Recent Amendments to the Companies (Incorporation) Rules, 2014

By Husain Kader

The Ministry of Corporate Affairs (MCA) has issued a recent notification dated 16th October, 2019 notifying the Companies (Incorporation) Eight Amendment Rules, 2019 to amend the Companies (Incorporation) Rules, 2014.

The amendments are summarised below:

Sr No. Particulars Erstwhile Provision After Amendment Remarks
1. Undesirable Names

 

Rule 8A

Earlier if the name of the proposed company included a registered trademark then approval from the owner or the applicant for registration of trademark had to be obtained by the promoters of the proposed company before making name application to ROC. Now the option to get approval from the applicant for registration of trademark has been removed.

 

Now approval has to be obtained from the owner only.

The Owner and applicant for registration of trademark could be two different persons and therefore earlier there was an option.

 

Now the rule has been made more stringent and the approval of the present owner is necessary.

2. Active Company Tagging Identities and Verification (ACTIVE)

 

Rule 25A

Earlier if a company was marked as ACTIVE-non-compliant than unless e-Form ACTIVE was filed the company was not able request for any changes in director information by filing Form DIR-12 except in case of cessation. Now if a company is marked as ACTIVE-non-compliant than it will not be able to request for any changes in director information except in the following cases:

 

1.   cessation of any director; or

2.   appointment of directors in a company where total number of directors fall below the minimum limit as provided in the Act on disqualification of all or any of the director; or

3.   appointment of any director in such company where DINs of all or any of its director(s) have been deactivated; or

4.   appointment of director(s) for implementation of the order passed by the Court or Tribunal or Appellate Tribunal.

MCA has liberalized the ACTIVE rule to allow changes to be made to the information of directors to allow appointment or cessation of directors where it becomes absolutely necessary  in cases which may  lead to non-functioning of the Board of Directors of a company or non-compliance of the Companies Act.
3. Shifting of registered office within the same State

 

Rule 28

After amendment the MCA has added the following rules to the present provisions:

 

1.   The Regional Director (“RD”) shall examine the application seeking confirmation from the RD for shifting the registered office within the same State from the jurisdiction of one ROC to another ROC and the application may be put up for orders without hearing and the order either approving or rejecting the application shall be passed within 15 days of the receipt of application complete in all respects; and

 

2.   The certified copy of order of the RD, approving the alternation of MOA for transfer of registered office company within the same State, shall be filed in Form No. INC-28 along with fee with the Registrar of State within 30 days from the date of receipt of certified copy of the order.

The Rule has been made more stringent by the MCA whereby now an order shall be passed by the RD after examination of all the submitted documents and such order shall have to be filed in Form INC-28 (which is an added compliance to be followed) for shifting of registered office.

 

Important Update – Annual Filings

 

As per a recent notification dated October 29, 2019, the Ministry of Corporate Affairs (“MCA”) has provided relief to the stakeholders by relaxing additional fees and extending the last date of filing for the following for the financial year which ended on March 31, 2019 to:

  1. Filing of forms for financial statements – November 30, 2019; and
  2. Filing of annual returns – December 31, 2019.

On failure to file the forms by the above due dates, an additional fees of INR 100/- per day for each day of default will become applicable.

CBDT issues clarifications regarding unabsorbed depreciation and unutilised MAT credit for companies opting for concessional tax rates

Background

The Government of India recently announced significant reduction in corporate tax rates through The Taxation Laws (Amendment) Ordinance, 2019 (‘Ordinance’). The Ordinance provides for a reduced tax rate of 22% for existing domestic companies and 15% for newly set up manufacturing companies. The taxpayer has the option to opt for lower tax rate or to continue under the existing tax regime and avail existing deductions and set-off of losses.

The Ordinance also provides that Minimum Alternate Tax (MAT) shall not apply to any taxpayer opting to be governed by these lower tax rates. One of the conditions for availing the lower tax rates is that the taxpayer shall not be eligible to set-off brought forward tax losses against its taxable income.

The drafting of the Ordinance left open certain key questions. The CBDT through Circular No. 29/2019 dated 2 October 2019, has sought to clarify the following two questions:

  • Whether taxpayers will be eligible to set-off unabsorbed depreciation against taxable income of FY 2019-20 and subsequent years?
  • What will be the position of unutilised MAT credit since the provisions of MAT no longer apply to taxpayers opting for concessional tax rates

 

Clarification 1:

A company opting for the lower tax rates shall not be eligible to set-off any brought forward business loss on account of additional depreciation

Key Takeaway:

The Clarification provided by the CBDT, with due respect, appears misplaced. Denial of benefit of unabsorbed depreciation will require an amendment in section 32(2) which can be carried out only by approval from the Parliament of India or a Presidential Ordinance and not by the CBDT through issuance of Circular. Therefore, to that extent, the Circular No. 29/2019 may be considered as ultra-vires the powers of CBDT and may not survive judicial review. Please refer the subsequent paragraphs for a discussion on this aspect.

It is pertinent to note that the restriction is only on set-off of unabsorbed additional depreciation. The set-off of normal depreciation should continue unabated

Be that as it may, taxpayers opting to be governed by the Circular will have to carry out active number- crunching to determine the component of unabsorbed additional depreciation comprised in brought forward depreciation

Our reasoning:

  1. The restrictions provided under the newly inserted section 115BAA(2) has three clauses, as under:
  • Clause (i) prohibits claiming specified deductions, including additional
  • Clause (ii) prohibits set-off of brought forward tax losses relating to deductions under Clause (i)
  • Clause (iii) provides for claim of current year depreciation in such manner as may be prescribed

It is a settled position under the Income Tax Act, 1961 (Act) that depreciation is an allowance and not a deduction. Therefore, the restriction under Clause (ii) dealing with losses relating to deductions referred in Clause (i) should not cover additional depreciation.

 

  1. Under section 32(2) of the Act, unabsorbed depreciation is treated as depreciation of the current year and can be carried forward indefinitely to be set-off against taxable income of future years. As such, when the taxpayer off-sets unabsorbed depreciation, technically, the taxpayer claims off-set of the current year depreciation and not of a brought forward loss. Therefore, any restrictions on brought forward losses should not apply to brought forward depreciation

 

  1. It is also an established position that unabsorbed tax losses are different than unabsorbed A case in point is the provisions of section 79 of the Act which deny benefit of brought forward losses to closely held companies in cases of change in control. Courts have held that section 79 would not apply to brought forward unabsorbed depreciation as depreciation is not a loss.
  2. The CBDT can issue Circulars only for administrative and procedural guidance. A Circular cannot amend or restrict the operation of the law. It is pertinent to note that the clarification is provided by the CBDT by way of a Circular and has not been announced through a Supplementary Ordinance.

 

Clarification 2:

A company opting for the lower tax rates shall not be eligible to set-off unutilised MAT credit

Key Takeaway:

Since the provisions of MAT do not apply to taxpayers opting for the lower tax rates, any unutilised MAT credit available with these companies up to 31st March 2019 shall lapse. This could require writing-off of unutilised MAT credit as an expense to the Profit and Loss Account, impacting the Profit after Tax.

This provision, in effect, will make the MAT paid in earlier years a final tax payment. However, since an option has been provided to the taxpayer of not opting for the concessional tax rate and utilise the MAT credit, a constitutional challenge to this clarification may not survive

Summary

The changes made by the Ordinance and this recent clarification present a strong case for the taxpayers and tax advisors to sit together for carrying out a tax review of existing business operations to ascertain whether any tax optimisation avenues exist and what would be the opportune time for the taxpayer to opt for the lower headline tax rate of 22%

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Private Limited Company or Limited Liability Partnership. Which one to choose?

Many Entrepreneurs starting a new business are curious about the comparison between a Private Limited Company vs LLP. Both entities offer many similar features required to run a small to large sized business, while also differing starkly on certain aspects.

In this article, we will decode for you the comparison between Private Limited Company vs LLP from the viewpoint of an Entrepreneur starting a new business.

Registration Process

The Private limited company registration process and the LLP registration process are very similar with some differences in the documents and forms being filed for incorporation. The steps for incorporation of a Private Limited Company are:

  1. Obtaining Digital Signature Certificate (DSC) for the proposed Directors,
  2. Obtaining Director Identification Number (DIN) for the proposed Directors,
  3. Obtaining name approval from MCA and 4. Filing for incorporation.

LLP registration also has a similar process:

  1. Obtaining Digital Signature Certificate (DSC) for the proposed Partners,
  2. Obtaining Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners,
  3. Obtaining name approval from MCA and 4. Filing for incorporation.

Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs and are issued a Certificate of Incorporation. The processing time for incorporation of a private limited company and LLP are also comparable with both entities taking on average about 20 days to incorporate.

Registration Cost

The Government fee for incorporation of an LLP is significantly cheaper when compared to the Government fee for incorporation of a Private Limited Company. LLPs have been introduced to meet the needs of small businesses and hence LLP enjoy lower government fee for incorporation. Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.

Features

Both LLP and Private Limited Company offer many of the same features. LLP and Private Limited Company are both separate legal entities and have assets and liabilities that are separate from that of the promoters. LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority.

Ownership

Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a private limited company can have up to 200 shareholders. Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a private limited company between the owners of share and the management. Hence, a private limited company is advantageous when it comes to ownership and management features.

In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in an LLP will be both an owner and a manager, whereas, in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers.

A private limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding.

Compliance

Tax compliances are similar for both private limited company and LLP. However, when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantages. An LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs.40 lakhs and the capital contribution is less than Rs.25 lakhs. An LLP would, however, have to file LLP FORM 8 and LLP FORM 11.

A private limited company, on the other hand, would have to file annual return audited financial statements with the Ministry of Corporate Affairs each year.

Fines and Penalties

The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for an LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance. Therefore, it is important for the promoters of an LLP to be aware of the due dates and file the required documents with the registrar on time.

Other Factors

Private limited companies have been in existence for longer than LLPs and enjoy widespread recognition in India and the world. Therefore, there are well-established processes and procedures for Private Limited Companies. LLPs, on the other hand, is a recently introduced entity in India. Therefore, some of the rules, regulations, and procedures are continuing to evolve. LLPs are also not as recognized in India as a private limited company since it is a relatively new concept.

Private limited company offers its promoters a better image or standing than that of an LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.

Foreign Ownership

Foreigners are allowed to invest in an LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval, whereas in Private Limited Company Foreigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectors.

Existence or Survivability

Existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a Partner.

In LLP, existence is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board, however in a Private Limited Company existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.

Registering the right type of company is crucial to the success of your business as it will help you avoid any complications later on. Every entrepreneur needs to closely consider his/her needs before even thinking of registering a company because every business is unique and the type of company you choose can go a long way in ensuring its success!

Contributed by: Vashvi Panwar

Directorship – Comply with MCA, KYC Guidelines

Ministry of Corporate Affairs (MCA), India would be conducting KYC (Know Your Customer) of Directors of all companies on an annual basis through a new e-form viz. DIR-3 KYC to be notified and deployed shortly with MCA.

Accordingly, every Director who has been allotted Director Identification Number (DIN) on or before March 31, 2018 and whose DIN is either (i) in ‘Approved’ status, or (ii) inactive due to disqualification of such Director would be mandatorily required to file form DIR-3 KYC on or before September 15, 2018 with MCA.

While filing the form, the Unique Personal Mobile Number and Personal Email ID of the Director would have to be mandatorily indicated and would be verified by One Time Password (OTP) to be sent to such Director’s registered mobile no.

The e-form should be filed by every Director using his own Digital Signature Certificate (DSC) with MCA and should be duly by a practicing professional (CA/CS/CMA).

Failure to comply with this provision will result in the DIN of such Director to be ‘Deactivated’ thus disqualifying such Director. Activation of DIN can then be done by paying requisite filing fees.

Fundraised from Foreign Investors? Ensure You Don’t miss this Filing with RBI!

Which companies are eligible to file the Form FLA?

Every Indian company and Limited Liability Partnership (LLP) which have received Foreign Direct Investment (FDI) and/or made Overseas Direct Investments (ODI) in the previous year(s), including the current year are required to file Annual Return on Foreign Liabilities and Assets (“Form FLA”) with RBI on or before July 15th every year.

The Form FLA has to be also filed in a case where a company/LLP has not received any fresh FDI and/or ODI in the current year but has outstanding FDI and/or ODI from previous years.

In case where the company/LLPs financial statements are unaudited before the due date of submission of Form FLA, the return is required to be submitted on the basis of such unaudited (provisional) financial statements. Once the accounts get audited and there are revisions from the provisional information submitted, the company/LLP’s will be required to submit a revised return by September 30th.

The following companies are excluded from submitting FLA return:

  1. Where Indian company/LLP does not have any outstanding investment in respect of inward and outward FDI as on the end of March of the reporting year, the company/LLP is not required to submit the Form FLA.
  2. If a company/LLP has received only share application money and does not have any foreign direct investment or overseas direct investment outstanding as on the end of March of the reporting year, the company/LLP is not required to submit the Form FLA.
  3. If all non-resident shareholders of a company/LLP has transferred their shares to the residents during the reporting period and the company/LLP does not have any outstanding investment in respect of inward and outward FDI as on the end of March of reporting year, the company/LLP is not required to submit the Form FLA.
  4. If shares are issued by reporting company to non-resident on Non-Repatriable basis, then it should not be considered as a foreign investment; therefore, companies which have issued the shares to non-resident only on Non-Repatriable basis, are not required to submit the Form FLA.

How does one submit the Form FLA?

The format of Form FLA can be found here. The filled form along with any attachment has to be mailed to [email protected] by the due date. The email has to be sent from the official email id of any authorized person in the company/LLP, such as CFO, Director, Company Secretary, etc.  Acknowledgment will be received from RBI on the same email id from which the form is sent.

If one is incorporated as a private limited company does he need to get a trade license from the municipality?

Trade license is permission granted in form of a certificate by State government to carry on any business/trade for which it is issued. Trade license is regulated to ensure that the citizen is not adversely affected by Health Hazard & Nuisance by the improper carrying of a trade.

The trade license is a means to ensure that the manner and locality in which the business is being carried on is according to the relevant rules, standards and safety guidelines. It is issued by the municipal corporation of the place where business is located. A trade license is a permission to carry on a specific trade or business at the premises for which it has been issued. Any unauthorized running of trade is an offense which may result in a substantial penalty and subsequent prosecution.

The business owners must apply for trade license is required in particular area without any delay. An application must be made before the commencement of the activity. However, some state governments allow up to 3 months’ time to seek a trade license. License once issued requires periodical renewal on annual basis. Application for renewal must be filed at least 30 days before expiry of license.

As per shops and establishment act, it is mandatory for three kinds of business:

1. All the eating establishments like hotels, restaurants, canteen, food stall, bakeries, the sale of vegetables, meat, provisions store, etc.

2. Trades which use motives like manufacturing industries, factories, power looms, flour mills, cyber cafe, etc.

3. Offensive and dangerous trades like a barber shop, dhobi shop, timber wood, sale of firewood, candle manufacturer, cracker manufacturer, etc.

Documents required for obtaining trade license:

1. Pan card of the establishment in case of company, LLP or Firm;

2. Canceled Cheque and bank statement of the establishment;

3. Certificate of Incorporation, MOA, and AOA of the company or LLP/ Partnership Agreement as the case may be;

4. Premises proof of the establishment in the form of Sale Deed, Electricity Bill/water bill and NOC from the owner;

5. Colour photograph, Pan card and ID Proof and Address Proof of all Directors/ Partners;

6. Photograph of the establishment with the display of goods traded from the premises; and

7. Site/Key plan showing the area under the occupation of the applicant earmarking the neighborhood of the site.

Is it mandatory to have audited balance sheet for a newly formed private limited company?

A private limited company is the most popular form of starting a business, there are various compliances which are required to be followed once a private limited company is incorporated including getting the balance sheet audited by the statutory auditors of the Company.

Every newly formed private limited company is required to appoint first statutory auditors of the Company, within 30 days of incorporation and in case of failure of the board to appoint such auditor, it shall inform the members of the Company who shall within 90 days at an extraordinary general meeting appoint such statutory auditor who shall hold the office till the conclusion of the first annual general meeting.

Every private limited company is required to file its balance sheet along with a statement of profit and loss account and director report within 30 days of holding of the annual general meeting.

Thus it is mandatory for every newly incorporated company to get its balance sheet audited and hold its first AGM within nine months from the closure of the financial year of the company and thereafter within six months from the closure of the financial year of the company.

Revival of Company Struck Off by Registrar Of Companies, India (“ROC”)

Over 2,00,000 companies which have not filed their annual returns and balance sheet for 3 consecutive financial years, have been de-registered by the Registrar of Companies (ROC) and a series of action against such companies have been taken including de-activating the DIN of the directors of such companies. This essentially means, that directors of such companies are now disqualified and cannot be appointed as directors in any other company.

However, the Registrar of Companies (ROC) has also now given an opportunity to such companies, to get their compliance in place and apply for the revival of the company.  If you are the director or promoter of any such company, then read on to understand how you can rectify the situation:

1. Who can apply for the revival of a company?

The following persons can file the application with National Company Law Tribunal (NCLT) for revival:

  • The company that has been deregistered by the Registrar of Companies (ROC);
  • Creditors or shareholders of a company that has been deregistered by the Registrar of Companies (ROC); and
  • Workmen of a company that has been deregistered by the Registrar of Companies (ROC).

2. What is the timeline for filing an application for revival of a company that has been deregistered by the Registrar of Companies (ROC)?

A company that has been deregistered by the Registrar of Companies (ROC) can apply for revival within the below-stated timelines:

  • Where the order for deregistration has been passed by NCLT: The company has 20 years from the date of strike-off order to apply to Registrar of Companies (ROC) for revival; or
  • Where the order for deregistration has been passed by Registrar of Companies (ROC): The company has 3 years from the date of the order passed by Registrar of Companies (ROC) to apply to Registrar of Companies (ROC) for revival.

3. What is the procedure to be followed for revival?

The applicant has to file a petition for revival with NCLT through the Registrar of Companies (ROC), in the prescribed Form NCLT-9 for the restoration of the name of the company with the following supporting documents:

  • Document and/or other evidence in support of the statement made in the application or appeal or petition, as are reasonably open to the petitioner(s);
  • Where the petition is presented on behalf of members (shareholders), the letter of consent given by them, if applicable;
  • Affidavit verifying the petition;
  • Evidence regarding payment of the fee of Rs. 1,000/-;
  • Memorandum of appearance with a copy of the Board resolution or the vakalatnama, as the case may be;
  • Certified True copy of the Power Of Attorney;
  • Affidavit Not Claiming Dormant Status Of The Company;
  • Affidavit on Demonetization;
  • Audited Financial Accounts, Profit and Loss account, Auditors Report;
  • Directors Report, AGM Notice, Attendance Register and Minutes;
  • Certified True Copy of the Memorandum of Association of the Company;
  • Certified True Copy of the Articles of Association of the Company;
  • Three copies of the petition; and
  • Any other documents in support of the case.

Upon receiving the application, NCLT shall fix a date for hearing the matter and after giving reasonable opportunity to both the parties of being heard, pass an order for restoration of the name of the company and removal of disqualification of the director, if it is satisfied with the reasons given by the company. There will, of course, be a certain penalty imposed as well.

4. Is the company automatically revived if the NCLT passes an order for restoration?

No. There are certain steps to be taken to restore the company. The applicant will have to submit a certified copy of the order with the Registrar of Companies (ROC) within 30 days from the date of the order. Only after the  Registrar of Companies (ROC) publishes the order of restoration in the Official Gazette, will the company be considered to have been restored.

In addition, the company will also have to complete all the pending financial statements and annual returns with the Registrar of Companies (ROC) and comply with the requirements of the Companies Act, 2013 and rules made thereunder within such time as may be directed by the NCLT.