CAPITAL INTRODUCED BY PARTNERS IN THE FIRM COULDN’T BE DEEMED AS LOAN TO INVOKE PROVISIONS OF SEC. 269SS

CAPITAL INTRODUCED BY PARTNERS IN THE FIRM COULDN’T BE DEEMED AS LOAN TO INVOKE PROVISIONS OF SEC. 269SS

Untitled7ASection 269SS, read with section 271D, of the Income-tax Act, 1961 – Deposits – Mode of taking/accepting (Amount Contributed by partners of firm)

Provisions of section 269SS would not be violated when money is exchanged inter-se between partners and partnership firm in spite of fact that partnership firm and individual partners are separate assessees [2015] 55 taxmann.com 202 -HIGH COURT OF DELHI – CIT v. Muthoot Financiers

FACTS 

The assessee-firm was involved in the business of banking. It was registered under the Kerala Money Lending Act.

During the course of the assessment proceedings, the Assessing Officer found that the firm had accepted payments from the partners in cash.

The Assessing Officer taking a view that the partners and the firm being two distinct and separate entities, they would also fall in the mischief of section 269SS.

The Assessing Officer thus imposed penalty under section 271D.

The Commissioner (Appeals) upheld the order of the Assessing Officer.

The Tribunal, however, opined that the amount brought by the partner to the firm could not be said to be a loan. It was also not in dispute that the amount taken was capital of the firm in view of language of the section 269SS.

The Tribunal thus taking a view that amount brought by the partner to the firm in these circumstances, be it in cash could not be said to have violated the terms of section 269SS, set aside the impugned penalty order.

On revenue’s appeal the High Court Held in favour of assessee

The question raised is whether in a transaction between the firm and the partner the provision of section 269SS would be attracted and if section 269SS was attracted and therefore violated, whether the assessee would be entitled to benefit of section 273B. The position that emerges is that there are three different High Courts, which have held that section 269SS would not be violated when money is exchanged inter se between the partners and partnership firm in spite of the fact that the partnership firm and individual partners are separate assessees. The opposite view is also possible. Keeping in view that three different High Courts have taken a consistent view of the facts, which are similar to the facts in the present case, which includes the judgment of the Madras High Court as late as in the year 2013, the same line of reasoning given by the Madras High Court in the case of CIT v. V. Sivakumar [2013] 354 ITR 9/32 taxmann.com 62 is followed. Having said that, it is clear that any interest, salary, bonus, commission or remuneration paid by a firm to any of its partners should be regarded as a mode of adjusting the amount that must have been taken to have been contributed to the partnership assets by a partner, who can really contribute in kind as well as in money. Applying this principle, it is opined that the transaction effected in these cases cannot partake the colour of loan or deposit and as such, section 269SS nor section 271D would come into play.

It is undisputed fact that the money was brought by the partners of the assessee-firm. The source of money has also not been doubted by the revenue. The transaction was bona fide and not aimed to avoid any tax liability. Creditworthiness of the partners and genuineness of the transactions coupled with the relationship between the ‘two persons’ and two different legal interpretations put forward could constitute a reasonable cause in a given case for nor invoking sections 271D and 271E. Section 273B would come to the aid and help of the assessee.

In view of aforesaid, it is held that the appeal filed by the revenue is devoid of any merit and, same is accordingly dismissed.

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-435 201 94

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BUDGET 2015: AMENDMENTS TO DEDUCTION UNDER CHAPTER VI-A

BUDGET 2015: AMENDMENTS TO DEDUCTION UNDER CHAPTER VI-A

29Section 80C :All investments in ‘Sukanya Samridhi Scheme’ were already eligible for deduction under Section 80C. Now all the withdrawals and interest accrued on such Scheme will also be exempted from tax with retrospective effect from April 1, 2015

Additional deduction under Section 80CCD: Additional deduction of Rs. 50,000 is provided for contribution to pension Scheme under Sec. 80CCD

Sec. 80D : Health Insurance and Medical Expenditure: limit of deduction under Sec. 80D increased from Rs 15000 to Rs 25000

limit of deduction for senior citizen or very super senior citizen from Rs 20000 to Rs 30000 A deduction is also proposed for payment made on account of medical expenditure of a very senior citizen which does not exceed Rs 30000.

Section 80DD :Additional deduction for medical treatment of differently-abled persons

The Finance Bill, 2015 proposes to amend section 80DD to give additional deduction of Rs 25,000 to differently-abled persons. As per the proposed amendment additional deduction would be available for medical treatment of dependent persons with disability or severe disability

Section 80DDB : Additional deduction for medical treatment of Super Senior Citizens

The Finance Bill proposes additional deduction of Rs. 20,000 under Section 80DDB to Super Senior Citizens (80 years or above), for sum incurred on medical treatment of prescribed disease or ailment. The new deduction for a super senior citizen shall be Rs. 80,000 under this provision.

Benefit of section 80DDB shall be allowed to assessee if he obtains prescription for such medical treatment from a neurologist, an oncologist, an urologist, a haematologist, an immunologist or such other prescribed specialist (not necessarily a Government Doctor).

Section 80U : Deduction under Section 80U raised limit of deduction raised to Rs. 75,000 in case of person suffering with disability and to Rs. 1,25,000 in case of person suffering with severe disability.

Section 80JJAA : Employment of new workmen. It is proposed that the benefit shall be extended to all assessees with manufacturing units rather than restricting it to corporate assessees only.

Further, in order to enable the smaller units to claim the incentive, the threshold limit on new regular workmen has been reduced from 100 to 50.

Deduction under Section 80G : An amendment is proposed to section 80G which will provide deduction for donations made to ‘Swachh Bharat Kosh’ and ‘Clean Ganga Fund’ as set up by Central Government.

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-43520194

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APPOINTMENT OF STATUTORY AUDITORS AND THEIR SERVICES UNDER THE COMPANIES ACT, 2013

APPOINTMENT OF STATUTORY AUDITORS AND THEIR SERVICES UNDER THE COMPANIES ACT, 2013

Untitled22ASECTION 139, 141,142, and 144 of the Companies Act, 2013 and the Companies (Audit and Auditors ) Rules, 2014 deal with appointment of Auditors, the criteria to become Auditors and payment of their remuneration etc. The new Act has not simplified the process. It is for us to understand the complexities involved and  to a possible extent  present the same in a simplified manner. Section 139 starts with the appointment of First Auditors and Rule3 (7) deals with appointment of subsequent auditors. Payment of remuneration is dealt in Section 143 and duties and responsibilities of the Auditors are dealt in Section 144. Section 141 deals with criteria to become a Statutory Auditor. Rule 10 gives some explanations to Section 141 who is not eligible to become Auditors .Rule 3 deals with the manner and selection of Auditors by the Audit committee of certain classes of Companies. Restriction on terms of office of a Statutory Auditor is dealt in Section 139 and Rule 5.

After studying the Act and the Rules, I have made an attempt to simply the legal aspects of appointments, manner of appointments , criteria of appointments, payment of remunerations, casual vacancy appointments, services rendered concerning the Auditors.

1. Appointment of a Statutory Auditor

A. Appointment of Auditors by Companies (other than Government Owned/controlled Companies )

  • Section 139(6) reads that the First Statutory Auditors shall be appointed within 30 days of registration of the Company by the Board so as to hold office from the conclusion of the First Board Meeting till the conclusion of the First Annual General Meeting and thereafter the Auditors shall be appointed by the members in the First Annual General meeting so as to hold office from the conclusion of the First Annual General Meeting till the Conclusion of the Sixth Annual General Meeting.
  • Asper Rule 3 (7), all existing Companies registered on or before 31.3.2014 and which are not supposed to appoint the First Auditors shall appoint Auditors in the forthcoming Annual General meeting so as to hold office from the conclusion of that meeting till the conclusion of the sixth Annual General Meeting.
  • If the Board fails to appoint the first Auditor, it shall inform the members who shall appoint an Auditor within 90 days in an Extra Ordinary General Meeting and the appointed Auditor shall hold office till the conclusion of the next Annual General Meeting.
  • However in every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.

Note : Rule 3(7) states under the heading Explanation “”If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act.’ This is contrary to the provisions contained in Section 139(10) wherein it states if no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the Company.

B. Appointment of Auditors in Government owned/controlled Companies

  • The Controller and Auditor General of India shall appoint the first Auditor within sixty days from the date of registration of Company. If the Controller and Auditor General of India fails to appoint the Auditor within the above period, the Board of Directors shall appoint the Auditor within the next thirty days, failing which, it shall inform the members who shall appoint the Auditor within 60 days in an Extra Ordinary General Meeting.
  • The subsequent Auditors shall be appointed by the Controller and Auditor General of India within 180 days from the commencement of the financial year and the appointed Auditor shall hold office till the conclusion of the next Annual General Meeting.

2. Manner of Appointment of Statutory Auditors and Payment of Remuneration

i. Procedure to appoint Statutory Auditors in the case of Companies not having an Audit Committee

a. An Auditor matching his qualification and experience with the size and requirements of the Company shall be chosen by the Board.

b. The Board shall then see whether there are any orders or pending proceedings relating to professional matters of conduct against the proposed Auditor before ICAI or any other competent Authority.

c. The Board has to see whether he satisfies the eligibility norms specified under Section 141.

d. The Board has to obtain a declaration from the Auditor that he is eligible to issue a certificate under rule 4(1).

Note: Asper Rule 4(1), the Company has to get the eligibility certificate after the Auditor is appointed in the Agm. What if the management finds out if the Auditor is ineligible to issue the certificate after he is appointed. The Board should then take the pains to identify a new Auditor in replacement of the appointed Auditor. To avoid such a scenario, it is suggested that clause (d) be followed.

e. The Board has to finalise the remuneration payable to the Auditor in consultation with him and pass the resolution in the Board subject to the approval of the shareholders in the Annual General Meeting. Section 142 requires the Company to quantify the remuneration in the General Meeting.

Note: Hitherto, under the Companies Act, 1956, The Company had the privilege to appoint Auditors in the AGMs on a remuneration that could be decided by the Board at a later date. That era is over.

f. With the Board’s consent on the Appointment as well as on the remuneration, the intended resolution to be passed could be mentioned in the AGM NOTICE itself. Here is the model resolution.

“Resolved that in accordance with the provisions of Section 139, 141 and 142 of the Companies Act, 2013 read with rule 3(7) of the Companies (Audit and Auditor) Rules, 2014, M/s.ABC & Co, Chartered Accountants, Bangalore be and are hereby appointed as Statutory Auditors of the Company so as to hold the said office from the conclusion of this meeting till the conclusion of the sixth Annual General Meeting on a consolidated remuneration of Rs.22,000 (Rupees twenty two thousand four hundred and seventy two only) for each Audit period unless otherwise revised subsequently at the time of ratifications in the subsequent Annual General Meetings”.

“Resolved further that M/s ABC & Co, Chartered Accountants, Bangalore shall in addition to the above remuneration be eligible to reimbursement of all expenses incurred during the course of Audit and availing   all such facilities as are extended to them during Audit”.

g. The Company shall file an E Form in ADT–1 intimating the Registrar about the appointment of Auditors within 15 days from the date of his appointment

h. The Company shall also inform the Auditors about his appointment in the AGM within 15 days of his appointment.

ii. Procedure to appoint Auditors in the case of Companies having an Audit Committee

i. Instead of the Board, the Audit Committee has to go through the process of selection of Auditors as mentioned in Clause (a) to (e) and then recommend to the Board which in turn recommends to the Members for consideration in the AGM.

ii. If the Board disagrees the recommendation of the Audit committee, it shall refer back again to the said Committee citing reason for disagreement and recommending reconsideration.
iii. If the Audit committee decides not to reconsider the recommendations made by the Board, the Board shall then record the reason for disagreement and send its own recommendations for consideration to the members to decide in the Annual General Meeting.

3. Conditions and Eligibility Criteria for Appointment of Auditors

The Auditor appointed by the Members or by the Board as the case may be, shall submit a certificate stating that

i. he is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013, the chartered Accountants Act, 1949 and the rules and regulations made there under.
ii. The proposed appointment is asper the terms provided under the Act.

Note: Section 141 and rule 10 list out the eligibility criteria for the Auditors and Section 144 list out services that he should not render either directly or indirectly while serving as Auditor

iii. the proposed appointment is within the specified limits laid under the Act.

iv. the list of proceedings against the Auditor or Audit firm or any partner of the Audit firm pending with respect to professional matters of conduct as disclosed in the certificate is true and correct.

4. Filling up of Casual Vacancy caused due to various reasons in the case of Companies not subject to Audit by the Comptroller and Auditor General of India

a. In the case of casual vacancy caused by the resignation of the Auditor, the following procedures have to be followed.

i. The Board of Directors shall approve the filling up the casual vacancy within thirty days and then recommend such appointments to the members.

ii. The members in an Extra Ordinary General Meeting shall confirm and approve the vacancy filled up by the Board on its recommendations within three months.

b. In the case of casual vacancy caused by any other reason other than resignation of the Auditor, the Board of Directors has the powers to fill such a vacancy within thirty days.

c. In the case of Companies having Audit Committee, filling up of casual vacancy shall be done after taking into account the recommendation of such a Committee in addition to the recommendation of the Board.

The Appointed Auditor shall hold office till the conclusion of the next Annual General Meeting

5. Filling up of Casual Vacancy in the case of Companies subject to Audit by the Auditor Controller General of India

i. The Comptroller and Auditor General of India shall fill up the casual vacancy within thirty days.

ii. In case the casual vacancy is not filled as mentioned in (i) above, the Board of Directors shall fill such vacancy within the next 30 days.

6. Reappointment of either the retiring Auditor or some other Auditor in the place of the retiring Auditor.

As per Section 139(9) of the Act, the retiring Auditor shall be reappointed at an Annual General Meeting if

i. he is not disqualified for reappointment

ii. he has not given the company a notice of unwillingness to be reappointed.

iii. A special resolution is passed at the Annual General Meeting appointing some other Auditor or providing expressly that he shall not be reappointed.

iv. The retiring Auditor shall continue to remain as Auditor till the end of this term viz., conclusion of the sixth Annual General Meeting if no other auditor is appointed or reappointed.

Note: This is contrary to rule 3(7) as mentioned earlier.

7. Services to be rendered by the Statutory Auditor

i. The Auditor shall conduct the Statutory Audit the manner in which it is laid down under Section 143.

ii. The Auditor in his report shall specify all matters as are enumerated in Section 143 and Rule 11.

iii. In case of frauds, the Auditor shall report in the manner laid under Rule 13.

iv. Section 146 requires the Auditor to attend either by himself or through his authorized representative who shall be qualified to be an Auditor all general meetings and he shall have the right to be heard on any part of business that concerns him. (How ever the Company may exempt the Auditor in complying with this provision)

8. Services not to be rendered in the capacity as Statutory Auditor

The Auditor shall not render either directly or indirectly to the Company, or its Holding or Subsidiary Company the following services.

a. Accounting and Book keeping service.

b. Internal Audit

c. Design and Development of any financial information system

d. Actuarial Services

e. Investment advisory services

f. Investment Banking Services

g. Rendering of outsourced financial services

h. Management Services

Any other services as may be prescribed by the Government.

8. Restrictions on Term of Office that a Statutory Auditor can hold applicable only to certain class of Companies

The term of office of an Individual Auditor shall be for five years and for a firm of Auditors shall be for two consecutive term of five years for the following classes of Companies.

  • All listed Companies
  • All unlisted Public Companies having a share Capital of Rs.10 Crores or more.
  • All Private Companies having a capital of more than Rs.20 Crores
  • All Companies not falling under clause (b) and (c)but having Public borrowings from financial institutions, banks or Public deposits of Rs.50 Crores or more.

However the Act has given time to comply with the above provisions by the aforesaid companies within a period of three years viz., on or before 31–3–2017.

Note: In effect these Companies have to comply with the said provisions in the AGM to be held on or before 30–9–2016 as technically speaking there will be a violation of Section 139 if they continue as Auditors beyond 31–3–2017… as the act says ‘within three years from the date of commencement of this Act’ .may be the Government may issue a clarification in this regard in future. 

10. APPOINTMENT OF FIRST AUDITOR

As per section 139(6) the first auditor of the company shall be appointed by the Board within 30 days of Incorporation. In case of Board’s failure, an EGM shall be called within 90 days to appoint the first auditor. The law is silent regarding from when this time limit of 90 days be reckoned, it is better to take a stricter view and interpret that the 90 days limit starts from Incorporation rather than expiry of 30 days(i.e. failure of Board) from it.

Tenure: – Till conclusion of 1st annual general meeting.

Remuneration: – As per proviso to section 142(1) remuneration of the first auditor can be decided by the Board.

11. Does appointment of 1st auditor require obtaining written consent, certificate and filing of form ADT-1 ?

The appointment of first auditor is governed through section 139(6) which starts with a non-obstante clause [notwithstanding anything contained in sub-section (1)] and it is sub-section (1) which requires obtaining consent & certificate from auditor and filing of form ADT-1 with ROC.

Interpretation of “notwithstanding anything contained….”:- As per Supreme court, the non-obstante clause is used to avoid the operation and effect of all contrary provisions. In case any departure between non-obstante clause and other provisions, no-obstante clause will prevail.

Since section 139(6) does not speak anything contrary to section 139(1) as far as obtaining of consent, certificate and filing of form is concerned therefore in can be interpreted that ADT-1 should be filed with ROC for first auditor also.

Procedure

  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
  • Obtain consent & certificate from auditor.
  • If audit committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
  • Call Board meeting.
  • Approve the appointment of auditor at the first Board Meeting.
  • Intimate the auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

12. APPOINTMENT OF AUDITOR AT 1ST AGM

As per section 139(1) every company shall appoint at its 1st annual general meeting an individual or a firm as an auditor of the company who shall hold office who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting

Tenure subject to ratification :- The tenure of 5 consecutive years is subject to ratification by shareholders at every AGM.

Remuneration: –As per section 142(1) remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.

Manner & Procedure for selection to be governed through rules :- it is prescribed in rule 3, explained hereunder,

1. Consideration of the appointment – The Board or the Audit Committee (where it is required to be constituted) shall consider the qualifications, experience of the auditor and whether the aforesaid attributes are commensurate with the size and requirements of the company. Further regard should also be given to professional matters of conduct against the proposed auditor before the ICAI, Court or any competent authority.

2. Recommendation of name – The procedure depends upon whether audit committee is required to be constituted or not.

  • Constitution of audit committee required: In this case the committee shall recommend the name of the auditor to the Board which if agrees with the recommendation, will further recommend it to the members. If the Board does not so agree, then it shall refer back the recommendation to the committee which may reconsider its recommendation, however if the committee decides not to do so then the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members.
  • Audit Committee not required: The committee shall recommend the name of the auditor to the members.
  • Written consent and certificate from the auditor :-   As per 2nd proviso to section 139(1) auditor has to give a written consent to become auditor of the company & a certificate stating that appointment is in accordance with conditions prescribed.

Contents of the certificate (rule 4(1) of Companies (Audit and Auditor) rules, 2014) are:-

  • The person being appointed is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder.
  • The proposed appointment is as per the term provided under the Act.
  • The proposed appointment is within the limits laid down by or under the authority of the Act.
  • The list of proceedings pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
  • The Certificate should also state that the auditor is eligible and not disqualified for appointment as per section 141(requirement of 3rd proviso).

Intimation to Auditor & ROC :- The company shall inform the auditor regarding appointment and also file a form ADT-1 to ROC within 15 days of the meeting in which the auditor is appointed.

Procedure

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask for the following information and documents:-

  • Qualification, experience and matters of professional conduct pending before ICAI, Court or any other competent authority.
  • Consent to become auditor.
  • Certificate (contents discussed above)

2. Call Board meeting for the purpose of following:-

  • Considering information and documents received in point 1.
  • Considering that the qualification & experience are commensurate with the size & operations of the company.
  • Recommending the name of the auditor to the members.
  • Calling of AGM.

3. Convene the AGM and get the Ordinary resolution appointing the auditor passed at the meeting.

4. Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Note: – In case the Company is required to constitute the Audit Committee, then the work of consideration and recommendation vests with it. The concept of the same has been discussed above.

13. RE-APPOINTMENT OF AUDITOR

After completion of tenure of 5 consecutive years the auditor may be re-appointed by complying with the provisions of section 139(9) which states that subject to the provisions of sub-section (1) & the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if-

  • He is not disqualified for re-appointment.
  • He has not given the company a notice in writing of his unwillingness to be re-appointed
  • A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

Does Re-APPOINTMENT or RATIFICATION of auditor at AGM require obtaining written consent, certificate and filing of form ADT-1 ?

As per 2nd,3rd & 4th proviso to section 139(1) consent, certificate and filing of form is required for appointment. Since as per explanation to section 139(1) appointment includes re-appointment therefore the documentation & filing of form is also required at the time of re-appointment but Ratification does not require filing of ADT-1 but it will be a better practice if certificate of disqualification is obtained even in case of ratification. 

Procedure

The procedure for re-appointment of Auditor shall more or less be same as both, appointment & re-appointment are goverened through provisions of Section 139(1). However, following additional things shall be kept in mind :-

  • Provisions of section 139(9)
  • Provisions relating to rotation of auditors

14. ROTATION OF AUDITORS

1. As per section 139(2) no listed company or companies as prescribed shall appoint or re-appoint :-

  • An individual as auditor for more than one term of 5 consecutive years; and
  • An audit firm as auditor for more than two terms of 5 consecutive years

Note: 1. Break in the term for a continuous period of 5 years will be considered as fulfillment of criteria of rotation. (explanation 2 to rule 6(3)(ii)).

2. the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be(rule 6(3)(i))

Cooling period: – 5 years from completion of tenure as said above.

15. OTHER PERSONS WHO CANNOT BE APPOINTED AS AUDITOR:-

  • Firm having a common partner to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years (1st proviso to section 139(2)).
  • The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms(rule 6(3)(ii)).
  • “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control (explanation 1 to rule 6(3)(ii))
  • If a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.
  • Companies prescribed (rule 5):-
  • Following companies excluding one person companies and small companies:-
  • Unlisted public companies having paid up capital of Rs.10 crore or more;
  • Private limited companies having paid up capital of Rs. 20 crore or more;
  • Companies having paid up capital less than as mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.

Note :- Rotation of auditors does not apply to dormant companies(proviso to rue 6 of Companies(Miscellaneous) rules, 2014)

Manner of rotation:- to be prescribed by way of rules(section 139(4) read with rule)

Recommendation of name:-The procedure depends upon whether audit committee is required to be constituted or not. If constitution required then the Committee shall recommend to the Board the name of the auditor who may replace the incumbent auditor on expiry of his term. The Board shall consider the same and make its recommendation to the members. In cases where committee not required then the Board shall itself recommend to the members.

Transitional period:-For companies existing on commencement of this act, 3 years from such commencement (2nd proviso to section 139(2) 

16. SPECIAL RIGHTS TO SHAREHOLDERS

As per section 139(3) members have following rights after passing resolution in their meeting:-

v  In case of audit firm, auditing partner and his team shall be rotated at such intervals as may be decided.

v  Audit shall be conducted by more than auditor.

17. CASUAL VACANCY

As per section 139(8) any casual vacancy, shall be filled by the Board within 30 days. If the vacancy has arisen due to resignation of auditor then such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board.

Instances of casual vacancy :-

Death

Resignation

Disqualification If an existing auditor gets disqualified under Section 141 then he shall inform the company and the situation will be treated as casual vacancy (Section 141(4))

Failure of ratification at AGM – If the ratification resolution fails at the AGM of company then this also tantamount to casual vacancy(explanation to rule 3).

Tenure: –Till conclusion of forthcoming annual general meeting.

Remuneration: – Section 142 deals with remuneration of auditor. The section expressly empowers the shareholders to fix the remuneration except in case of 1st auditor. The law is silent for fixing remuneration for auditor being appointed in casual vacancy, since the law being silent and going with the purposeful interpretation of law the remuneration can be decided by the Board as the appointing authority is the Board itself moreover section 224(8) of Companies Act, 1956 also enumerated the same principle. However, this shall not be the case where casual vacancy has arisen due to resignation.

18. Does appointment of auditor in casual vacancy require obtaining written consent, certificate and filing of ADT-1 ?

On reading section 139(8) prima facie it seems that the aforesaid is not required to be done, but since an auditor is appointed by the board in place of existing auditor the regulator (ROC) should be intimated of the same and consent, certificate should also be obtained so as to prove that board has acted diligently.

Procedure

  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
  • Obtain consent & certificate from auditor.
  • If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
  • Call Board meeting.
  • Approve the appointment of auditor in casual vacancy at the Board meeting.
  • Intimate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

Procedure – where casual vacancy arises due to resignation of existing auditor

  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
  • Obtain consent & certificate from auditor.
  • If Audit Committee required to be constituted under section 177, then obtain its recommendation (Section 139(11)).
  • Call Board meeting for the purpose of following:-

o    Appointment of auditor in casual vacancy.

o   Considering that the qualification & experience are commensurate with the size & operations of the company.

o   Recommending the members to approve the appointment.

o   Calling of EGM(to be held within 3 months from date of Board meeting).

o   timate the Auditor and file with ROC form ADT-1(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days of EGM(since the appointment is not final until approval of members).

19. RESIGNATION OF AUDITOR

  • As per section 140(2) the Auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and ROC indicating the reasons and other facts as may be relevant with regard to his resignation in form ADT-3(to be attached in form GNL-2 as per MCA circular 09/2014 dated 25th April, 2014). If the auditor does not comply with these requirements, he or it shall be punishable with fine which shall not be less than 50,000/- rupees but which may extend to 5,00,000/-. After resignation the provisions of casual vacancy shall be triggered which has been explained above.

Conditions for audit committee (section 179 read with rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014):-

  • Listed Companies.
  • Public companies with a paid up capital of Rs. 10 crore or more.
  • Public companies having turnover of Rs. 100 crore or more.
  • Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crore or more.

Conditions for rotation of auditors (section 139(2) read with rule 5):-

  • Listed Companies.
  • Public companies having paid up capital of Rs. 10 crore or more.
  • Private limited companies having paid up capital of Rs. 100 crore or more.
  • All companies having paid up capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more.

Companies to which audit committee applies but not rotation:-

  • Public companies having turnover f more tan Rs. 100 crores but paid-up capital less than Rs. 10 crores.
  • Public companies which have issued debentures or have borrowed money from other than bank/financial institution in excess of Rs. 50 crores.

Companies to which rotation applies but not audit committee:-

  • Private companies having paid up capital of Rs. 100 crore or more.
  • Private companies which have borrowed money from financial institutions/banks in excess of Rs. 50 crores.

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-435 201 94

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ALLOWABILITY OF SALARY TO PARTNER, IN CASE OF FIRM – BUSINESS EXPENDITURE

ALLOWABILITY OF SALARY TO PARTNER, IN CASE OF FIRM – BUSINESS EXPENDITURE

Untitled37ANo reassessment after 4 years alleging wrong allowance of exp. if assessee had disclosed all material facts

Section 37(1), read with section 147, of the Income-tax Act, 1961 – Business expenditure – Allowability of salary to partner, in case of Firm

Where assessment in case of assessee was completed under section 143(3) wherein assessee’s claim for salary paid to partners was allowed, then in absence of assessee’s failure to disclose all material facts necessary for assessment, Assessing Officer could not initiate reassessment proceedings on basis of change of opinion that claim for payment of salary was wrongly allowed [2015]-HIGH COURT OF GUJARAT – SKY Diamonds v. Assistant Commissioner of Income-tax

FACTS

The assessment in case of assessee was completed under section 143(3) wherein assessee’s claim for payment of salary to partners was allowed.

After expiry of four years from end of relevant assessment year, the Assessing Officer initiated reassessment proceedings taking a view that assessee’s claim for payment of salary was wrongly allowed.

The assessee filed instant writ petition contending that since there was no failure on its part to disclose fully and truly all material facts necessary for assessment, impugned reassessment proceedings deserved to be quashed.

The High Court held in favour of assessee that

Section 147 enables the Assessing Officer to reopen the assessment subject to the provisions of sections 148 to 153, but the first proviso to the very section 147 provides that no action shall be taken under this section 147 after the expiry of the period of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by the reason of failure on the part of assessee to disclose full and truly all material facts necessary for assessment for the respective assessment year.

The aforesaid shows that unless the case falls in the exceptional category of ‘failure to disclose fully and truly all material facts necessary for the assessment,’ the action after the expiry of four years for reopening of the assessment is not permissible.

The assessee’s case was that full and true disclosure of all material facts relevant to the reasons which is the ground for reassessment were disclosed before the Assessing Officer at the time when the scrutiny of the assessment had taken place. It was submitted that not only that but the audit report was also produced which included the remuneration to the partners and during the course of the assessment, this aspect is deemed to have been considered and the assessment order was passed.

Whereas the revenue is not in a position to dispute the factual aspect that the true disclosure was made by the assessee for the remuneration paid to the partners and computed while computing the business income, the revenue is also unable to dispute that the audit report showing the aforesaid details were produced.

In view of the above, there was no reason to believe that true and full disclosure was not made by the assessee to come out from the bar of four years as provided by first proviso to section 147. Once the bar operates upon the power by express statutory provision, the action can be said as without jurisdiction. If the action of issuance of notice is without jurisdiction, it would be a case for interference under article 226 of the Constitution.

In view of the above, the impugned action under section 147 and consequently issuance of notice under section 148 may not stand in the eye of law. Hence, they are quashed and set aside.

The petition is accordingly allowed.

Recent due dates:

  • 15th March is the last date for payment of advance tax for the year ending 31st March 2015
  • 16th March is the last date for submission of documents to CAG for empanelment for the year 2015-16

Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 011-435 201 94

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