Weekly Round-up on Tax and Corporate Laws | 23rd to 28th October 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 23^rd  to 28^th October 2023, namely:

(a) MCA mandates Dematerialization of securities for Private Cos. (excluding Small Cos.);

(b) Society formed to leverage combined skills of civil servants with no profit motive qualifies for Section 12AA registration;

(c) CBIC prescribes valuation of inter-corporate guarantee provided to banking companies or financial institutions;

(d) CBIC issues notification to allow supplies made to SEZ units/developers on payment of IGST and

(e) Significance of ‘Inception Date’ and ‘Commencement Date’ as per Ind AS 116.

1. MCA mandates dematerializing securities for Private Cos. (excluding Small Cos.)

On October 27, 2023, the MCA introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. This amendment adds a new rule 9B to the existing rules. The newly introduced rule requires every private company that is not a small company as on the last day of F.Y. ending on or after March 31, 2023, to issue securities in dematerialized form within 18 months from the closure of the said F.Y., i.e. by September 30, 2024. The company must also ensure the Dematerialization of all its securities in accordance with the Depositories Act. These amendments are effective from 27.10.2023.

Let’s take note of the key highlights of the notification:

(a) Dematerialization Revolution: Private Companies embrace Digital Securities in compliance with new Rule 9B

Now, every private company making an offer for the issuance of any securities, buyback of securities or issuance of bonus shares or rights offer after the specified date must ensure that the entire holding of securities of its promoters, directors, and KMP has been dematerialized before making such an offer.

Further, all securities holders of a private company who intend to subscribe to any securities of the concerned private company, whether by way of private placement or bonus shares or rights offer on or after 18 months from the closure of F.Y., must ensure Dematerialization.

(b) Mandatory Dematerialization for security holders intending to transfer securities after 18 months of closure of FY

Every holder of securities of the private company that intends to transfer securities on or after 18 months of the closure of F.Y. must get such securities dematerialized before such transfer.

(c) Ensuring timely fee payments and maintaining security deposits by private companies

Private companies must ensure timely payment of fees to the depository, Registrar to an issue and share transfer agent, as per the agreement executed between the parties. Additionally, they must maintain a security deposit, consistently holding an amount not less than two years’ fees, in a manner mutually agreed upon by the parties involved.

(d) Submission of Form PAS-6 and Capital Discrepancy Reporting

A private company is required to submit Form PAS-6 to the Registrar with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014, within 60 days from the conclusion of each half-year duly certified by a C.S. in practice or C.A. in practice. Additionally, the company must promptly notify the depositories of any disparities detected between its issued capital and the capital held in dematerialized form.

(e) New Compliance Requirements for Public Companies w.r.t Share Warrants issued before Co(s) Act, 2013 under Rule 9 of Companies (PAS) Rules, 2014

A new sub-rule has been inserted into rule 9 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. As per the newly inserted sub-rule, every public company that had issued share warrants prior to the commencement of the Companies Act, 2013 and the same has not yet been converted into shares is required to complete the following compliances –

• Inform the ROC about the details of outstanding warrants within a period of 3 months of this notification in Form PAS-7.
• Require the bearers of share warrants to surrender warrants to the company within a period of 6 months of the notification and get the shares dematerialized in their account. The company must place a notice for the bearers of share warrants in Form PAS-8 on the website of the company.

Further, in case any bearer of the share warrant fails to surrender the share warrants within the specified period of 6 months, then the company must convert such share warrants into dematerialized form and transfer the same to the Investor Education and Protection Fund (IEPF) established u/s 125 of the Companies Act.

Comments

In conclusion, extending dematerialization provisions to private companies (except small companies) to align with the unlisted public companies represents a significant step towards enhancing transparency and efficiency in the securities market, benefitting both companies and investors. Additionally, the newly inserted sub-rules within rule 9 enhance regulatory transparency, streamline the conversion of warrants into dematerialized shares and promote improved corporate governance.

Read the Notification

2. Society formed to leverage the combined skills of civil servants with no profit motive qualifies for Section 12AA registration

Assessee was a registered society. The Registrar of Societies granted it a certificate of registration. The main object of the assessee was to promote the welfare of the Officers of Civil services. The assessee society applied for obtaining registration under section 12A before the Commissioner (Exemptions).

The Commissioner (Exemptions) denied registration, contending that the objects were not charitable in nature. The matter reached before the Tribunal.

The Tribunal held that it is required to be seen at the time of grant of registration that the objects mentioned in the bylaws are charitable in nature and the activities carried out are genuine. It was not in dispute that the assessee had duly furnished the complete list of activities carried out by it, together with the audited financial statements for the relevant years.

Moreover, the objects mentioned therein are purely charitable and are not meant to benefit any individual or selected persons. The predominant purpose is only to benefit the nation at large. Since civil servants play a crucial role in that task, the assessee was created to bring on record the congregation of various civil servants and use their skill sets for better cooperation and coordination. The objects carried out by the assessee fall within the residuary limb of the definition of charitable purpose as per section 2(15), i.e. advancement of any other object of general public utility.

Further, it was held that there was no scope for distribution of profits or surplus of the assessee society to be distributed to the members of the society even at the time of dissolution. Hence, the assessee did not exist for profit to be distributed to private parties. It existed solely for public purposes only, even though its bylaws restrict the persons’ eligibility to become club members. There was no harm in having a restriction with regard to the eligibility of the persons to become members of the club.

Therefore, it was held that the assessee objects are charitable and would be entitled to registration under section 12AA.

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3. CBIC prescribes valuation of inter-corporate guarantee provided to banking company or financial institution

The CBIC has notified Central Goods and Services Tax (Fourth Amendment) Rules, 2023. In this rules, it has been provided that the value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be 1% of the amount of such guarantee offered, or the actual consideration, whichever is higher.

It has also been provided that the provisional attachment order shall cease to have any effect after the expiry of the period of 1 year from the date of order. Also, the eligibility criteria for GST practitioners have been widened.

Read the Notification

4. CBIC issues notification to allow supplies made to SEZ units/developers on payment of IGST

The CBIC has issued a notification to provide that suppliers can supply goods & services on payment of IGST option to SEZ units/developers. Earlier, the Government notified goods and services which can be exported with payment of IGST except the supply of Tobacco, Pan Masala, and other similar products, where the refund will only be available through the Bond/Letter of Undertaking (LUT) route. Also, the notification didn’t cover supplies made to SEZ units and developers.

Now, it has been notified that all the goods and services, except for the specified tobacco and similar products, can continue to be supplied to SEZ units or developers with or without IGST payment. However, for the specified products, the option to supply with payment of tax and claim an IGST refund has been withdrawn.

Read the Notification

5. Significance of ‘Inception Date’ and ‘Commencement Date’ as per Ind AS 116

Appendix A of Ind AS 116, which deals with lease accounting, defines two important dates: the “Inception Date” as the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease and the “Commencement Date” as the date on which a lessor makes an underlying asset available for use by a lessee. This can lead to confusion about when a lessee should record a Right-to-use (RoU) asset and a lease liability in their financial records.

The accounting standard explains that at the contract’s inception, an entity shall assess whether the contract is or contains a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Further, it states that a lessee shall recognize a right-of-use asset and a lease liability at the commencement date.

For instance, if a lease agreement is signed on 1st April, lease payment starts from 1st July, and the asset is available for use on 1st May. Therefore, in light of the above provisions, the inception date in this case is 1st April. This date is important in determining whether or not the arrangement is or contains a lease. Whereas the commencement date in this case is 1st May, i.e., when a lessor makes an underlying asset available for use to the lessee. On this date, the lessee recognizes a right-of-use asset and a lease liability.

Therefore, the lease accounting in the lessee’s books shall begin on the Commencement Date, not the Inception Date.

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