Can the payment of loan, advances etc to shareholders or to entities in which members are substantially interested be treated as "Deemed Dividend " under Section 2(22) of Income Tax Act

section 2(22)(e) dealing with the payments or distributions by the company to its shareholders deemed to divided to the extent of accumulated profits of the company. 

Whereas it can be applied to ‘Loans’ or ‘Advances’ but not to the transactions amount to Loan and Advances carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. 

What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simplicitor or as such per se without any further obligation behind receiving such advances, may be treated is ‘deemed dividend’, but if it is otherwise, the amount given cannot be branded as ‘advances’ . Within the meaning of deemed dividend under section 2(22)(e). 

The athe decision of HIGH COURT OF DELHI, In The case of: CIT v. Creative Dyeing & Printing Pvt. Ltd., Appeal No.: ITA No. 250/2009, Decided on: September 22, 2009 is corroborating the above.

Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company advance in the ordinary course of carrying on business cannot be considered as dividend within the meaning of section 2(22)(e).

By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such ‘Advance’ as deemed dividend ”

METTUR BEARDSELL LTD , Madras vs. REGIONAL LABOUR COMMISIONOR (CENTRAL)-ELIGIBILITY FOR GRATUITY

In this case , the Madras High Court decided about the eligibility of employees who completed 4 year ,10 months and 18 days service  for gratuity eligibility under section 2 (a), 2 (b), 2(c),2(e), and 2 A under the Payment of Gratuity Act ,1972.

Section 4 of the Payment of Gratuity Act, 1972 provides that an employee will entitled to gratuity on completion of continuous service of 5 years and while clarifying the 5 years complete service, Andhra Pradesh Hight Court in P. Raghuvulu and Sons v. Additional Labour Court , [1985] , had held that the minimum period for becoming eligible for payment of gratuity should not be less than 5 years since it should be complete 5 year service.

 It was further clarified that the words or part in excess of six months' are only meant for the purposes of computation of gratuity for the subsequent year or years to first complete 5 years. It was also held that if an employee has worked for 4 years 11 months and 10 days, he will not be eligible for gratuity for want of completion of 5 years. 

Further in a subsequent case, MADRAS HIGH COURT while relying upon the clarification by the SUPREME COURT pertaining to 240 working days in one year will be deemed to be continuous service of one year meaning thereby that there should not be complete 12 calendar months' service. MADRAS HIGH COURT has further held that an employee, who has put in service of 4 Years 10 Months and 18 Days in the 5 years, will be entitled to gratuity.

The gratuity act says continued services . In this case , there is continuity in service.

Further , as per SC , a year means 240 working days.

Since the employee who has completed 4 years 10 months and 18 days is eligible for gratuity as he has put in service of 5 years continuously as per SC explanation.

To ,  gratuity act is a social welfare act and one should have liberal interpretation offering benefits to employees who had put more than 4 years and but less than in 5 years but falls within 240 days in the 5th year.

SC applied liberal interpretation of the Act and had given benefits to the employee.

Hence , an employee who has completed 4 years 10 months and 18 days continuously without any break is eligible for Gratuity under the Act.

GRATUITY FOR CASUAL OR TEMPORARY WORKERS - INDIAN RARE EARTHS LTD , MADURAI HIGH COURT

Please go through the following Madurai Bench of Madras High Court , where it has held recently that for the purpose of gratuity , even the period of casual or temporary work period will be calculated for the eligibility of gratuity and for the payment of gratuity to eligible workers. Workers who were employed as casual and then after wards retrenched then taken back and became permanent employment , then gratuity should be calculated even for such casual or temporary phases of employment. This is another example where Courts had liberal interpretation in social welfare laws.

The facts of the case is given below:

Once workmen became eligible for gratuity, then, the entire length of their service must be counted, including different spells under which they were employed by the same employer. Otherwise, it would defeat the very purpose of the Payment of Gratuity Act, 1972, the Madurai Bench of Madras High Court has held.

In its order, the Court, while dismissing the writ petitions filed by Indian Rare Earths Ltd, Manavalakurichi, Kanyakumari District, a Government of India undertaking, challenging, inter alia, the common order dated September 23, 2005 of the Regional Labour Commissioner/Authority under the Payment of Gratuity Act, Chennai-600 006 in granting gratuity to workmen for the period when they (respondents) were employed on casual or temporary basis before their spell of employment as permanent workers, ruled that the entire length of service must be counted. Otherwise, it would defeat the very purpose of the enactment.

The issue

According to the petitioner, in early 1960s, when the unit was constructing the plant, the workers were employed for construction. They were later retrenched for want of work. Then, when mining operations got expanded, some workers, who were retrenched earlier, were taken back on casual or temporary rolls and subsequently made permanent. .At the time of superannuation (which were on different dates), the workers were paid terminal benefits, including gratuity. Long after their settlement of gratuity by management, the workers staked their claim for further gratuity for their first spell of employment. They moved the Controlling Authority (Assistant Labour Commissioner, Central). When the Authority held in workers' favour, the Company had come forward with the writ petitions.

Master-servant ties

The petitioner contended that the service rendered by the workers during the first spell of employment ended due to retrenchment. Their subsequent re-employment, on direct recruitment, could not be tagged on because during the interregnum period, there was no master-servant relationship that existed.

Mr Justice K. Chandru, who heard the petitions, said that if the contention of the petitioners was accepted, then it was easy for the employer to employ them in different spells and deny gratuity to them in spite of the fact that they might have put in sufficient length of service. The term ‘continuous service' under Section 25B of the Industrial Disputes Act was more or less similar to the definition under Section 2-A of the Gratuity Act. Hence, the objection of the petitioner on the findings of the Appellate Authority and Controlling Authority had to be rejected. Also, the question of delay would not arise in moving the authority.

The Judge also ruled that 3 other writ petitions of workers, M. Vairamuthu, V. Ponnaiah and N. Harikrishnan, could not be rejected as similarly placed persons were getting benefits.

Criminal Prosecution can be Initiated for wrong disclosure in Balance Sheet

SANJAY SURI V. STATE [2010] 157 COMP CAS 10 (DEL) V.K.Jain, J [Decided on 29-1-2010]
Sections 209(6) and 217(1) of the Companies Act, 1956 read with sections 468, 469(1)(b) and 482 of the Cr.P.C – 

Failure by company to give proper disclosure in balance-sheet regarding collateral security and activities relating to export.


Prosecution initiated by ROC –
 1. There was a contravention of section 212 (1) as the company had acquired in excess of 90% of shareholding .


2.No proper disclosure was made in the balance sheet regarding the collateral security thereby its bank account was attached due to a court order and no contingent liability was disclosed towards this.


3.Its director report failed to disclose activities relating to exports , action initiated to enhance the exports , expansion of new export markets .

The defendants argued that the complaint was barred by limitation.  The ROC cannot be regarded as " person of aggrieved " under section 469 (1) (b) of the Criminal Procedure , 1973.


Trial Court took cognizance of the offence-summons issued against the directors – Whether criminal proceedings can be quashed-  It was held by the Court as No as the petitioners were the persons obliged to make sure compliance of the appropriate provisions of the Act and the officers in default at the appropriate time.

VRS CAN BE REFUSED IF THE EMPLOYEE IS EFFICIENT AND CABABLE !!!

The management of a bank can deny the request for voluntary retirement if it considers the officer very efficient and wants to keep him. In this case decided by the SC last week, Indian Overseas Bank vs Tribhuvan Nath, the officer joined as a clerk but due to exceptional merit and dedication to the bank, he was promoted fast and posted abroad in managerial posts. However, he applied for voluntary retirement. The bank rejected his application. He challenged the action in the Allahabad high court. It held the bank’s decision arbitrary and even mala fide . 

The bank appealed to the SC. It upheld the discretion of the bank in accepting or rejecting the application according to the scheme. The bank can shed staff with inferior abilities, while it can retain officers of superior merit. No organisation would like to lose its best people, the SC said while quashing the high court decision. This officer retired before the judgment.

Thus , drafters should keep in mind in the VRS agreement to include a clause 

The VRS cannot be opt by all the eligible employees. If bank thinks a particular employee as an efficient and capable , bank may disregard his request for VRS.

WHEN GIFT TAKES EFFECT?

In view of Venkat Subba Srinivas v. Subba Rama', AIR 1928 PC 86 (A) it has been held that a gift would be a valid gift if the gift has been accepted, even though the document may not have been registered at the time of the execution. 

In the above case the court has observed that Section 47 of Registration Act lays down that a registered document shall operate from the time 'from which it would have commenced to operate if no registration thereof had been required or made, and not from the time of its registration. The deed of gift was executed on 20th February 1946, and was registered on 28th March 1946. It, therefore, became operative on 20th February 1946.

Gift takes effect from the date of execution and not from the date of registration.

E-Mail and informal contracts are valid – SC held in “Trimex International FZE Limited, Dubai vs. Vedanta Aluminium Limited, India

The  Hon’ble Supreme Court (SC) in a recent judgment in the case of “Trimex International FZE Limited, Dubai vs. Vedanta Aluminium Limited, India” in Re (2010) 3 SCC 1”. It was held that in the absence of signed agreement between the parties, it would be possible to infer from   various documents duly approved and signed by the parties in the form of exchange of emails, letter, telex, telegram and other means of communication. 

The Hon’ble Supreme Court has accepted the unconditional acceptance through emails and held the same to be a valid contract which satisfies the requirements of Section 4 and 7 of the Contract Act 1872 and further it satisfies Section 2(1)(b), 7 of the Arbitration and Conciliation Act 1996.  In the absence of a signed agreement inference can be from documents approved and signed by the parties in the form of exchange emails, letters, telegrams which come within Section 10 and 2(e) of the Contract Act 1972.

As per Section 4: The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made.

As per Section 7: In order to convert a proposal into a promise the acceptance must - be absolute and unqualified; and be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted.
If respondent accepts the offer of petitioner following a very strict time schedule, he cannot escape from the obligations that flowed from such an action -

• Arbitration clause can be inferred from various documents duly approved and signed by the parties in the form of exchange of e-mails, letter, telex, telegrams and other means of tele-communication even in the absence of signed agreement -
• If no inference can be drawn from the facts that the parties intended to be bound only when a formal agreement had been executed, the validity of the agreement would not be affected by its lack of formality -
• On facts, the Commercial Offer carried no clause making the conclusion of the contract incumbent upon the Purchase Order -Therefore, the moment commercial offer was accepted by the respondent, the contract came into existence - Since the contract contained arbitration clause, petitioner made out case for appointment of arbitrator - Arbitration.

Petitioner's case was that on 15.10.2007, it submitted a commercial offer through e-mail for supply of Bauxite to the respondent. After exchange of several e-mails, respondent conveyed acceptance of offer through e-mail on 16.10.2007 confirming the supply of 5 shipments of Bauxite. Dispute arose and petitioner served arbitration notice on the respondent. Respondent rejected the arbitration notice stating that there was no concluded contract between them. Petitioner filed arbitration petition for appointment of arbitrator.