Ministry of Law and Justice notified The Banning of Unregulated Deposit Schemes Ordinance 2019 vide notification published in official Gazette on 21^st February 2019. It provides a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interest of depositors and matters connected thereto. This bill could not be passed in the house of Rajyasabha however, President given his consent looking at the prevailing circumstances in exercise of powers conferred by clause (1) of article 123 of the Constitution. The said ordinance is applicable immediately (effective from 21^st February 2019). This law will help in tackling the risk of accepting fraudulent deposits and to safeguard the interest of investors. The law has been enacted especially to regulate Unregulated Deposit Schemes after the Saradha and Rose Valley chit fund schemes that shook West Bengal & other states. There are 166 more such chit fund cases where investors lost their monies that have been registered in the last four years. The introduction of this ordinance will regulate and control non-corporate deposit takers who tempt the public at large with lucrative schemes. Definition of “deposit takers” also include any individuals/ group of individuals, proprietorship concerns and partnership firms apart from other recognized legal structures (viz. LLP, companies, societies)

The ordinance defines “Deposit” as an amount of money received by way of an advance or loan or in any other form, by any deposit taker with a promise to return whether after a specified period or otherwise in whatever form. Pursuant to the definition of “Deposit” and exclusions, now any individual or group of individuals cannot take any deposit or loan from any person other than relatives, whereas partnership firms can take deposit or loan from relatives or partners only. However, genuine connection to businesses like an advance for supply/hire of goods, consideration of immovable property, security or dealership deposited for the performance of the contract and supply of capital goods are excluded from the ambit of the ordinance.

The ordinance defines “Regulated Deposit Scheme” as those schemes regulated by SEBI, RBI, IRDA, State Governments or Union Territory Governments, National Housing Banks, Pension Funds Regulatory, EPFO, Central registrar Multi State Co-operative societies, MCA and other regulatory bodies. All other deposits will be considered as “Unregulated Deposits”. No deposit taker shall directly or indirectly promote, operate issue any advertisement soliciting participation or enrollment in or accept deposits in pursuance of an Unregulated Deposit Scheme. It has been further clarified through insertion of explanation in Multi State Co-operative Societies (Amendment) Act that it shall not be entitled to receive deposits from persons other than voting members. Vide amendment of section 45I of RBI Act 1934, an explanation has been inserted stating that the amount accepted by co-operative society from members/ shareholders/ associate members who do not have full voting rights in meetings shall be deemed to be deposit.

Under section 9, the government may designate an authority whether existing or to be constituted which shall create, maintain and operate an online database for information on deposit takers operating in India. As per section 10 of the ordinance, existing and new deposit takers shall intimate the designated authorities about its business in such form and manner as applicable from time to time as prescribed and if the competent authority has a reason to believe that the deposits are being accepted pursuant to an Unregulated Deposit Scheme, it may direct deposit taker to furnish documents/statements as it considers necessary relating to or connected with the deposit.

The ordinance provides for punishment ranging from 1 year to 10 years and fine ranging from Rs. 2 lakh to Rs.10 lakh in case of non-compliance. The ordinance provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. Depositors’ have priority to all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority at the time of insolvency.

Conclusion

As per the literal reading of ordinance, it seems that unless the amount received by way of advance or loan is falling under the exclusions of definition of “Deposit”, then the same is subject compliances prescribed under the ordinance. As can be seen from the preamble to ordinance, the intention of the legislature is to provide for a comprehensive mechanism to ban the unregulated deposit schemes to protect the interest of depositors. It seems that routine business transactions of accepting unsecured loan should be out of ambit of the law. The ordinance further gives power to the Government to exempt further schemes by notification and one can expect some relief/clarity through notification when final rules are published. Many representations are expected to happen in coming days and it is expected that Government will come up with clarifications in the form of FAQ soon.

Ministry of Corporate Affairs (MCA) has introduced KYC of Companies by inserting Rule 25A under Companies (Incorporation) Rules, 2014. This has been notified by MCA vide notification dated 21st February 2019 and shall be effective from 25th February 2019. Below are the highlights of the requirements of Rule 25A.

Every Company incorporated on or before 31st December 2017 is required to file e-Form ACTIVE (Active Company Tagging Identities and Verification) latest by 25th April 2019. In case of default in filing of e-Form ACTIVE, the status of the Company in MCA records shall be changed from Active to ACTIVE-non compliant and it shall attract penalties under Section 12(9) of Companies Act, 2013. Companies which has not filed its financial statements u/s. 137 and/or annual return u/s. 92 with the Registrar of Companies and companies which have been struck off or are under the process of striking off or under liquidation or amalgamated or dissolved as recorded in Registrar shall not be allowed to file form ACTIVE

Further, defaulting Company shall not be able to report the Corporate Actions to Registrar of Companies like Changes in Share Capital, Changes in directors except cessation, change in registered office and corporate restructuring. Belated filing will attract an additional fees of Rupees Ten Thousand.

In the e-form ACTIVE, the following details are required to be intimated to Registrar of Companies

• Address of registered office with photo of registered office also showing at least one Director/Key Managerial Personnel who will sign the e-Form ACTIVE
• Email ID of Company: Email ID shall be verified through One time password (OTP)
• Number of Directors with list of directors as on date of filing of e-form
• Details of Auditors – Statutory and Cost Auditor
• Details of Managing Director, Chief Executive Officer or Manager or Wholetime Director, Chief Financial Officer and Company Secretary.
• Details of annual returns filed for financial year 2017-18.
• Photograph of registered office showing external building and inside office also needs to be attached to e-form

This will enhance transparency and will server as yardstick to detect and identify shell/dormant companies.

GST Policy Wing, CBIC has issued three circulars on 18th February, 2019 as listed below in brief.

Circular No. 90/09/2019 – GST dated 18-02-19: 

All registered persons making supply of goods or services or both in the course of inter-State trade or commerce to specify the place of supply along with the name of the State in the tax invoice. Sections 10 and 12 of the Integrated Goods and Services Tax Act, 2017 deals with the place of supply in case of supply of goods and services respectively. Since, GST is a destination-based consumption tax, the tax paid by a registered person accrues to the State in which the consumption of goods or services or both takes place.

Contravention of the above shall attract penal action under the provisions of section 125 of the CGST Act i.e. penalty upto Rs.25,000/- 

Circular No. 89/08/2019 – GST dated 18-02-19: 

It has been brought to the notice of tax payers that mentioning details of inter-state supplies made to unregistered persons in Table 3.2 of FORM GSTR-3B and Table 7B of FORM GSTR-1 is mandatory even though not mentioning the same in section 3.2 of GSTR 3B will have not impact on tax computation. Since the apportionment of IGST collected on inter–State supplies made to unregistered persons in the state where such supply takes place is based on the information reported in Table 3.2 of FORM GSTR-3B by the registered person, reporting is very important.

Contravention of the above shall attract penal action under the provisions of section 125 of the CGST Act i.e. penalty upto Rs.25,000/- 

Circular No. 91/10/2019 – GST dated 18-02-19

It was clarified through circular No. 3/1/2018-IGST on 25^th May 2018 that from 1st of April, 2018, the supply of warehoused goods before their clearance from the warehouse would not be subject to the levy of integrated tax.

Supply of warehoused goods while deposited in custom bonded warehouses had the character of inter-State supply as per the provisions of IGST Act 2017. But, due to non-availability of the facility on the common portal, suppliers have reported such supplies as intra-State supplies and discharged central tax and state tax on such supplies instead of integrated tax. In view of revenue neutral position of such tax payment and that facility to correctly report the nature of transaction in FORM GSTR-1 furnished on the common portal was not available during the period July, 2017 to March, 2018, it has been decided that, as a one-time exception, suppliers who have paid central tax and state tax on such supplies, during the said period, would be deemed to have complied with the provisions of law as far as payment of tax on such supplies is concerned as long as the amount of tax paid as central tax and state tax is equal to the due amount of integrated tax on such supplies.

The Department for Promotion of Industry and Internal Trade (DPIIT) has issued a new notification in supersession of its earlier notification no. GSR 364(E), dated 11-04-2018. The DPIIT has extended the definition of the start-up and also relaxed norms for the purpose of claiming exemption from applicability of provision of section 56(2)(viib) of the Income-tax Act, 1961 (hereinafter referred to as ‘Angel tax’).

As per new definition, an entity shall be treated as a start-up for a period up to 10 years from its date of incorporation and registration. Earlier this period was 7 years. Similarly, an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs. 100 crore as against Rs. 25 crore earlier.

The Govt. has also relaxed the conditions to claim the exemption from the applicability of provision of Angel tax. Consideration received from angel investor by eligible Start-ups for shares issued or proposed to be issued shall be exempt up to an aggregate limit of Rs. 25 crore. Earlier, an start-up could avail the tax exemption only if angel funding doesn’t exceed Rs. 10 crore.

However, the aggregate limit of Rs. 25 crore will exclude consideration received by eligible Start-ups for the following classes of persons

1. non-Resident
2. a venture capital company/venture capital fund
3. listed company having net worth of Rs. 100 crore or turnover of Rs. 250 crore in preceding year

Further, the start-ups claiming exemption from Angel tax shall not be eligible to invest in any of the following assets:

A. land or building being Residential house other than that used for the purposes of renting.

B. land or building not being a residential house other than that occupied by start-up for its business or renting.

C. loans and advances, if the start-ups isn’t engaged in ordinary business of lending of money.

D. capital contribution made to any other entity

E. shares and securities

F. motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10.

G. any other asset, whether in the nature of capital asset or of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56.

However, the above conditions are not applicable in case start-up holds the above assets as stock-in-trade, in its ordinary course of business.

Notice u/s 271I states that if the assessee has failed to furnish information or has furnished inaccurate information u/s 195(6) in form of filing of Form 15CA and 15CB, there is a penalty for Rs. 1,00,000/- for each such default. Now, previously Form 15CA and 15CB needn’t be submitted in the case of transactions involving import of goods from non- resident or foreign company if the same is not chargeable to tax. But the provisions of Sec. 195(6) of the income tax Act were amended by the Finance Act 2015 and which came into force with effect from 1-6-2015 which asked the assessee to file 15CA irrespective of whether the amount is chargeable to tax or not , subject to some exemptions in Rules. The failure to comply with Section 195(6) attracts penalty u/s 271I

Note

Hence, this article is helpful for those who have been served with a notice u/s 271I for AY 2015-16 and the transaction in quesion is for import of goods from non-resident or foreign company.

Penalty for non filing of Form 15CA & Form 15CB was also introduced through Section 271I. Now the following Paper gives the line of action in drafting submissions before Assessing Officer or Appellate Authorities, and an Penalty u/s 271I can be dropped/ not imposed on the basis of two grounds

• Operative Rule 37BB (even after amendment in Section 195(6) w.e.f 1.6.2015) stated that the Form 15CA is to be furnished only when payments are chargeable to tax. It is undisputed that the payments on account of purchase of raw materials were not chargeable to tax and there was no liability of TDS also and hence Form 15CA/15CB was not required.
• AO has discretionary power to levy penalty U/s 271I, and such position can be countered u/s 273B

Main Argument

At the outset, it is important to discuss the interplay of provisions of Section 195(1), Section 195(6) and Rule 37BB. The relevant sections are reproduced as under –

The existing “Section 195(6)- Other sums” reads as under

The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.

Old Law– Section 195(6) was substituted w.e.f 1.6.2015. Prior to substitution, sub- section (6) read us under

“The person referred to in sub-section (1)shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.”

Further Section 195(1) reads as under

“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC)] [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” [***]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”

On perusal to the above, it is clear that Section 195(1) is applicable only when the payment is made to the non-resident and such non-resident is chargeable to tax in respect of the said payment. It is also clear that earlier, information u/s 195(6) inserted by Finance Act, 2008 was to be provided for only those payments which were covered by 195(1) ( i.e. chargeable to tax) however due to amendment by Finance Act 2015, Section 195(6) was made applicable to all foreign payments w.e.f 1.6.2015. Thus, the earlier provisions of sub-section (6) of section 195 of the Act provided that the person referred to in section 195(1) of the Act shall furnish prescribed information under Rule 37BB in Form 15CA/15CB. Thus, earlier remitter was required to report foreign remittances in Form 15CA in respect of payments chargeable to tax. Now the amended provisions of Section 195(6) made a reference to Rule 37BB however it is submitted that Rule 37BB was amended w.e.f 01.04.2016 and not 01.06.2015.

Thus, from the above provisions, it is clear and it is submitted that operative Rule 37BB when the assessee made foreign payments for raw material (even after amendment in Section 195(6) w.e.f 1.6.2015) stated that the Form 15CA is to be furnished only when payments are chargeable to tax. It is undisputed that the payments on account of purchase of raw materials was not chargeable to tax and there was no liability of TDS also and hence Form 15CA/15CB was not required and hence it is submitted that no penalty u/s 271I is to be levied.

Alternative Argument

Section 271I was inserted w.e.f 1.6.2015 which reads as under

Penalty for failure to furnish information or furnishing inaccurate information under section 195.- If a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information, or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.

There is also no dispute to the legal proposition that penalty u/s 271I is not mandatory but  is discretionary and AO has to exercise his judicial discretion before levying the penalty. The use of the word “may” in Section 271I clearly shows that discretion is conferred on the AO to impose penalty or not to impose the penalty having due regard to the facts and circumstances of the case. Hon’ble Supreme Court in the case of Hindustan Steels – 83 ITR 26 observed that penalty will not be imposed merely because it was lawful to do so. Now, further the provisions of Section 273B is reproduced below for ready reference:

273B. Penalty not to be imposed in certain cases

Notwithstanding anything contained in the provisions of [section 271-I,no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.

Thus, section 273B clearly states that no penalty shall be imposable on the assessee, for any failure referred to in certain provisions if he proves that there was reasonable cause for the said failure. The provisions listed in Section 273B includes penalty levied under Section 271I and the assessee submits that he was of the belief that no Form 15CA/ Form 15CB is to be furnished for import of raw material.

It is also well settled that the expression ‘reasonable cause’ must receive a liberal interpretation so as to advance substantial justice.

Hon’ble Delhi High Court in the case of Woodward Governor India (P) Ltd. – 253 ITR 745 has observed as under

“Reasonable cause as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinarily prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences follow.”

So it can be understood that penalty cannot be imposed, if the assessee is able to prove that there was reasonable cause for the said failure of not complying with the condition to file 15CA when goods were imported. Thus, before 1.6.2015, the Act as well as Rule was applicable for payments which are chargeable to tax. Since there was amendment in the Act w.e.f 1.6.2015 but no corresponding amendment was made in Rules 37BB, the assessee was of the bonafide belief that Form 15CA/Form 15CB was not required during this operative period of 1.6.2015 to 31.3.2016. Further the authorized person viz bank through which foreign payment was remitted did not require the assessee to furnish Form 15CA before making such payment which shows that the Banks were also not aware of such provisions. Hence these arguments proves bonafide belief of the assessee and thus once bonafide cause is shown, the same may also please be considered as reasonable cause for non-imposition of penalty u/s 271I more so when there was no loss to the Revenue being caused as the payments were not chargeable to tax.

Conclusion

Penalty for non filing of Form 15CA & Form 15CB was introduced through Section 271I. Now, Penalty u/s 271I can be dropped/ not imposed on the basis of the two grounds discussed above. However it is also important to understand that, whenever there is an Amendment in law, and the corresponding Rules are not in parity with the respective Act then in case of any conflict between the Act and Rules, the Act shall prevail, but as in this particular situation, it might be helpful to prove that since Rules were not changed, assessee had bona fide belief and reasonable cause and hence relief can be claimed in view of the provisions of Section 273B.

Disclaimer

This article doesn’t constitute professional advice. The author does not represent that the said informationis 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.

A recent “Standing Order” No.01/2019 [C.No: IV/16/32/2019–CT (Tech.)] issued by the Principal Commissioner of Central Tax, Hyderabad on 04-02-2019, instructs GST Tax Officials and field formation Officers to inquire into cases of late filing of returns, where asseseees has paid interest only on the net tax liability of GST and further instructing to issue recovery notices u/s 79 of CGST/SGST Act in all such cases where interest on the ITC Component of overall tax liability is not paid, arising or accruing due to late filing of GSTR-3B returns. Similar view is being taken on the part of department officials while inquiring into reasons for delay in filling of returns.

This “Standing Order” was issued without any regards to the already made announcement of the outcome of the 31st GST Council duly declared through press release dated 22-12-2018, that suitable amendment in section 50 of the CGST Act is to be made to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger. The view taken by the GST officials is detrimental to the interest of the tax payers on the ground that Interest is levied whenever there is delay in recovery of tax due to the government. However, when any sum of monies represented as ITC are already available to the credit of the Government, then there is no loss of revenue or delay in collection of tax wherever GST liability is settled with balance in credit ledger since to the extent of credit balance, tax is not payable in cash.