Prof R Balakrishnan – [2024] 168 taxmann.com 403 (Article)

1. The Background of this Case

Private placement of securities can be made only to select persons or identified persons (as identified by the board of directors of a company). A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer. If the offer is advertised or marketed, it will be considered a public offer and not a private placement by the company. The application monies received by the company on an application for private placement are required to be kept in a separate bank account with a scheduled commercial bank. The monies raised through private placement could only be used by the company after the securities are allotted and the return of allotment in e-form PAS-3 is filed with the Registrar of Companies within a period of 15 days from the date of allotment of securities.

In this particular case, M/s. Galaxeye Space Solutions Private Limited raised funds through a private placement route, and the company did not open a separate bank account as mandated by the provisions of the Companies Act 2013. Instead, they received the funds through their existing bank account, which was being operated for business purposes. Also, the company utilized the funds much before filing the return of allotment as mandated by the Act. Both these violations committed by the company led to penal actions against the company and its directors. The company, upon realising the violation committed by them, filed a suo-moto adjudication application, and the Adjudication Officer, after following the due procedure of law, levied a penalty of Rs.5 lakh upon the company and its directors, having considered that the company is a small company entitled to a reduced amount of penalty as provided in the Act. Let us go through this case in detail so that we will know the provisions of the Act, the compliances called for, and finally, the consequences of non-compliance, as well as the rationale behind this order issued by the Registrar of Companies of Chennai.

2. Provisions under the Companies Act 2013 relating to this case

The following are the relevant provisions under the Companies Act 2013 and the related rules relating to this case.

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Notification No. SEBI/LAD-NRO/GN/2024/210; Dated: 20.11.2024

SEBI has notified the SEBI (Buy-Back of Securities) (Second Amendment) Regulations, 2024. A new proviso has been inserted to Regulation 4(iv)(a) relating to the conditions and requirements for the buyback of shares and specified securities. It states that if any member of the promoter/promoter group has declared its intention not to participate in the buy-back, the shares held by such member of the promoter/promoter group must not be considered for computing the entitlement ratio.

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Notification No. SEBI/LAD-NRO/GN/2024/211; Dated: 20.11.2024

SEBI has notified the SEBI (Bankers to an Issue) (Amendment) Regulations, 2024. As per the amended norms, SEBI has expanded the scope of activities carried out by ‘banker to an issue’ under Regulation 2(aa). These activities now include providing escrow services for the purpose of issue management, delisting, buyback or open offer and other activities specified by the Board. Further, a person must not act as a banker to an issue unless a certificate of registration has been obtained from the Board.

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This week’s Global Financial Insights covers significant updates in financial reporting and auditing practices:

1. FRC Report on Local Audit Quality: The Financial Reporting Council (FRC) released its annual report on the quality of local audits, focusing on the recovery of the local audit system. The FRC inspected eight audits, mainly in the NHS, and will continue to prioritize clearing the audit backlog, extending its strategy through 2023/24.
2. IFRS Guide on Sustainability Disclosures: The IFRS Foundation released a guide to help companies identify and disclose material sustainability risks and opportunities impacting financial performance. It promotes integrated thinking, aligns materiality judgments with financial reports, and offers guidance on harmonizing ISSB Standards with frameworks like ESRS and GRI for global implementation.
3. FASB Seeks Feedback on Financial KPIs: The FASB issued an Invitation to Comment (ITC) to gather stakeholder feedback on the standardization and disclosure of Financial Key Performance Indicators (KPIs) in GAAP financial statements. Stakeholders are invited to provide input on which KPIs should be included by April 30, 2025.
4. IAC Meeting Summary – November 7, 2024: The Investor Advisory Committee (IAC) discussed FASB projects and provided feedback for the 2024 Agenda Consultation. Topics included enhanced disclosures on business combinations, company spending, lending, deposits, insurance, KPIs, and geography/product disclosures. The next IAC meeting is set for Q2 2025.
5. FASB Seeks Feedback on Government Grant Accounting: The FASB proposed new guidance for accounting government grants, aiming to incorporate IAS 20 into U.S. GAAP with improvements. The proposal covers grants related to assets and income, with disclosure requirements on grant nature, policies, and terms. Stakeholder feedback is requested by March 31, 2025.
6. SEC Charges Gambling Company with FCPA Violations: The SEC charged a gambling company for violating the Foreign Corrupt Practices Act, involving $2.5 million in bribes to Japanese officials between 2017 and 2019. The company paid a $4 million civil penalty and a $10 million criminal fine, highlighting the importance of internal controls to prevent corruption.
7. SEC Charges Executives in Indian Energy Bribery Scheme: The SEC charged three executives in a bribery scheme involving two Indian renewable energy companies. The executives paid bribes to secure a solar project, misleading investors about anti-corruption policies. The SEC seeks penalties and bans, while the DOJ has filed criminal charges.

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Case Details: NRC. Spin Tex v. Assistant Commissioner (ST) - [2024] 168 taxmann.com 315 (Madras)

Judiciary and Counsel Details

• Krishnan Ramasamy, J.
• Vignesh Kumar K. for the Petitioner.
• V. Prashanth Kiran, Govt. Adv. for the Respondent.

Facts of the Case

The petitioner was a company engaged in the business of spinning of textiles. The department issued a show cause notice (SCN) and passed an order without providing any opportunity of personal hearing to the petitioner. The petitioner filed appeal against the said order with a delay of 54 days but the said appeal was rejected by the department on the aspect of limitation. It filed writ petition to challenge the order.

High Court Held

The Honorable High Court noted that the petitioner was unaware of the impugned order and it had failed to file appeal within the prescribed time. However, the reasons assigned by the petitioner for non-filing of appeal within the prescribed time appeared to be genuine. Therefore, the Court was inclined to condone the delay in filing the appeal. The Court also directed the Appellate Authority to take the appeal on record and pass appropriate orders on merits and in accordance with law, after providing sufficient opportunity to the petitioner.

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Case Details: SBI General Insurance Company Ltd. v. Union of India - [2024] 168 taxmann.com 278 (Bombay)

Judiciary and Counsel Details

• M.S. Sonak & Jitendra Jain, JJ.
• Prasad Paranjape & Lumiere Law Partner, for the Petitioner. 
• Ms Jaymala Ostwal & Sangeeta Yadav, for the Respondent.

Facts of the Case

In the present case, the petitioner challenged the Order-in-Appeal by which petitioner’s appeal before the Commissioner (Appeals) was dismissed on the ground that the authorised signatory of the petitioner did not sign the same. The Commissioner (Appeals) reasoned that since no proof, such as a board resolution, was produced, it could not accept the appeal instituted by the authorised signatory.

High Court Held

The Honorable High Court noted that the proper material had been produced to show that the signatory on the appeal memo was indeed authorised to sign the same. The Court also noted that the Appellate Authorities adopted such shortcuts and dismissing appeals, even without allowing appellants to either establish that the signatory was authorised to sign appeal memo or to place on record resolutions authorising such signatory with necessary powers, which violates principles of natural justice. Therefore, it was held that the impugned order was liable to be set aside.

List of Cases Reviewed

• Reliance General Insurance Company Ltd. v. Union of India [2024] 167 taxmann.com 408 (Bombay), followed.

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Case Details: Sanjay Bhandari vs. Income-tax Office - [2024] 168 taxmann.com 389 (Delhi)

Judiciary and Counsel Details

• Dinesh Kumar Sharma, J.
• Dayan Krishnan, Sr. Adv., Avneesh Arputham, Ankit Sharma & Abhishek, Advs. for the Petitioner.
• Zoheb Hossain, Sr. Standing counsel, Sanjeev Menon, Jr. standing counsel, Vivek Gurnani & Manish Dubey, Advs. for the Respondent.

Facts of the Case

A search and seizure operation was conducted on the assessee’s premises. During the search and seizure operation, incriminating documentary evidence and information were discovered, establishing that the assessee held undisclosed foreign bank accounts and properties. Notices under section 10(1) of the Black Money Act, 2015, were issued to the assessee, to which he responded.

Subsequently, the Additional Commissioner of Income Tax (Central), New Delhi, had filed the complaint against the assessee for an offence under section 51(1) of the Black Money Act, and the assessee was summoned for the offence.

The assessee contended that the prosecution was initiated without completing the assessment proceedings. There was no finding by the department that the assessee evaded any tax. Furthermore, there was no evidence showing that the alleged foreign assets belonged to him. Aggrieved by the complaint, the assessee filed a writ petition to the Delhi High Court.

High Court Held

The Delhi High Court held that the bare perusal of Section 48 of the Black Money Act makes it clear that the offences and prosecution, which fall in Chapter V of the Black Money Act, are independent of any order made under this Act. It is relevant to note that the assessment under the Black Money Act is being made under Section 10, which falls in Chapter III. Therefore, the submission of the assessee does not hold any force in the eyes of the law.

The initiation of the prosecution is not dependent on the completion of the assessment. If the conditions as required under Section 51 of the Black Money Act are fulfilled, the prosecution can be initiated irrespective of the completion of the assessment.

Section 51 of the Black Money Act would come into play if, even before filing a return of income, the person is found to have done any of the acts as prescribed in Section 51(3) of the Black Money Act, 2015. Apparently, the prosecution under this provision cannot depend on the assessment. The offence, if proven, stands completed as soon as the conditions as required under Section 51(3) of the Black Money Act, 2015 are fulfilled, irrespective of the return of income.

At this stage, the complainant is not required to bring the material on record that could prove the guilt of the accused or even be sufficient for framing the charge. This is a very initial stage where the Magistrate has to form an opinion that there are sufficient grounds for issuing the process. Such an opinion is to be formed based on the entire material on record. The objections of the petitioner regarding the assessment are not relevant. In regard to the evidence to show that the petitioner owned foreign assets, the complainant shall be obliged to produce the same at an appropriate time.

Accordingly, the petition was dismissed.

List of Cases Referred to

• and Nagawwa v. V.S. Konjalgi 1976 3 SCC 736 (para 22 and 33),
• Sasi Enterprises v. ACIT (2014) 5 SCC 139 (para 24),
• Act. Reliance has been placed upon Koppula Venkat Rao v. State of A.P. (2004) 3 SCC 602 (para 24),
• necessary intention. Reliance has been placed upon Chaitu Lal v. State of Uttarakhand (2019) 20 SCC 272 (para 24),
• petitioner has also heavily relied upon Birla Corporation Ltd. v. Adventz Investments & Holdings Ltd., (2019) 16 SCC 10 (para 31),
• In State of Haryana v. Bhajan Lal (1) SCC 325 (para 34),
• offence. In this regard reliance was placed on Abhayanand Mishra v. State of Bihar 2 SCR 241 (para 44),
• Reliance was also placed on Malkiat Singh v. State of Punjab (para 45),
• Reliance was also placed on Koppula Venkat Rao v. State of A.P. (2004) 3 SCC 602 (para 46)
• Genpack India Pvt. Ltd. v. Dy. CIT and Anr. 2019 SCC OnLine SC 1500 (para 49).

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Notification No. 06/2024, dated 19-11-2024

The Central Board of Direct Taxes (CBDT) has notified that the following forms shall be furnished electronically and verified in the manner prescribed under sub-rule (1) of Rule 131:

• Form 42: Appeal against refusal to recognize or withdrawal of recognition from a provident fund;
• Form 43: Appeal against refusal to approve or withdrawal of approval from a superannuation fund; and
• Form 44: Appeal against refusal to approve or withdrawal of approval from a gratuity fund.

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Discussion Paper; Dated: 19.11.2024

IBBI has released a discussion paper proposing various amendments to the liquidation process under the IBBI (Liquidation Process) Regulations, 2016 and IBBI (Voluntary Liquidation Process) Regulations, 2017. Part A proposes changes in liquidation regulations in relation to (a) a review of the auction process, (b) ensuring transparency in compromise or arrangement schemes by mandating liquidator for applying closure of the liquidation process to the Adjudicating Authority, and (c) improving the management of unclaimed proceeds in the Corporate Liquidation account.

Part B proposes changes in voluntary liquidation regulations w.r.t uncalled capital or unpaid capital contributions and improving the management of unclaimed proceeds in the Corporate Voluntary Liquidation account.

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Discussion Paper; Dated: 19.11.2024

The IBBI has released a discussion paper on monitoring committees under CIRP and proposed strengthening the regulatory framework governing monitoring committees under the IBC. While the current framework under Regulation 38 of the CIRP Regulations provides certain basic recognition to monitoring committees, the proposed amendments aim to make their constitution mandatory for the implementation of all resolution plans.

The proposed framework empowers the CoC to take the final decision on the constitution, composition, and functioning period of the monitoring committee, as part of the resolution plan Comments may be submitted electronically by December 9, 2024.

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