Friday, 17 November 2017

More Hope for Company Directors Disqualified by RoC

High Court Stays RoC’s Order Disqualifying Individual Director!
MCA's Clarification also expected soon!!

The Madras High Court has issued an interim stay against an order of the Registrar of Companies (RoC), Chennai, disqualifying an individual from being director under the Companies Act, 2013, for five years till 2021. The court has also issued notice of motion to the Centre and the Registrar of Companies, in a petition filed by an individual director.

Alleged ‘Clean up Act’
In a so-called ‘clean up act’ Ministry of Corporate Affairs (MCA) had disqualified in September this year, 106,578 directors of companies that did not file their financial statements for three straight years. It had also identified 210,000 shell companies and bank accounts of around 200,000 shell firms were frozen.

In September 2017 MCA had planned to blacklist 300,000 directors of shell firms. National Stock Exchange (NSE) also asked 200 companies to take action against directors named in the MCA list.

Consequence of Disqualification
Under the Indian Companies Act 2013, a Director disqualified by MCA cannot serve on the Board of any company (including a not-for-profit Section 8 company) for a period of five years. His/her digital signature would also be treated as invalid.

This means, if an individual is Director on the Board of five companies and if one of these companies has failed to file accounts with the RoC for a block of three years, he/she would be disqualified for the next five years from serving on the Board of any of the five companies or any other company for the next five years.

While most of the blacklisted individuals were associated with small or defunct companies, the list also included a few prominent names. Reportedly, Pawan Goenka of Mahindra & Mahindra, S Narayan of Apollo Tyres, Vinod Kumar Dasari of Ashok Leyland, S Sridhar of DCB Bank, and GV Krishna of Hindustan Petroleum, are also on the list.

MCA’s move to disqualify directors is without following principles of natural justice. Being on defunct companies is not sufficient to disqualify a director since holding such a position doesn’t prove any wrongdoing.

According to the Companies Act, it is clear that such disqualified directors have to vacate directorship in the company concerned and also can’t seek fresh directorship or re-appointment in any other firm. However, what it does not suggest is a cascading removal from boards of other firms.

MCA may soon issue clarification
A couple of weeks back there was news that the Ministry of Corporate Affairs will soon clarify that a director’s disqualification would be limited only to the company which did not file statutory returns for three consecutive years, and not others which were compliant.

Reportedly, the ministry plans to file a transfer petition before the Supreme Court to club all writ petitions pending before different high courts into one, while stating that a director’s disqualification was applicable only to the defaulting company.

MCA’s draft proposed clarification
A director disqualified in terms of Section 164(2)(a) of the (Companies) Act would be liable to vacate his office as Director under the provisions of Section 167 (1)(a) only in the company that has defaulted in filing its statutory returns for three consecutive years. He would continue to hold his office of Director, if any held by him, in companies that are compliant in filing their statutory returns as per the Companies Act.

Madras High Court
The petition was filed by R Ganapathi, who has been the director at RSG Engineering and Constructions Pvt. Ltd, Deccan Softlab Pvt Ltd and Projelec Marketing and Management Pvt. Ltd, which weren't operative and were struck off from the Register of Companies prior to 2010. However, he was named in RoC's list of disqualified directors in an order dated September 8, 2017, for being a director in some other companies that had not filed annual returns continuously for three years.

Ganapathi argued that RoC’s order should be quashed as illegal, arbitrary and devoid of merit, and also sought direction from the Court to the Ministry and the Registrar to permit him to get re-appointed or appointed as director of any company in any company without any hindrance.

Ganapathi further argued that the new regulation disqualifying a company if it fails to file annual returns for three financial years, as per Section 164 of the Companies Act, 2013, came into effect only on April 1, 2014 and the time limit to disqualify companies under this would start only after October 30, 2017. The argument being three years from April 2014, would fall only by the end of March 31, 2017 and that the last date for filing annual return for the fiscal 2016-17 -- the third year from implementation of the new Act -- is October 30, 2017.

It was argued that the order of Registrar of Companies, Chennai, disqualifying the director without giving him any opportunity of being heard is against the provisions of the Act.

Hearing the petition, Justice M Duraiswamy has issued an order to issue a notice of motion returnable in four weeks. 

Thursday, 16 November 2017

Can interest on corpus be added back to corpus?

Here is an interesting case and an even more interesting judgment regarding donations that were made to the trust by donors who had not only instructed the trust that the donations should be treated as corpus, but, also instructed that the interest accrued thereon should be ploughed back towards corpus of the trust. 
Is that possible? 
Is this good in law? 
Read on to find out!

Facts of the case
The Assessee is a charitable institution, entitled to exemption under Section 11 of the Income Tax Act. Such exemption is subject to the conditions prescribed therein.

During the assessment years in question, it was found that on the voluntary contributions that were received by the Assessee, interest was earned and the income earned on the contributions were added by the Assessee to its corpus, acting upon the instructions in that behalf issued by the donors themselves.

In other words, when the donations were made to the trust, the donors had not only instructed the trust that the donations should be treated as corpus, but, also the interest accrued thereon should be ploughed back towards corpus of the trust.

Case history
Commissioner of Income Tax (CIT) while assessing Mata Amrithandamayi Mata Trust had taken the view that section 11(1)(d) of Income Tax Act 1961 covers donations with specific direction that they shall form part of corpus and not interest thereon since it would result in exemption to interest in perpetuity, defeating legislative intent.

In appeal, Income Tax Appellate Tribunal (ITAT) held that funds received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations, if the donors had so intended

Now, Kerala High Court in an order dated August 22, 2017 (Appeal No. 34 of 2017) has also upheld Income Tax Appellate Tribunal’s (ITAT) Order that interest on corpus funds received by the Assessee as corpus donations u/s 11(1)(d) of the IT Act, should also be exempt from Income Tax.

Questions of law before the High Court
Revenue had filed the appeal before the High Court for the Assessment years from 2007-08 through 2012-13 and the common questions of law framed for the consideration of the Court were:
1. Whether the ITAT has erred on facts and law in treating the interest on corpus funds received by the Assessee as corpus donations u/s 11(1)(d) of the IT Act, to be exempt from Income Tax. 
2. While section 11(1)(d) covers donations with specific direction that they shall form part of corpus it cannot include the interest thereon as it would result in exemption to interest in perpetuity defeating the legislative intent?
3. Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus include interest accruing/credited on deposits from above donations?

Kerala High Court’s view
Having considered the submissions made by Revenue and the Assessee trust, the High Court was of the view that the questions which were framed had to be answered in the light of Section 11(1)(d) of the Act.

A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income.

One of the incomes enumerated in clause (d) of sub-Section (1) of Section 11 is, “the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution”.

  • The High Court observed that the donors had instructed that the interest earned shall be added to the corpus of the trust and that this fact is undisputed. 
  • If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust.
  • And, if that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act.

The High Court did not find any question of law arising in this case for consideration. Accordingly the appeal of Revenue failed and was accordingly dismissed!

Monday, 13 November 2017

Charging fees does not make an educational institute non-charitable

Income Tax Appellate Tribunal (ITAT) New Delhi in the case of Jaycees Public School vs. ITO (Appeal No: ITA No. 4554/Del/2012) has held that merely charging of fees does not make an educational institution non-charitable or existing for the purposes of profit.

Case history
Commissioner Income Tax (CIT) had in the assessment order passed u/s 143(3), taken the view that the income of the Assessee Society was not eligible for exemption u/ 11 & 12 of the IT Act, 1961, because income of the Society is from fee and other related levies which cannot constitute income falling within the ambit of classes as defined in section 11 & 12 of Income tax.

CIT was also of the view that the Assessee’s activities are commercial in nature and there is no element of charity. The school did not provide exemption from fees or charge concessional fees to poor students.

CIT while examining the income and expenditure statement of the Society found that fees were charged from students under different heads such as admission fee, tuition fee, computer fee, late fee, games fee, library fee, examination fee, miscellaneous fees, prospectus fees and all those fees aggregated to approximately Rs. 2.01 crores.

Therefore, the view was taken that the above income of the Society cannot be said to be income derived from property held under trust and fees received from the student do not amount to voluntary contribution.

Hence, it was held that the Society had the object to impart education, but, education was provided by charging fees to the students. Looking to the amount of fees collected (Rs. 2.01 Cr) from the student the assessing officer held that the school is engaged in profit-making activity.

In other words, the Assessing Officer’s  views were that if education is run on commercial lines, merely because it is a school, it does not mean that it would be entitled to the exemption under section 11 of the income tax act. Therefore he held that society’s income generated by way of tuition fees and other fees is not eligible for exemption under section 11 and 12 of the income tax act, 1961.

Further, if the students have to pay more than what is to be spent on them for imparting education, then there is no relief provided and the activity is merely a commercial and business activity.

Supreme Court’s verdict in a similar case

Recently, Supreme Court in Queen’s Education Society vs. CIT 372 ITR 699, has held that where a surplus is made by an educational institute which is also ploughed back for educational purpose, the said institution is to be held as existing solely for educational purposes and not for the purposes of the profit.

Supreme Court has further held that:

  • Where an educational institution carries on the activity of education, the fact that it generates a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.
  • The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.
  • A distinction must be drawn between having surplus income and an institution run “for profit”.
  • No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
  • If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be an institution existing solely for educational purposes.

The ultimate test is whether in an overall view of the matter, in the concerned assessment year, the object is to make profit as opposed to educating persons.

ITAT’s verdict

In the Order dated 16th October 2017, ITAT observed that the school was engaged in educational activities and earned certain sums of money by way of fees. However, these sums of money were not applied for any non-educational purposes. The fees charged were also found to be reasonable and not exorbitant.

ITAT also observed that while the Society is running an educational institute it does not mean that the Assessee must run it for free. If the Assessee does not charge fees from student then it would not be possible for the trust to carry on its activities for which it is established as the excess would not be available to plough back for development of the educational facility for the students. Hence, ITAT did not find that the order of the Commissioner Income Tax cancelling the 12AA registration to the Society sustainable.

ITAT also disagreed with the contention of the Assessing Officer that it is necessary that Assessee should not charge fees or exempt fees to poor students or charge fees at concessional rate and then only it can be said that it is exists for the charitable purposes. ITAT did not approve of such finding because Section 2(15) of Income tax Act does not prescribe such condition (i.e. it is not necessary to provide free education or charge concessional fees in order to fall within the definition of ‘charitable purpose’).

In view of the above facts ITAT directed Commissioner of Income tax to restore the registration granted to the Assessee Society u/s 12A A of the Income Tax Act 1961.

Wednesday, 8 November 2017

Preservation of environment is ‘charitable activity’ eligible for tax exemption

In Order dated: October 25, 2017, Income Tax Appellate Tribunal (ITAT) Ahmedabad in the case of “ITO (Exemptions) Vs. Gujarat Environment Service Society (ITAT Ahmedabad)” (Appeal Number: ITA. No. 1233 and 2520/Ahd/2015) has held that preservation of environment is a ‘charitable activity’ and eligible for tax exemption.

Facts of the case
Gujarat Environment Service Society is registered under Society Registration Act, 1860 and it was granted registration under section 12(A)(a) of the Income Tax Act in June 1984. The Society’s objects include, providing clean environment to society, maintenance of gardens, plantations, horticulture etc., which were in the nature of charitable purpose, and as such accepted by the ITO in the past. 

Exemption under section 11(1)(a) of the Act had been granted to the Society in the past, and there was no change in the objects or nature of activities. Registration granted under section 12A had not been cancelled. 

The activity of the Society did not fall under the expression “advancement of any other object of general public utility”. In fact, it specifically fell within the ambit of “preservation of environment”.

Tax exemption denied
The Assessing Officer (AO) denied tax exemption to the Society simply on account of amendment carried out in section 2(15) of the Income Tax Act which provides definition of “charitable purpose”. According to the AO, a proviso was inserted in section 2(15) by way of Finance Act (2) 2009. The AO was of the opinion that activities of the Society was in the nature of business, and therefore, it was not entitled for exemption under section 11(1)(a) of the Act. He assessed taxable income of the Society in the Assessment Year 2010-11 at Rs. 43,07,960/- and Rs. 41,32,020/- in the Assessment Year 2011-12.

Nature of activities
To fulfill the main object of preservation of environment, the society carried out various activities including increase facilities for a better environment, services for testing of water, air, sewage, tree plantation, sanitation, horticulture, training and educational services for the study of the environmental and its protection, maintain nurseries and orchards etc.

However, the Assessing Officer denied tax deduction by observing that the Society’s objects do not involve relief to the poor, education, medical relief and preservation of environment including water sheds, forests and wild life. The AO took the view that the Society’s activities/services are rendered for the advancement of other objects of general public for which the Society was charging fees.

Society was perceived as ‘contractor’
The AO further took a view on the basis of the directions issued by the Joint Commissioner of Income Tax (JCIT), Anand Range that the Society was simply a ‘contractor’ carrying out work as specified by companies and institutions such as GCMMF, IRMA, Mother Dairy etc. who pay the society for preservation of gardens etc.

ITAT’s observations
  •       ITAT observed that the AO had not brought out any difference between the activities of the appellant in the years preceding the assessment year in which tax exemption was sought to be denied.
  •     The main objects of the Society are for the purposes of preservation of environment and under such circumstances, the amended provisions of the Section 2(15) relating to the receipt of fees etc. for carrying out the activities of the trust are not applicable in this case and under such circumstances, the AO has to demonstrate that the appellant’s activities are no longer charitable in nature.
  •      The only observation made by the AO in this regard was that the companies who are making the payments for maintenance of garden etc., are doing the job of preservation of environment and the Society is simply a contractor for this purpose.

It may be mentioned here that the ITAT, Mumbai Bench, in its decision in the case of New Saibaba Nagar Welfare Society 25 226 (Mum) had earlier held that activity of maintenance and development of park could fall within the meaning of, ‘preservation of environment’ u/s 2(15).

Activity held as ‘charitable’
ITAT held that the Society is engaged in preservation of environment including watersheds, forests and wildlife etc., and this activity in itself is for charitable purposes and it stands apart from “advancement of any other object of general public utility”.
As a result, the appeals of Revenue (ITO) was dismissed.

Tuesday, 7 November 2017

GST on Education Services

Education Services by a trust, society or Section 8 company registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities are exempted from GST.
However, what qualifies as 'education' or 'educational institution'? 
What is 'vocational education' or 'auxiliary education services'? 
Read to learn more about what is exempt and what is not!

 What is Education?
  • Education is a process involving training and developing knowledge, skill and character of students by way of normal schooling.
  • GST Act is attempting to strike a fine balance whereby core educational services provided and received by educational institutions are exempt and other services are sought to be taxed at the standard rate of 18%.
  • Auxiliary services received by such educational institutions for the purpose of education up to Higher Secondary level is also exempt from GST
  • Other services related to education, not covered by exemption would be taxed at a standard rate of 18% with full admissibility of Input Tax Credit (ITC) for such taxable services in cases where the output service is not exempt.

·   However, to reiterate, services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities are exempted from GST.

Education Services are covered under forward charge and thus GST must be paid by the supplier of services, though charged to the receiver of the service. In other words the onus of compliance is on the provider of education services.

What is Educational Institution?

Educational Institution means an institution providing services by way of:
1. Pre-school education and education up to higher secondary school or equivalent;
2. Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
3. Education as a part of an approved vocational education course

As per Notification No. 12 CTR dated 28th July 2017, an “approved vocational education course” means:
(i) A course run by an industrial training institute or an industrial training center affiliated to the National Council for Vocational Training or State Council for Vocational Training offering courses in designated trades notified under the Apprentices Act, 1961 (52 of 1961); or
(ii) A Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Training, Ministry of Skill Development and Entrepreneurship.

In light of the above, conducting degree courses by colleges, universities or institutions which lead to grant of qualifications recognized by law would be exempt under GST.

However, training given by private coaching institutes or other unrecognized institution or self-styled educational institution would not be exempted as such training does not lead to grant of a recognized qualification.

Services provided by way of education as a part of a prescribed curriculum for obtaining a qualification recognized by a law of a foreign country are also not exempted because the course / degree not recognized by Indian Law.

Education Services are classified in heading 9992 and are further sub-divided into six groups comprising:
  1. Pre-primary education services
  2. Primary education services
  3. Secondary Education Services
  4. Higher education services
  5. Specialised education services
  6. Other education & training services and educational support services
GST Rates for education sector are mentioned in:
  1. Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and
  2. Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017
Chapter/ Section/Heading
Description of Service
Rate / Notification
Education Services
18% as per serial no 30 of notification no. 11 CTR dated 28thJuly 2017


Services provided –
(a) by an educational institution to its students, faculty and staff;
(b) to an educational institution, by way of, –
(i) transportation of students, faculty and staff;
(ii) catering, including any mid-day meals scheme sponsored by the Central Government, State Government or Union territory;
(iii) security or cleaning or housekeeping services performed in such educational institution;
(iv) services relating to admission to, or conduct of examination by, such institution; up to higher secondary:
Provided that nothing contained in entry (b) shall apply to an educational institution other than an institution providing services by way of pre-school education and education up to higher secondary school or Equivalent

NIL as per serial no 66 of notification no. 12 CTR dated 28th July 2017
Services provided by the Indian Institutes of Management, as per the guidelines of the Central Government, to their students, by way of the following educational programmes, except Executive Development Programme: –
(a) two year full time Post Graduate Programmes in Management for the Post Graduate Diploma in Management, to which admissions are made on the basis of Common Admission Test (CAT) conducted by the Indian Institute of Management;
(b) fellow programme in Management;
(c) five year integrated programme in Management.

NIL as per serial no 67 of notification no. 12 CTR dated 28th July 2017
90 or any Chapter
Technical aids for education, rehabilitation, vocational training and employment of the blind such as Braille typewriters, Braille watches, teaching and learning aids, games and other instruments and vocational aids specifically adapted for use of the blind Braille instruments, paper etc.

5% as per serial No. 257 of Schedule I of the Notification No. 1 CTR dated 28th June, 2017
Instruments, apparatus and models, designed for demonstrational purposes (for example, in education or exhibitions), unsuitable for other uses
28% as per serial No. 191 of Schedule IV of the Notification No. 1 CTR dated 28th June, 2017

  • Hence, services provided by an educational institution to students, faculty and staff are exempt.
  • The output services of lodging/boarding in hostels provided by such educational institutions which are providing pre-school education and education up to higher secondary school or equivalent or education leading to a qualification recognized by law, are also fully exempt from GST.
  • Annual subscription/fees charged as lodging/ boarding charges by such educational institutions from its students for hostel accommodation therefore, does not attract GST.
  • Input services like canteen, repairs and maintenance etc. provided by private players to educational institutions are subject to GST.
  • As output services are exempted, the Educational institutions may not be able to avail credit of tax paid on the input side.
  • Auxiliary education services (entry no 66 of notification no. 12), if provided to educational institutions providing degree or higher education, the same would not be exempt from GST.
  • The supply of placement services provided to educational institutions for securing job placements for the students shall be liable to GST.
  • Educational institutes such as IITs, IIMs charge a fee from prospective employers like corporate houses/ MNCs, who come to the institutes for recruiting candidates through campus interviews in relation to campus recruitments. Such services shall also be liable to GST.

What is 'Place of Supply' in education sector where BOTH the location of supplier of services and the location of the recipient of services is in India?
As per section 12(6) of the IGST Act, 2017, the place of supply of services provided by way of admission to an educational or any other place and services ancillary thereto, shall be the place where the event is actually held or such other place is located.
As per section 12(7) of the IGST Act, 2017, the place of supply of services provided by way of:
(a) organization of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of services in relation to a conference, fair, exhibition, celebration or similar events; or
(b) Services ancillary to organization of any of the events or services referred to in clause (a), or assigning of sponsorship to such events:
(i) To a registered person, shall be the location of such person;
(ii) To a person other than a registered person, shall be the place where the event is actually held and
(iii) if the event is held outside India, the place of supply shall be the location of the recipient.
Place of supply of Educational Services where the location of the supplier of services or the location of the recipient of services is outside India, the place of supply will be the place where the event is actually held.

Composite and Mixed Supply in Education sector
·        If in Boarding schools, charges for education and lodging and boarding are inseparable then it exempt from GST.

     Provision of dual qualifications is in the nature of two separate services as the curriculum and fees for each of such qualifications are prescribed separately. Service in respect of each qualification would, therefore, be assessed separately.

The Government of India too has issued a detailed note with regard to GST on Education Services.
To read the note, please click on the following link: