Weekly GST updates

 Goods & Services Tax (GST) updates

• The late fee payable for delay in furnishing of FORM GSTR-4 for the FY 2019-20 under section 47 of the said Act, from the 1^st November, 2020 till the 31^st December, 2020 shall stand waived for the registered person whose principal place of business is in the Union Territory of Ladakh.

• CBIC has issued a notification 94/2020 relating to the amendment in rules 4, 8, 9, 21, 21A, 22, 36, 59, 138 and 138E & insertion of new rule 86B

Rule 8 amendment:

To apply a new registration the taxpayer has to undergo

• Biometric-based Aadhaar authentication and taking photograph or
• Taking biometric information, photograph and verification of such other KYC documents & physical verification

Rule 9 amendment:

For a new registration the department will be taking 7 days instead of 3 days (if Aadhar Authentication is done) else 30 days after physical verification.

Rule 21 Amendment:

The GST Registration can be cancelled by the department if:

• The Assessee has claimed ITC more than what is eligible under Sec 16
• Outward Supply details (Sales) declared more than one time in GSTR1 by mistake
• Violates Rule 86B, which is inserted now under this notification

Rule 21 amendment:

The registration will be suspended after giving 30 days’ time to explain the reason when there is significant differences or anomalies in GSTR 1 & GSTR 3B & GSTR 2A

Rule 36(4) amendment:

An assessee can avail ITC only upto 105% of his Suppliers filed data in their respective GSTR1, which is populated as GSTR2A for the assessee.

Rule 59 amendment:

The registered person will not be allowed to furnish details of GSTR-1 or in Invoice Furnishing Facility if

• He has not filed his GSTR-3B for preceding 2 Months – in case of monthly filers of GSTR 3B
• Has not filed GSTR-3B for preceding periods – in case of registered persons opting for QRMP
• He has not furnished GSTR 3B for the preceding month to whom rule 86B  applies

Rule 138 amendment

The validity of the e-way bill has been revised from 1 day for every 100 kms to validity of 1 day for every 200 kms.

Rule 86(B)

The rule has restricted to use the amount available in the electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent of such tax liability in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees i.e. an assessee has to pay 1% of his liability mandatorily through Cast ledger even if he has adequate ITC in his Credit ledger if his taxable supply exceeds Rs. 50 Lakhs.

GST Updates

 *Important Changes introduced CGST(Fourteenth Amendment) Rules 2020*

*Time limit for system-based GST Registration increased*

1. The time for system-based registration has been enhanced from 3 days to 7 days. That means, now department shall be required to review and grant registration within 7 days against 3 days as provided earlier from the date of filing of registration application. Where the applicant does not do adhaar authentication or where department feels fit to carry out physical verification the time limit for grant of registration shall be 30 days instead of 7 days. 

*More Powers to GST department in cancellation of GSTIN*

 

2. Now the officer can proceed for cancellation of GSTIN where a taxpayer avails Input Tax Credit (ITC) exceeding than that permissible in Section 16. Clause (e) has been inserted in Rule 21 of CGST Rules 2017.

3. Now where the liability declared in GSTR 3B is less than that declared in GSTR 1 in a particular month, department may now proceed with cancellation of GSTIN. There might be some practical difficulties in implementing such a provision as there are number of corrections which are made in GSTR 3B which may result in lower tax liability as compared with GSTR 1. The clause (f) newly inserted talks about details of outward supply to which we understand that Taxable value and tax both should be in synchronization between GSTR 1 and GSTR 3B.

4. Now, no opportunity of being heard shall be given to a taxpayer for suspension of GSTIN, where the proper officer (PO) has reasons to believe that the registration of person is liable to be cancelled. The words “opportunity of being heard has been omitted from clause (2) of Rule 21A. 

5. Where there are significant deviation/anomalies between details of outward supply between GSTR 3B and GSTR1 or inward supplies (ITC) between GSTR 3B and GSTR 2B which indicate contravention of Act, department shall now serve a notice in FORM GST REG 31 to call explanation as to why GSTIN should not be cancelled. Taxpayer shall be required to submit his reply within 30 days of such notice being served to him. 

6. Where a GSTIN is suspended no refund u/s 54 of CGST Act 2017 can be availed by the taxpayer. This means that first GSTIN Suspension proceedings have to be closed before applying refund. 

*Restriction on claim of ITC as per Rule 36(4)*

7. The claim of ITC in respect of invoices not furnished by the corresponding vendors has now been restricted to 5% of the credit available in GSTR 2B. This limit earlier was 10% of ITC available. This would be mean that a taxpayer’s ITC claim shall now be restricted to 105% of the Credit reflected in his GSTR 2B. Any claim exceeding the specified limit shall result in violation of CGST Act read with rules which may result into suspension of GSTIN as described above. The provision shall come into effect from 1st January 2021.

*GSTR 1 to be blocked in case of non-filing of GSTR 3B*

8. Where a taxpayer fails to file GSTR 3B for two subsequent months, his GSTR 1 shall now be blocked. Earlier non filing of GSTR 3B used to result in blocking of E-way Bill facility but from now on it shall also result in blocking of GSTR 1 of the taxpayer. Similarly, for quarterly return filers, the taxpayer failing to file GSTR 3B for the preceding quarter shall not be permitted to file GSTR 1 of subsequent quarter.   

9. A taxpayer whose is restricted to avail ITC as per rule 86B shall also not be permitted to file GSTR 1 where he has not filed GSTR 3b for the preceding tax period.

*Restriction on Utilization of Input Tax Credit – Rule 86B*

10. New Rule 86B shall be affected from 1st January 2021 wherein restriction has been placed on setting off more than 99% of tax liability from Input tax credit where the value of taxable supplies other than exempt supply and zero rated supply exceeds Rs. 50 lakhs in a month. Though few exceptions have been provided to this rule which are as follows:

(i) Where the taxpayer has paid Income Tax exceeding Rs. 1 lakh in two preceding financial year.

(ii) Where taxpayer has received refund exceeding Rs. 1 lakhs u/s 54 of CGST Act 2017.

(iii) Where taxpayer has used electronic cash ledger to pay of liability on outward supplies which cumulatively makes 1% of the total liability up to the said month

(iv) Where a person is a Government Department, Public Sector Undertaking (PSU), local authority or a statutory body.

*Narrowing the validity of Eway bill*

11. Earlier one day was permitted for distance up to 100 kms under e way bill provision. Now the same has been increased to 200 kms. This means that only one day validity shall be granted to cover a distance up to 200 kms which was earlier 100 kms.

Cash transaction under the Income tax Act 1961

 We come across a common saying ‘Cash is King,’ however idle cash can never generate any interest income, therefore channelizing the idle money into digital mode shall generate income. The Cashless economy is a system where majority of transactions take place by modes other than cash. These modes may be credit cards, debit cards, wallets or digital modes where flow of cash is non-existent or is bare minimum. Cashless economy can be an effective gimmick to curb grey economy, terror-financing, corruption etc.Government has been taking many steps towards promotion of cashless economy and have been introducing many provisions under Income tax Act 1961 to restrict cash transactions.The article shall highlight various transactions coming under Income tax Act where assesses need to say No to cash and also the transactions which induce assesses to pay in modes other than cash So, let’s dive into these transactions:

1. Cash Restrictions in Immovable Property: Section 43CA and Section 50C of the Income Tax Act, 1961 deal with immovable property transactions. As per the Section 43CA and Section 50C dealing with case of transfer of stock in trade/capital asset being land or building or both, the value adopted or assessed by the stamp valuation authority for the purpose of payment of stamp duty shall be taken as the full value of consideration(FVOC) for the purposes of computation of capital gains.

As per Section 50C if a capital asset, and in Section 43CA if any asset (other than a capital asset) being land or building or both, is transferred for a consideration below the stamp duty value, then such stamp duty value shall be deemed to be the FVOC for the purpose of computation of capital gains under Section 48 of Income Tax Act,1961. The original consideration paid for the transfer shall not be considered for the purpose of capital gain in the hands of the seller. Further from AY 21-22 the scope of applicability of section 50C and Section 43CA has been restricted to only those transactions where stamp duty value exceeds 110% (105% in AY 20-21) of the consideration so received or accrued for the transfer of capital asset/stock in trade being land or building or both.

Scenario	Deemed Full value of consideration
If stamp duty value exceeds 110% of consideration received or accruing as a result of transfer.	Stamp duty value
If stamp duty value is less than or equal to 110% of consideration received or accruing as a result of transfer.	Actual consideration received

Further In section 50C and Section 43CA; Stamp duty value to be adopted is dependent on the mode of consideration if date of agreement and date of transfer are different.

Scenario	Deemed Full value of consideration
If the whole or part of consideration has not been received by way of account payee cheque/draft, ECS or through prescribed electronic mode* on or before the date of Agreement.	Stamp duty value on date of transfer
If the whole or part of consideration has been received by way of account payee cheque/draft, ECS or through prescribed electronic mode* on or before the date of Agreement.	Stamp duty value on date of agreement

Let’s understand this with the help of example:

SECTION :50C

There is a transfer of land held as capital asset by Mr. Ram where actual consideration is Rs 1000 lakhs and the stamp duty value as on the date of agreement is 1090 lakhs and the stamp duty as on date of transfer of land is Rs 1120 lakhs. Here date of agreement and date of transfer of land are not same. So, let’s check the scenarios.

Scenario	Deemed Full value of consideration
If Mr. Ram receives Rs 500 lacs by account payee cheque before the date of agreement.	The actual consideration of Rs 1000 lacs would be the full value of consideration since stamp duty on the date of agreement I.e., Rs 1090 lakhs does not exceed 110% of actual consideration I.e., 1000 lakhs.
If Mr. Ram has not paid any consideration on or before the date of agreement.	The stamp duty value as on the date of transfer I.e., Rs 1120 lakhs shall be the full value of consideration as it has exceeded 110% of actual consideration of Rs 1000 lakhs.

SECTION-43CA 

Let’s see another example where Ram holds building as stock in trade. Mr. Ram transfers the building on 01/05/2020 where actual consideration is Rs 1000 lakhs and the stamp duty value as on the date of agreement (01/09/2019) is 1200 lakhs and the stamp duty as on date of transfer of land is Rs 2100 lakhs. Here date of agreement and date of transfer of land are not same. So, let’s check the scenarios.

Scenario	Deemed Full value of consideration
If Mr. Ram receives Rs 500 lacs by account payee cheque on 01/09/2019.	Stamp duty value to be adopted as full value of consideration as per section 43CA shall be the stamp duty value as on the date of agreement I.e., Rs 1200 since Rs 500 lacs have been received by A/c payee cheque on the date of agreement and stamp duty value on 01/09/2019 exceeds 110% of consideration I.e., Rs1100 lacs.
If Mr. Ram receives Rs 500 lacs by cash on 01/09/2019.	The stamp duty value as on the date of transfer I.e., Rs 2100 lakhs shall be the full value of consideration as it has exceeded 110% of actual consideration of Rs 1000 lakhs and Rs 500 lacs has been received in cash.

2. Section 269SS of Income tax Act,1961: As per the provisions of section 269SS of Income tax act 1961 no person shall take or accept any loan or deposit or specified sum (herein referred to as advance or otherwise) from any person (herein referred to as depositor) by any mode other than account payee cheque/bank draft or by use of electronic mode where:

I) The amount of loan, deposit or such specified sum is Rs 20,000 or more or

II) The aggregate of total amount of loan, deposit and the specified sum is Rs 20,000 or more or

III) Where a person has received such loan, deposit or specified sum from the depositor at an earlier date but the repayment of such loan, deposit or specified is outstanding, if such outstanding loan or deposit or specified sum or the aggregate outstanding amount is Rs 20000 or more or

IV) The aggregate of all the above loans, deposit or specified sum received in above 3 transactions is Rs 20000 or more.

Non-Applicability to Section 269SS

Any loan or specified sum or deposit “taken or accepted by” or “taken or accepted from” the following entities –

a. The Government

b. Any banking company, post office savings bank or co-operative bank

c. Any corporation established under Central, State or Provincial Act

d. Any Government company as defined in Section 2(45) of the Companies Act, 2013

e. Any institution, association or body or class of institutions, associations or bodies notified in Official Gazette.

Consequences of violation of Section-269SS

According to Section 271D of Income Tax Act 1961 a loan or deposit or specified sum is accepted violating the provisions of section 269SS, then a penalty may be levied which shall be equivalent to the amount of such loan or deposit or specified sum by the Joint commissioner.

3. Section 269T of Income tax Act,1961: Section 269T restricts any person to repay the deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system as mentioned under Rule 6BBA through a bank account, if –

a. Amount of loan or deposit, along with the interest amount, is Rs. 20,000 or more, or

b. The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.

Non-Applicability to Section 269T

(a)  Government;

(b)  any banking company, post office savings bank or co-operative bank;

(c) any corporation established by a Central, State or Provincial Act;

(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956);

(e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.

Consequences of violation of Section-269T

The assessing officer shall levy a penalty equivalent to 100% of the loan or deposit amount under section 271 E of Income Tax Act 1961.

Let’s understand Section 269 SS and 269T with examples:

1) Mr. P takes a cash loan of Rs 17000 on 01/05/2019 from Mr. R and repays it on 20/12/2019 in cash. He again takes a loan in cash from Mr. R of Rs 19000 on 01/08/2020 and repays it in cash on 29/10/2020.

Let’s check whether the provisions of Section-269SS and Section-269T have been violated?

Here in this case the assessment years are different and also the receipts and repayments are within the limits (I.e., below Rs 20,000) as prescribed under Section-269SSand Section 269T.

2) Mr. P receives a loan of Rs 18000 on 01/10/2020 and by account payee cheque on 04/10/2020 of Rs 22000. Mr. P repays the entire amount on 20/11/2020 by Rs 15000 in cash and Rs 25000 by account payee cheque.

In this case the aggregate receipts of loan of Mr. P have exceeded the limit of Rs 20,000. Mr. P received the second loan by way of account payee cheque. Hence there is no violation of section-269SS. The aggregate amount outstanding is Rs 40,000 as on 04/10/2020. Mr. P has repaid the outstanding loan in cash amounting to Rs15000 on 20/11/2020 and has violated the provisions of section-269T as aggregate amount outstanding was more than Rs 20000.

4. Section-269ST of Income tax Act,1961: Section 269ST will be triggered in any of the following 3 circumstances where amount is received in cash and exceeds the specified limit of Rs 2 lacs.

Let’s understand the circumstances:

Receipts from ‘a person’ in ‘a day: It means that a person can receive cash up to Rs 2 lacs in a day from a single person. So, the next question that comes into our mind is if a person receives cash in different days then can the provisions of this section be escaped?

Single transaction: This means that a single transaction in cash shall be up to Rs 2 lacs. Therefore, if a person splits invoices pertaining to a single transaction then also the payee cannot receive the amount in cash amounting to Rs 2 lacs or more than Rs 2 lacs.

Transactions relating to a single event or occasion: It means that even if a person receives cash for different transactions but the transactions relate to one occasion or an event then also the payee cannot receive cash amounting to Rs 2 lacs or more.

Non-Applicability to Section 269ST:

a) Government/ any banking company, post office savings bank or co-operative bank;

b) Transactions of the nature referred to in section 269SS – i.e., acceptance of Loan, deposits etc.;

c) Such other persons or class of persons or receipts etc. that may be notified by the Central Government;

d)Any corporation established by a Central, State or Provincial Act;

Consequences of violation of Section-269ST

Failure to comply with section 269ST would attract the penalty under section 271DA of the Act, equivalent to the amount receipt in cash.

Let’s understand the section with the help of examples:

1) Mr. A receives Rs 2,35,000 in cash for 2 different bills of Rs 1,00,000 and Rs 1,35,000 then since aggregate receipts in day received exceeds Rs 2lacs Section-269ST has been violated.

2) Mr. A made a sale of Rs 3,50,000 on 02/05/2020 and cash is received on 10/10/2020 and 12/12/2020 amounting to Rs 1,90,000 and Rs 1,60,000. Since cash is received in respect of single bill(transaction) Section-269ST has been violated

3) Mr. A receives a catering and decoration contract for marriage and receives Rs 3,00,000 in full. Section 269ST has been violated since he has received for a single event.

It is important to note here that Section 269ST is applicable on payee and not payer for any receipt whether capital or revenue. Further Section 269ST shall not be applicable to transactions in nature of Section 269SS I.e., receiving loan/deposit or specified sum. This indicates that a borrower remains out of the purview of Section-269ST.

Further the provisions of Section 269T and Sec269ST are inharmonious. Where Section 269T is applicable on borrower and its scope is restricted to transactions for loans, deposits or specified sum, Section 269ST is imposable on recipient for all types of transactions including loans, specified sum or deposits.

Scenario	Violation U/s	Reason
Mr. Ram repays Rs 60,000 in cash	269T	Mr. Ram is a borrower. Hence Section-269ST shall not be applicable. He has repaid in cash more than the limit prescribed under Section 269ST. Hence shall be liable for penalty under section 271E.
Mr. Ram repays Rs 2,60,000 to Mr. Sham in cash	269ST & 269T	Mr. Ram has repaid in cash more than the limit prescribed under Section 269ST. Hence shall be liable for penalty U/s 271E whereas Mr. Sham has received more than Rs 2,00,000 hence has violated Section 269ST and penalty U/s 271DA shall be levied.

5. Section 40A(3) and 40A(3A) of Income tax Act,1961 read with Rule 6DD: As per this section an expenditure is if the assessee incurs any expense in relation to which payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque/draft or use of Electronic clearing system exceeds Rs10,000.

However, in cases payment is made for plying, hiring or leasing of goods carriage the limit id Rs35,000 instead of Rs10,000.

Section 40A(3A): As per section 40A(3A) if an assessee had claimed a deduction in respect of any expenditure incurred in a previous year and payment to such expenditure is made during the current year otherwise than by an account payee cheque/draft or use of Electronic clearing system exceeds Rs10,000.

Let’s understand the above section with the help of examples:

1) Payments of 5 invoices of Rs 6000 each made in cash to Mr. Ram who is engaged in leasing of goods and carriages as on 4/08/2020.

Disallowance of expenditure Section 40A (3) shall not be attracted since the aggregate payments made are Rs30,000 and do not exceed Rs35,000.

2) Payments of 2 Invoices of Rs 19000 each made to Mr. Ram engaged in leasing of goods and carriages on 27/10/2020 and 28/10/2020.

Disallowance of expenditure Section 40A (3) shall not be attracted since the aggregate of payments has not exceeded Rs 35,000 in a day.

3) Payments of Rs 38000 made in cash to Mr. Ram who is engaged in leasing of goods and carriage against an invoice booked in 2017-18.

Disallowance under section 40A(3A) shall be attracted as expense has been booked in 2017-18 and had been allowed in previous year 2017-18.

6. Tax exemptions to Political Parties: Section 13A of Income tax act,1961 allows tax exemption to political parties which are recognized (Registered with election commission of India) if they comply with the following requirements with respect to cash:

• The above political party shall not receive any donation in excess of Rs 2,000 otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account or through electoral bond.
• For each such voluntary contribution [other than contribution by way of electoral bond] in excess of twenty thousand rupees the eligible political party shall maintain and furnish a record of such contribution the details of the person making such contribution.

Violation consequences: Consequences of violating the above cash related provisions will be taxability of income to the extent of income from house property, income by way of voluntary contributions, income from capital gains and income from other sources which is otherwise exempt in hands of political parties.

7. Donation under Section-80G: Section 80G covers Contributions made to charitable institutions and certain relief funds. The deduction under Section 80G is available to all persons whether a company, Individual, firm or any other person. The donations under this section in excess of Rs 2,000 should be made in any mode other than cash to qualify as a deduction under section 80G.

8. Deduction under Section-80D: Deduction under this section can be availed for two types of expenditure Medical insurance premium (which includes preventive health check-up) and Medical expenditure. The deduction under this section is allowable if mode of payment for the expenditure incurred (other than preventive health check-up) is other than by cash.

9. Disallowance under section 35AD R/w section 43(1): Second proviso to Section 43(1) states that no expenditure shall form part of actual cost of capital assets, if the payment for acquiring such assets has been made to a person in a day, otherwise than by account payee cheque/ bank draft/ using Electronic Clearing System exceeds Rs. 10,000.

10. Deduction U/s 80GGA: Section 80GGA provides deduction to an assessee other than an Assessee whose Gross Total Income includes income chargeable under PGBP in respect of certain donations for scientific, social or statistical research or rural development program or for carrying out an eligible project or National Urban Poverty Eradication Fund Subject to certain conditions.

In order to discourage the cash transactions, section 80GGA provides that no deduction shall be available if payment made by cash exceeds Rs. 10,000.

11. Deduction under section 80JJAA of Income tax act,1961: Section 80JJAA provides deduction of 30% of additional employee cost incurred by the Assessee shall be allowed as deduction for 3 assessment years. The Assessee who have income under head PGBP and liable to tax audit under section 44AB are entitles for deduction under Section 80JJAA.

In order to discourage cash transaction, no deduction shall be allowed u/s 80JJA, if Assessee made the payment of emoluments otherwise than by prescribed banking channel i.e., account payee cheque/ bank draft/ using Electronic Clearing System, subject to certain conditions.

12.Section 36(1)(ib) of Income tax act,1961:Section-36 disallows deduction for expenses in respect of premium paid by the employer for health insurance of its employees if paid in cash.

Process and treatment of Subscription money not paid in the Companies Act 2013

 In case of newly incorporated company, situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. Earlier there was no time limit prescribed in the Companies Act, 2013 (the ‘Act, 2013’) for depositing the subscription money by the subscribers to the Company. As per the recent amendment, a Company which has been incorporated on or after 02 November 2018, shall within 180 days of incorporation required to file the declaration by the director with the Registrar of Companies (‘ROC’) stating that every Subscriber to the Memorandum has paid the value of shares taken by them.

As per Section 3(1) of the Companies Act, 2013, “a company may be formed for nay lawful purpose by                                                       (a) Seven or more person, where the company to be formed is to be a Public Company;

(b) Two or more person, where the company is to be formed is to be a Private Company; or

(c) One person, where the company to be formed is to be One Person Company that is to say, a Private Company:

by subscribing their names or his name to memorandum and complying with the requirements of this Act, in respect of registration.”

The minimum paid-up share capital requirement of Rs. 100,000 (in case of a Private Company) and Rs. 500,000 (in case of a Public Company) under the Act, 2013 has been done away by Companies (Amendment) Act, 2015 w.e.f. 29th May, 2015. Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as well as public companies in India.

If any entity has been formed for the lawful purpose it requires capital to carry out the business. Such Capital is infused by the Individual or Corporates by subscribing the shares of the entity, such shares have a nominal value which is to be paid by the subscriber as “Subscription Money”. These persons are termed as “Subscribers”. Subscribers are also considered as first shareholders of the company and later on members of the company.

‘Subscribers’ are those persons whose name is entered in MOA and by signing the MOA they are giving consent to take some number of shares of the company by contributing capital to the entity. It is to be noted that any person who is competent to contract can be a subscriber. A company being a legal person can subscribe. A partnership not being a legal person cannot do so. In this case an individual partner must subscribe. Signing of MOA by subscribers is a contract with the company and subscription money not received from the subscriber then it will be considered as breach of contract by the subscriber and will attract civil dispute for breach of contract.

The ‘liability of each subscriber’ is equal to the total amount due on the shares subscribed for by him. Each subscriber is liable to pay to the company the full amount of the shares for which he has subscribed when a call to pay up is made on him by the directors or on the date or dates fixed for payment.

The term “Subscription Money” refers to that amount where subscriber is willing to subscribe shares of the company at a face value and need to deposits the amount in bank of the company. There is no prohibition/restriction under the Act, 2013 for receiving the subscription money in cash (i.e. not through account payee cheque or other banking channel). However, the Company and/or subscribers have to comply with the provisions of the Income Tax Act with regard to cash transaction.

Deemed Allotment.

In case of incorporation of new company, the shares are deemed to be allotted on the date of incorporation of the Company and subscription amount is received subsequently.

Time limit for depositing the Subscription Money.

In case of a newly incorporated company, the recent amendments [via Companies (Amendment) Ordinance, 2018 dated 02.11.2018] specify that the subscribers are mandatorily required to bring in subscription money within 180 days from the date of incorporation and the Directors are required to file a declaration to this effect with the Registrar [Section 10A of the Companies Act, 2013].

It is submitted that situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. In this situation, the various provisions of the Act, 2013 have to deal for different aspects.

Subscribers are Members.

The definition of “Member” is given under Section 2(55) of the Act, 2013 in relation to a company, means-

(i) The subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members.

(ii) Every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) Every person holding shares of the company and whose name is entered as a

beneficial owner in the records of a depository.”

It is clear from the definition that subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not.

Register of Member.

Pursuant to Section 88 of the Act, 2013 ‘Register of Member’ every company shall keep and maintain a register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India.

It is to be noted that as subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not, therefore name of the subscriber as a member of the company will be entered in the register of Member.

Issuance of share certificates.

Every company pursuant to Section 56 of the Act, 2013, shall deliver the certificates of all securities allotted within a period of 2 months from the date of incorporation, in the case of subscribers to the memorandum.

As per Section 56 of the Act, 2013, company have to issue share certificate within a period of 2 months of incorporation of the company irrespective of the fact that subscription money is received or not.

Whether subscription money not received, shall be included in the share capital of the Company?

As per Section 2(50) of the Act, 2013, “Issued capital” means such capital as the company issues from time to time for subscription.

As per Section 2(86) of the Act, 2013, “Subscribed capital” means such part of capital which is for the time being subscribed by the members of a company.

As per Section 2(64) of the Act, 2013, “Paid up Share Capital” or “share Capital Paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.”

From the above definitions, it is clear that subscription money not paid, shall be included in the issued capital and subscribed capital. However, in respect of the paid-up share capital, it is submitted that the definition of paid-sup share capital can be seen in two parts.

• One, aggregate amount received and credited as paid-up in respect of shares issued;
• Second, any amount credited as paid-up in respect of shares of the company.

At second instance paid up share capital means ‘any amount credit as paid up.’ In this situation, company can credit the subscription money not received as paid up in the Balance Sheet of the company, which is still receivable

Quorum in the Meeting.

Pursuant to provisions of Section 103 of the Act, 2013, members personally present shall be the quorum for a meeting of the company. As we have already mentioned that subscriber of MOA will be member of Company irrespective of the fact that subscription money is received or not. Therefore, such subscribers will be count for the quorum under Section 103 of the Act, 2013.

Restriction on Voting Rights.

As per Section 106(1) of the Act, 2013, “Notwithstanding anything contained in the Act, the articles of a company may provide that no members shall exercise any voting rights in respect of any shares registered in his name on which any calls or other sums presently payable by him have not been paid, or in regard to which the company has exercised any right of lien.”

In view of the above, articles of a company should be checked first whether it contain any restriction clause that a member shall not exercise any voting right in case of any sums payable by him have not been paid to the Company. If such clause is existing then such member shall not get right to vote in the meeting. But if there is no such clause in the article of a company then member will get the right to vote in meeting.

Transfer of subscribed shares on which subscription money is not paid.

As per Section 56(3) of the Act, 2013, “Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.”

Please note that pursuant to the provisions of Section 56(3) of the Act, 2013, the Company cannot restrict the transfer of such shares (subscribed shares on which subscription money is not paid), as the transferor is the registered owner of those shares. However, his debt to the company cannot be transferred in favour of any other person.

Subscription money not paid- position in Balance sheet of the company.

In case of where subscription money not received has been credited as paid-up, pursuant to the provision of Section 2(64) of the Act, 2013, in the Balance Sheet of the company, then as per Schedule III of the Act, 2013 the debts due from the subscriber should be appropriately disclosed as an asset in the balance sheet.

Crux of above various provisions:

1. As per Section 2(55) of the Act, 2013, subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not.

2. As per Section 56 of the Act, 2013, company have to issue share certificate within a period of 2 months of incorporation of the company irrespective of the fact that subscription money is received or not.

3. As per Section 2(64) of the Act, 2013, subscription money not received shall be credited as paid-up in the Balance Sheet of the company.

4. As per Section 2(55) & 88 of the Act, 2013, as subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not, therefore name of the subscriber as a member of the company will be entered in the register of Member.

5. Subscriber of MOA will be member of Company irrespective of the fact that subscription money is received or not. Therefore, such subscribers will be count for the quorum under Section 103 of the Act, 2013.

6. If article do not contain any restriction clause that a member shall not exercise any voting right in case of any sums payable by him have not been paid to the Company, then member will get the right to vote in meeting.

7. Pursuant to the provisions of Section 56(3) of the Act, 2013, the Company cannot restrict the transfer of such shares (subscribed shares on which subscription money is not paid), as the transferor is the registered owner of those shares.

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

 

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In case of newly incorporated company, situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. Earlier there was no time limit prescribed in the Companies Act, 2013 (the ‘Act, 2013’) for depositing the subscription money by the subscribers to the Company. As per the recent amendment, a Company which has been incorporated on or after 02 November 2018, shall within 180 days of incorporation required to file the declaration by the director with the Registrar of Companies (‘ROC’) stating that every Subscriber to the Memorandum has paid the value of shares taken by them.

As per Section 3(1) of the Companies Act, 2013, “a company may be formed for nay lawful purpose by-