related party.

Now, it’s time to know about Related-party transactions which is a transfer of resources, services, or obligations between a reporting entity and a related party, irrespective of whether a price is paid. Accordingly, IAS 24 specifies that it discloses the existence of the related party relationship as well as information on certain transactions and deferred balances, including obligations, required for users to recognize the possible impact of the relationship on the financial statements. Thus, IAS 24 requires an entity to disclose key management personnel compensation in total and by category as specified in the Standard.

So, let’s have a look at the disclosures that need to be made:

  • Relationships between the parent and the subsidiaries should be disclosed irrespective of whether any transactions have been made or not. Unless the parent of the company or the ultimate controlling party does not produce consolidated financial statements, instead the next senior parent shall be designated for public use of the consolidated financial statements.
  • An entity will report the compensation total to the main management personnel for each of the categories such as short-term employee benefits, post-employment benefits, termination benefits, share-based payment and other long-term benefits.
  • If main management resources are provided by another company, instead it must report only the sums paid for the delivery of such resources.
  • If, throughout the financial year, the company has dealings with the related party, it shall report the existence of such dealings, as well as all the information such as the number, unpaid balances and obligations, the provision of questionable debts, and the costs recognized in respect of poor and uncertain debts.

The disclosures for similar items can be made in aggregate except when separate disclosure is necessary to understand the effects of related party transactions on the financial statements.

As per Companies Act, 2013 under section 2(76) which defines a related party, with reference to a company to mean;

  • Director or a key managerial person or their relatives or
  • A firm, private co. in which the partner, director/manager or his relative is a partner or
  • A private co. or a public co. in which a director holds along with his relatives, more than 2% of its paid-up share capital.

Now,

 Related Party Transaction as per sec 188

Exemption from sec 188 where such a transaction takes place during the ordinary course of business and at arm’s length price. Where Arm’s length price means if a company is entering into any transaction with its related party then that price which the company would have taken or given if such transaction would have taken place with any unrelated party i.e. the actual market price of that good, property or service. Therefore any transaction made at arm’s length price called arm’s length transaction and such transaction did not require approval of the board for its completion.

Disclosure Requirements;

Disclosures to be made in the notice of Board Meeting;

  • name of the related party and nature of the relationship;
  • nature, duration of the contract and specifies of the contract or arrangement;
  • material terms of the contract or arrangement including the value, if any;
  • any advance charged or earned for the contract or arrangement, if any; and
  • the manner in which prices and other terms of trade are calculated, both included as part of the contract and not considered as part of the contract;
  • whether all factors applicable to the contract have been taken into account, if not, the specifies of factors not included with the justification for not taking into account certain factors;
  • any other information relevant or important for the Board to take a decision on the proposed transaction.

Disclosure by interested directors;

Every representative of an organization involved or engaged in a contract or arrangement or a planned contract or arrangement entered into or to be entered into in some manner, explicitly or indirectly;

  • with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or
  • with a body corporate in which such director is a promoter, manager, Chief Executive Officer of that body corporate; or
  • with a firm or other entity in which, such director is a partner, owner or member, as the case may be

Shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed.

Disclosures to be made in Register of contracts or arrangements in which directors are interested;

Every company shall maintain one or more registers in Form MBP 4, and shall enter therein the particulars of contracts or arrangements with a related party with respect to transactions to which section 188 applies.

Consequences of non-compliance:

  1. If any related party transactions or contracts are signed without the consent of the board and/or members and if, as the case may be, the board and/or members do not ratify the agreement within 3 months at a meeting, the contract or agreement will be voided at the Board’s discretion and if the agreement is with any related party any director or approved by any other director then the concerned directors are liable to indemnify the loss incurred by the company.
  2. In addition, the company can also move against a director or employee who, in contravention of the provisions of this section, has entered into such a contract or arrangement to recover any damage suffered by the company as a result of such contract or arrangement.
  3. Any director or other employee of a company who has entered into or approved a contract or agreement in violation of the provisions of this section shall:-
  4. In the case of listed co. be punishable by imprisonment for a period of up to 1 year or by a fine not less than Rs. 25,000/- but extending to Rs. 5,00,000/- or both;
  5. In case of any other co. a fine of no less than Rs. 25,000/- but which may extend to 5,00,000/- shall be punishable.
  6. Another is ineligible to be a director for five years if, within the last five years preceding it, he is convicted of an offense associated with related party transactions.

As per, Sec 40A(2)(b) The persons referred to in clause (a) u/s 40A(2) are the following;

  • In case the individual is an assessee relative of the individual.
  • In case the assessee is HUF/ Firm/ Company/ Association of Person any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member
  • any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
  • a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest;
  • a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
  • any person who carries on a business or profession,
  • where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
  • where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation — for the purposes of this subsection, a person shall be deemed to have a substantial interest in a business or profession, if,—

In a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty percent of the voting power; and

In any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty percent of the profits of such business or profession.

The word relative is defined u/s 2(41) of the Income Tax Act in relation to an individual, as the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

It is disclosed in the company’s annual report which details related party disclosures providing a better understanding of the company’s operations.

An auditor is required to give in a tax audit report payment details for the persons specified in the part 40A(2)(b) of the Form 3CD(Audit Tax Report) referred to in Clause 23. The information to be disclosed in clause 23 can be found easily from the Related Party Disclosures under AS 18 in the Notes to Accounts of Audited Financial Statements as tax audit is normally conducted after the statutory audit. However, the related parties as per AS 18 and the persons covered u/s 40A (2)(b) are not completely the same.

Conclusion

There is no consistency between the criteria of the Companies Act, 2013, Sebi norms, and Accounting principles for related parties. The Companies Act, 2013 requires disclosure at the time of contract or agreement while the accounting norm requires disclosure at the time of transaction. Clause 49 adds to the definition provided under the Act a new class of related parties that includes close family members, fellow company organizations, joint ventures of the same third party that their combinations which are not in the accounting norm or the Companies Act. Revised Clause 49 includes the consent of shareholders for all transactions of material related parties, with no provision for transactions in the ordinary course of business or arms-length. The related party transactions are thus widespread and form part of all business group activities.

Extensions announced under Direct Tax, Audit Compliance and RERA due to Covid 19

Khushi Surana
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Extensions announced under Direct Tax, Audit Compliance and RERA due to Covid 19

The Finance Minister Ms. Nirmala Sitharaman, in the press release held on 13.05.2020 announced various relaxations in respect to deadlines and due dates under Income tax return filing, Tax Audit, Vivad se Vishwas scheme and RERA,2016.

Have a look at the revised due dates below:

  1. Income Tax Returns Deadline For 2019-20 Extended to End-November

The dates for the financial year 2019-20, for filing the income tax returns have been            pushed back from July 31, 2020 and October 31, 2020 to November 30, 2020.

  1. Tax Audit Deadline for 2019-20 Extended to End-October

The date for the tax audit has also been pushed back by a month from September 30, 2020 to October 31, 2020.

  1. Payment due date for “Vivad se Vishwas” Scheme Extended

The period of “Vivad se Vishwas” Scheme for making payment without additional amount will be extended to December 31, 2020. Applicants will not have to pay any extra interest or penalty on the extension, said the minister. 

  1. Extension of Registration and Completion Date of Real Estate Projects under RERA

There has been an adverse impact due to COVID and projects stand the risk of defaulting on RERA timelines. Ministry of Housing and Urban Affairs will advise States/UTs and their Regulatory Authorities to the following effect:

  • Treat COVID-19 as an event of ‘Force Majeure ‘under RERA which means the epidemic COVID-19 will be considered as unforeseeable circumstances that prevent someone from fulfilling a contract.
  • Extend the registration and completion: The registration and completion date Suo-moto by 6 months for all registered projects expiring on or after 25th March, 2020 without individual applications. Regulatory Authorities may extend this for another period of up to 3 months, if needed.
  • Issue fresh ‘Project Registration Certificates’ automatically with revised timelines
  • Extend timelines for various statuary compliance under RERA concurrently.

IMPACT: These measures will de-stress real estate developers and ensure completion of projects so that home buyers are able to get delivery of their booked houses with new timelines.

Why it is important to know your business’s “Working Capital Cycle”?

CA Richa Agarwal
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Why it is important to know your business’s “Working Capital Cycle”?
A working capital cycle (WCC) may sound like financial jargon, but it’s an important concept for business owners to understand. What entrepreneur wouldn’t want to know how fast their company can turn a profit? The Working Capital Cycle is a measure of how quickly a business can turn its current assets into cash. Understanding how it works can help small business owners like you manage their company’s cash flow, improve efficiency, and make money faster. To understand net working capital, you should know what your current assets and current liabilities are. Current assets can be converted to cash in a short-period. In financial parlance, “current” or “short-term” typically refers to one year. A business’s current assets might include inventory, accounts receivables, prepaid expenses, or short-term investments. They don’t include long-term assets, such as real estate or equipment. Your firm’s Current liabilities are its debts and obligations within the same period. These might be bills to vendors, payroll, or serving loans. Working capital is your current assets net of current liabilities. In other words, working capital is the assets you have after paying your bills, at least in the short-term. Essentially, the working capital cycle begins when assets are obtained to start the operating cycle and ends when the sale of a product or service is converted to cash. Ultimately, the working capital ratio that you have will determine if you can afford short-term expenses, so it’s imperative that you monitor your business’s finances. One way to do this is to keep a balance sheet, which is a statement of your business’s assets, capital, and liabilities. Referring to your balance sheet frequently will enable you to review how much positive working capital you have, so that you can adjust payment cycles or other factors

What Affects the Cycle?

The stages of a working capital cycle will vary depending on your business’s industry and how you operate, but the key elements will be the same. For accounting purposes, the working capital cycle is measured by how long inventory takes to move, and the time it takes to receive cash payment from the sale, subtracted by how long your business has to pay its bills. For instance, the working capital cycle for a retail company might involve purchasing raw materials on credit to begin the cycle, selling the product over several weeks, and collecting cash from credit card sales a month later. Let’s say it takes the business 90 days to turn inventory into cash, and the bill for inventory is due in 60 days. Therefore, the business’s working capital cycle is 30 days, which is how long the company will be short on cash. Ideally, owners will want a negative working capital cycle, in which they receive payment for goods before their own bills are due. This can be accomplished by revising various stages of the cycle, such as moving inventory faster, or asking customers to pay sooner. You could also lengthen your accounts payable or credit terms, for example, by asking vendors to give you more time to pay your bill.

Financing Growth and Working Capital

Businesses with normal/positive cycles often require financing to cover the period of time before they receive payment from customers and clients.  This is especially true for rapidly growing companies. A common warning axiom regarding growth and working capital is to be careful not to “grow the company out of money.” To deal with this potential problem, companies often arrange to have financing provided by a bank or other financial institution.  Banks will often lend money against inventory and will also finance accounts receivable. For example, if a bank believes the company is capable of liquidating its inventory at 70%, it may be willing to provide a loan equal to 50% of the value of the inventory. (The 20% difference between 70% and 50% gives the bank a buffer, or financing cushion, in case the inventory has to be liquidated). Additionally, if a company sells products to businesses that have high creditworthiness, the bank may finance those receivables (called “factoring”) by providing early payment of a percentage of the total revenue. By combining one or both of the above financing solutions, a company can successfully bridge the gap of time required for it to conclude its working capital cycle. Small business owners who fall short might turn to financing options, such as a revolving credit line, cash advance, or business loan to bridge these gaps in cash flow. Ultimately, you should try to shorten the working capital cycle. The faster your business converts assets to cash, the sooner that cash is available for use to run and grow your operations.

Index funds – Here’s why they’re a smart investment.

Anjali Garg
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Index funds – Here’s why they’re a smart investment.

Index funds, created by John Clifton Bogle almost 45 years ago as a way for everyday investors to compete with the pros. Index funds are a form of passive investing which is an investing technique that involves purchasing and keeping long-term assets, rather than performing regular trades to try to beat the market because they allow investors to buy a lot of stocks at once and hold them for the long term. We know the importance of investing in stocks to grow our wealth. But choosing the companies and industries that will deliver the best earnings growth is a real challenge. Competitive trends, management’s ability to execute on their plans and unpredictable events, make it very difficult to forecast results with success and consistency. Building a well-rounded portfolio of individual stocks is complex. Also it is difficult to actively buy and sell individuals securities and match the market’s performance. So to build a portfolio that is designed to grow and to get invested in many different companies and sectors it has to be well diversified.

At a period when financial markets have witnessed a dramatic downturn since the Covid-19 pandemic broke out and values of several securities reach their multi-year lows, investors have to pick stocks from certain firms that have a relatively solid balance sheet.

What will you do?

However, instead of focusing at specific firms, though, an investor will preferably participate in index funds that would have stocks of industry leaders around the board. Here, the easiest and low cost way to get invested in as many companies as possible is to invest in a mutual fund or an exchange traded fund(ETF). And an insightful solution to that is Index Investing which gives two important advantages that are: diversification and minimizing costs.  Index funds can give a broad exposure to the market. In fact, some are so broad that buying them means owing a tiny piece of almost every company in any country, with just one investment! 

Index funds have, proved to be a big success for retirement savers and other non-finance professionals, also for investors who are risk-averse and expect predictable returns as it does not require any extensive tracking. First of all, since you no longer pay someone to pick stocks for you, index funds appear to be less costly for investors than actively managed funds. In 2020, the average passive fund expense ratio is around 0.5% as compared to active managed funds having an expense ratio of 1% to @2.5%. These index fund investments are not controlled aggressively, so no plan is needed for the fund manager to devise. So, the disparity is in the expense ratio. So, Index Fund’s main USP is low expense ratio which generate comparatively higher returns on investment.

Index funds collect money from a group of investors and then buy individual stocks or other assets that form a particular index which helps to reduce the related costs that managers charge when opposed to other funds where someone is actively strategizing to include which investments and thus incurs low expenses. With an index fund, the mix of stocks — what’s known as its diversification — helps to minimize the portfolio’s related risk.

As the global business situation is volatile and the conditions are evolving quite quickly, the investors need to pick the index carefully. Ideally an individual would be invested in diversified funds such as Nifty or Sensex. When the Nifty is benchmarked with an index fund, the portfolio would make up the same 50 stocks as the benchmark. Individual investors who are not aware can hang on to investing funds for flexibility, liquidity and investment comfort. Some of the index funds to investment now are: LIC MF index Fund, ICICI Prudential Index Fund, HDFC Index Fund Nifty 50 Plan, UTI Nifty Index Fund and SBI Nifty Index Fund.

“Consistently buy an S&P 500 low-cost index fund,” Buffett said. “I think it’s the thing that makes the most sense practically all of the time.”

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