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Bbbbbbbbbbbbbbbbbbbbbbbbbb case

  1. 1. LAB CASE STUDY 1. CASE DIRECTORS Harbour Engineering Private Ltd. vs Commissioner Of Income-Tax, ... on 22 February, 1962 All the tree shareholders are directors of the company, and the first of them is also the managing director. The managing director is a qualified mechanical engineer. M.V. Sastry is an electrical engineer with considerable experience. Syed Mohammed is a partner in Messrs. K.P.V. Sheik Mohammed Rowther& Co., well-known steamer agents at Madras. On and from April 1, 1955, the directors claimed to be paid remuneration at the rate of Rs. 500 per month for each director. The managing director claimed an additional salary of Rs. 1,250 per month from that date. This salary and remuneration were not drawn by the directors each month but were adjusted at the end of the calendar year The resolution to pay remuneration to the directors was passed at a directors meeting held on May 7, 1955. The Tribunal has adverted to the fact that in the minuteds book the figure 9 denoting the month in which the meeting was held is over-written by 5. Mr. Hayden appears to have conceded before the Tribunal that the minutes were not written by him contemporaneously with the holding of the meeting but were written later on with the aid of memoranda made by him. The annual general meeting of the company was held on May 21, 1956, and in that meeting the resolution of the board of directors to pay salary and remuneration to the directors was ratified. It is not necessary for us to go into the question whether there is a valid resolution binding the company to enable the directors to get the remuneration now claimed as deduction from the companys profits as we are of opinion that in any event the claim is not permissible in law. This was introduced into the statute book under section 7 of the Finance Act of 1956, with effect from April 1, 1956. This section is intended to prevent companies from claiming allowances which really benefit the directors, directly or indirectly, under the mask of allowances under section 10(2). No allowance considered by the Income-tax Officer as excessive or unreasonable (having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company therefrom)
  2. 2. is rmissible even though warranted by section 10(2) if it results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or if it is in respect of any asset of the company used by the director wholly or partly for his own purposes or benefit. companys trade or business or the normal practice obtaining in such trade. A few illustrations will be helpful to understand the real scope of this section. A director owns a building which is let out to the company for its business for rent. Normally and in the usual course the building may not get more than Rs. 100 a month. The company pays a rent of Rs. 500 to the director, the owner of the building. The building is used solely for the purpose of the business of the company. But for section 10(4A) the payment of Rs. 500 per month as rent will be a properly deductible allowance under section 10(2)(i). But by reason of section 10(4A) the Income-tax Officer can hold that the payment of Rs. 500 per month is excessive and unreasonable, that it is calculated to benefit the director indirectly and that the proper allowance would not only be Rs. 100, the rent which the company could have paid if the building had not been owned by the director. Regarding capital asset of the company like building, depreciation is permitted under section 10(2) of the Act. 2. CASE: DIRECTORS UNION OF INDIA v. SATYAM COMPUTERS SERVICES LTD. & ORS [Decided on 9.1.2009] Companies Act, 1956 - Sections 388B, 397, 398 and 408 – Financial mismanagement - Whether board of directors to be removed - Held, yes. Brief Facts: The Respondent Company indulged in grave financial mismanagement practices due to which its Chairman resigned. The Central
  3. 3. Government applied to the CLB for the removal of the Board of directors and to appoint its directors to manage the respondent company. Decision: Petition allowed. 3. CASE DIRECTORS A. L. MUDALIAR v. ASSISTANT REGISTRAR OF COMPANIES [Decided on 5-8-2009] Companies Act, 1956 - Sections 159 and 162 - Offence by company — Director’s Liability—Failure to file balance sheet and profit and loss account—Non-executive director resigning before date of default— Proceedings initiated against ex-director –Whether proceedings to be quashed- Held, Yes. 4. CASE DIRECTORS AUROBINDO PHARMA LTD. v. ANIL KUMAR PODDAR [Decided on 14- 8-2009] Companies Act, 1956 – Section 284(4) – Removal of directors – Notice by shareholder seeking removal of director for failure to supply records sought for – Documents sought for supplied and inspection of records offered – Rights of member abused – Whether company should place notice before general body meeting – Held, No.
  4. 4. 5. CASE DIRECTORS RANBAXY LABORATORIES LTD. v. DR. JAYARAM CHIGURUPATI [Decided on 21-10-2009] Companies Act, 1956 – Sections 260 and 287(2) – Quorum for Board Meeting – Board meeting convened by single director on account of resignation of two directors to appoint two additional directors to constitute quorum – Whether such appointment is valid – Held, Yes. 6. CASE DIRECTORS 1994 (5) TMI 232 - HIGH COURT OF RAJASTHAN HerdilliaUnimers Ltd. VersusArunBansal Offences against the act to be cognizable only on complaints by registrar, etc. category of offences enumerated under section 545 of the Companies Act. Considering the facts of the case that the complaint has been filed just to harass the petitioner-company and is a frivolous complaint, the same has no force. Even on a specific query whether under any law or any section of the Companies Act the complainant is competent to file the complaint, when he is not a shareholder and when there is no dispute regarding payment of the money by the company, counsel for the complainant failed to point out any provision where under such complaint can be entertained. If such proceedings are allowed to continue, then it will be an abuse of the process of the court. In such circumstances and in view of the provisions of section 621 of the Companies Act, 1956, the proceeding in Case No. 59 of 1993, ArunBansal v. HerdilliaUnimers Ltd., before the Special Court of
  5. 5. Judicial Magistrate (Economic Offences) Rajasthan, Jaipur, is quashed. Consequently, this petition is allowed. 7. CASE DIRECTORS T. P. Sokkalal Ram Sait Factory ... vs T. P. S. H. SelvaSarojaAnd Others. on 2 April, 1974 To this petition, the applicants mother and the managing director of the company has filed a counter-affidavit. It is pointed out in the counter affidavit that Company Petition No. 84 of 1969 was filed by a person claiming to be a next friend of the applicant, who was a minor at the time of the application. On his mothers application the said next friend was removed by an order in O. S. As Nos. 43 to 46 of 1970. By that time the applicant had attained majority and he filed an affidavit stating that the allegations of mismanagement were unfounded and that he was not desirous of prosecuting debtor of the company could not be put in issue in the proceedings in Company Petition No. 84 of 1969, which was one under sections 397 and 398 of the companies Act, 1956, relating to the management and administration of companys affairs. It is averred that the applicants denial of his debt was not bona fide and that he owed large sums to the company to the tune of Rs. 5,54,866 as on August 16, 1973. Another point taken in the affidavit is that the applicant could not require this court to adjudicate on the issue of his liability to the company and seek to stay the tax recovery proceedings against the company.
  6. 6. 8. CASE : AMALGMETION SEQUENT SCIENTIFIC LTD. In re., Khanwilkar A. M. J [Decided on 16- 6-2009] Companies Act, 1956 – Sections 391 and 394 – Scheme of amalgamation - Objection by intervenor having supply agreement with transferor company that scheme in breach of agreement – Whether objection tenable – Held, No. 9. CASE: AMALAGMETION MEKASTER VALVES AND ENGINEERING SERVICES P. LTD., [Decided on 06.05.2008] Companies Act, 1956 - Section 394 - Scheme of amalgamation - shareholders approved the scheme - Whether provisions of sections 17, 21, 94 and 97 of the Act have to be separately complied with - Held, No. 10. CASE AMALGEMETION RAMCO SUPER LEATHERS LTD. v. DHANALAKSHMI BANK LTD [Decided on 17-8-2009]
  7. 7. Companies Act, 1956 – Sections 391 & 394 – Scheme of amalgamation and demerger – Secured creditor – Banks – Stipulations in loan agreements that company would not undertake any amalgamation or reconstruction without prior permission of banks – Material facts not placed before sanctioning court – Scheme sanctioned without notice to banks – Order of sanction modified to be subject to approval of secured creditors – Whether the modification is valid – Held, Yes. Case study (Book) amalgamation CASE STUDY: 198.2 – P1 X owns a block of assets (consisting of plants A & B, depreciation rate 15 %. On April 1, 2009, depreciated value of the block is Rs. 10, 40,000. On July 7, 2009, the block of assets is transferred by X to Y for Rs. 30, 70,000. Find the tax consequences under the following situations ― 1. X is amalgamating company and Y, being an Indian company, is the amalgamated company and the block of assets is transferred by X to Y in a scheme of amalgamation. Y does not own any other asset. 2. Suppose in (1) (supra) Y is a foreign company.
  8. 8. 3. Suppose in (1) Y owns a block of assets (consisting of plants A and B, depreciation rate 15 %) on April 1, 2009. Depreciated value of the block of asset being Rs. 6, 40,000. Y purchases plant E, an office appliance (rate of depreciation 15 %0 on March 10, 2010 for Rs. 2, 90,000. It is put to use on the same day. 4. X is partnership firm. It is converted into Y company. The conversion satisfies the conditions of section 47(xiii). Y does not own any other asset. 5. X is a firm. The business of X is taken over by Y, a partner in the firm. On April 1, 2009, Y owns plants C and D (depreciation rate 15 %, actual cost Rs. 36,000). It is put to use on the same day. On March 13, 2010, Y sells plant C for Rs. 26, 40,000. Solution:- Computation of depreciation allowance on Plants A & B Rs. Depreciated value of block on April 1, 2009 10, 40,000 Depreciation @ 15% 1, 56,000 Apportionment between X and Y Rs. No. of days when assets are held by X (from April 1, 2009 to July 6, 2009) 97 days
  9. 9. No. of days when assets are held by Y (365 days – 97 days) 268 days Depreciation available to X (Rs 1, 56,000 * 97 / 365) 41, 458 Depreciation available to Y (Rs. 1, 56,000 * 268 / 365) 1,14,542 Tax consequences in the hands of X and Y Situatio n 1 Situatio n 2 Situatio n 3 Situatio n 4 Situati on 5 Tax consequences in hands of X: Depreciation Short term capital gain under sec. 48 read with sec. 45 Depreciation in hands of Y: Depreciated value of block of block on April 1, 2009. Add: Actual cost of assets acquired from X Add: Actual cost of plant E acquired by 41,458 Nil1 Nil 10,40,0 41,458 20,30,0 002 Nil 41,458 Nil1 6, 40,000 41,458 Nil3 Nil 30,70,0 41,458 20,30,0 00 60,78,0 00
  10. 10. Y Less: Assets sold during the year Written down value of block Depreciation: On asset acquired from X On Plant E On other assets 00 - - 30,70,0 00 - - 10,40,0 00 2,90,00 0 - 00 - - 30,70,0 00 36,000 26,40,0 00 10,40,0 00 1,14,54 2 - - 30,70,0 00 1,14,54 2 - - 19,70,0 00 1,14,54 2 21,7504 96,0005 30,70,0 00 1,14,54 2 - - 65,44,0 00 1,14,54 2 2,7006 5,15,70 07 Total depreciation Written down value 1,14,54 2 1,14,54 2 2,32,29 2 1,14,54 2 6,32,94 2
  11. 11. of the block on April 1, 2010 9,25,45 8 29,55,4 58 17,37,4 58 29,55,4 58 59,11,0 58 Notes: 1. It is exempt under section 47(vi). 2. As the amalgamated company is not an Indian company, the provisions of the section 47(vi) are not applicable. 3. It is exempt under section 47 (xiii). 4. It is 15% of ½ of Rs. 2, 90,000 as Plant E is put to use for less than 180 days during the previous year. 5. It is 15% of (Rs. 19, 70,000 – Rs. 10, 40,000 – Rs. 2, 90,000). 6. It is 15% of ½ of Rs.36, 000. 7. It is 15% of (Rs. 65, 44,000 – Rs. 30, 70,000 – RS. 36,000). 8. In the above problem, situation 4 covers the case if a firm is converted into company by satisfying conditions of section 47(xiii). The tax treatment will be same in the following cases [except exemption under section 47(xiii)] ― a. if X is a firm & the business sis taken over by Y a partner in the firm; b. if X is HUF & the business is taken over by Y a member of the family; c. if X is a sole proprietor & business is taken over by Y, a firm in which X is one of the partners. d. if X is a sole proprietor & business is taken over by a company in which X is of the shareholders. In (d) if conditions of section 47(xiv) are satisfied, exemption will be available to X under that section. 9. In situations 2, 4 and if the Assessing Officer is satisfied that fair market value of Plants A and B is less than Rs. 30, 70,000 (being the consideration paid by Y), then he can take action under Explanation 3 to section 43(1).
  12. 12. 11 CASE : MEMBERSHIP Mismanagement in family companies - a case study - Company Law in India There was a closely held company floated by all family members. All the family members own shares in the Company. The family has active participation in other companies too. In the company as referred to, few members are actively involved in day-to-day management of the company and few other members are not involved in day-to-day management. While this is the case, one of the family members who are qualified to approach the Company Law Board under section 399 of the Companies Act, 1956, approaches the Company Law Board alleging some mismanagement in the Company. The applicant before the Board refers to many irregularities and especially the action of the majority in selling the company properties for throw away price. The majority has taken a stand denying the allegation that the properties of the company are sold for a throw away price and also specifically alleges that the applicant before the CLB did not participate in the day-to-day affairs of the Company. The Board has given an exit option to the applicant rather looking into the issue of irregularities. The issues for consideration in the above case are like: 1. Will the majority be allowed to contend that they are privileged in the company as they run the company and participate in the day- to-day affairs of the company? 2. How to deal with the issue of undervaluation of company properties in the given case? 3. Whether the applicant before the Board be forced to exercise exist option on the ground that he did not participate in the day-to-day affairs of the Company. Study of case and the issues: With regard to the first issue, barring the rights provided under the Companies Act, 1956, the majority can never contend that it is privileged as it is involved in day-to-day affairs of the Company. It is same even in family companies as company is a company irrespective of its shareholding pattern or kind. The Act deal with the issue of incorporation and functioning of the company and in a family companies, the understanding and the regulations contained in the Articles matters more. But, no where it is provided in the Act that the a person or a group which is taking care of the
  13. 13. day-to-day affairs of the Company is privileged over the minority keeping the provisions of the Act apart. A shareholder is a shareholder and he has every right to question the misdeeds in the company and he need not participate in day-to-day affairs of the company thinking that the directors are expected to act fairly in the interest of all the shareholders. As such, in my opinion, the issue of non-participation in the affairs of the company or its functioning can not be given significance under company law. The second issue is very very complicated. Some companies over values its properties and procures loan. Few other companies under values the company properties in order to get away from paying taxes to the Government. The overvaluation may not create much problem to the shareholders and the creditors are duty bound to inquire and looking into the issue of overvaluation when the company approaches them for a loan. But, the issue of undervaluation is very very dangerous. The problem with the undervaluation is that most of the money goes unaccounted. The minority may allege that the valuable properties of the company are sold for a throw away price and the majority may show the guideline value at the area. It is very very complicated issue to deal with. Because, once the properties are sold, then, the purchasers' interests are also to be considered. The issue of Board's power in setting aside the deeds to be looked into so carefully.Its one of the very complicated areas under section 397/398. The applicant before the Board who alleges oppression and mismanagement in the company should be able to prove that the properties are sold for a throw away price and for that he should resort to the enquiry as is being done by the Rent Control Courts while fixing the fair rent. What I feel is that the second issue as referred to above is always complicated. With regard to the third issue, though the Board is empowered with many powers in the interests of the Company and as provided under section 397/398 of the Act, I don't think that it is right to force the applicant to exercise exist option on the ground that the applicant did not participate in the day-to-day affairs of the Company.
  14. 14. 12 CASE: RECONSTUCTION ADVANCED MEDICAL OPTICS INDIA P. LTD., [Decided on 28-1- 2009] Companies Act, 1956 – Sections 78 and 100 to 104 – Capital reduction- Reduction to write off accumulated losses – Articles of association permitting reduction – Special resolution passed accepting reduction – Creditors’ rights not prejudiced – No objection from any person to proposed reduction- Whether Reduction could be sanctioned- Held, Yes.