Organizational Structure Running A Successful Business
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1. LAB CASE STUDY
1. CASE DIRECTORS
Harbour Engineering Private Ltd. vs Commissioner Of Income-Tax, ...
on 22 February, 1962
All the tree shareholders are directors of the company, and the first of them
is also the managing director. The managing director is a qualified
mechanical engineer. M.V. Sastry is an electrical engineer with
considerable experience. Syed Mohammed is a partner in Messrs. K.P.V.
Sheik Mohammed Rowther& Co., well-known steamer agents at Madras.
On and from April 1, 1955, the directors claimed to be paid remuneration at
the rate of Rs. 500 per month for each director. The managing director
claimed an additional salary of Rs. 1,250 per month from that date. This
salary and remuneration were not drawn by the directors each month but
were adjusted at the end of the calendar year
The resolution to pay remuneration to the directors was passed at a
directors meeting held on May 7, 1955. The Tribunal has adverted to the
fact that in the minuteds book the figure 9 denoting the month in which the
meeting was held is over-written by 5. Mr. Hayden appears to have
conceded before the Tribunal that the minutes were not written by him
contemporaneously with the holding of the meeting but were written later
on with the aid of memoranda made by him. The annual general meeting of
the company was held on May 21, 1956, and in that meeting the resolution
of the board of directors to pay salary and remuneration to the directors
was ratified. It is not necessary for us to go into the question whether there
is a valid resolution binding the company to enable the directors to get the
remuneration now claimed as deduction from the companys profits as we
are of opinion that in any event the claim is not permissible in law.
This was introduced into the statute book under section 7 of the Finance
Act of 1956, with effect from April 1, 1956. This section is intended to
prevent companies from claiming allowances which really benefit the
directors, directly or indirectly, under the mask of allowances under section
10(2). No allowance considered by the Income-tax Officer as excessive or
unreasonable (having regard to the legitimate business needs of the
company and the benefit derived by or accruing to the company therefrom)
2. is rmissible even though warranted by section 10(2) if it results directly or
indirectly in the provision of any remuneration or benefit or amenity to a
director or if it is in respect of any asset of the company used by the
director wholly or partly for his own purposes or benefit.
companys trade or business or the normal practice obtaining in such trade.
A few illustrations will be helpful to understand the real scope of this
section. A director owns a building which is let out to the company for its
business for rent. Normally and in the usual course the building may not get
more than Rs. 100 a month. The company pays a rent of Rs. 500 to the
director, the owner of the building. The building is used solely for the
purpose of the business of the company. But for section 10(4A) the
payment of Rs. 500 per month as rent will be a properly deductible
allowance under section 10(2)(i). But by reason of section 10(4A) the
Income-tax Officer can hold that the payment of Rs. 500 per month is
excessive and unreasonable, that it is calculated to benefit the director
indirectly and that the proper allowance would not only be Rs. 100, the rent
which the company could have paid if the building had not been owned by
the director. Regarding capital asset of the company like building,
depreciation is permitted under section 10(2) of the Act.
2. CASE: DIRECTORS
UNION OF INDIA v. SATYAM COMPUTERS SERVICES LTD. & ORS
[Decided on 9.1.2009]
Companies Act, 1956 - Sections 388B, 397, 398 and 408 – Financial
mismanagement - Whether board of directors to be removed - Held, yes.
Brief Facts: The Respondent Company indulged in grave financial
mismanagement practices due to which its Chairman resigned. The Central
3. Government applied to the CLB for the removal of the Board of directors
and to appoint its directors to manage the respondent company. Decision:
Petition allowed.
3. CASE DIRECTORS
A. L. MUDALIAR v. ASSISTANT REGISTRAR OF COMPANIES
[Decided on 5-8-2009]
Companies Act, 1956 - Sections 159 and 162 - Offence by company —
Director’s Liability—Failure to file balance sheet and profit and loss
account—Non-executive director resigning before date of default—
Proceedings initiated against ex-director –Whether proceedings to be
quashed- Held, Yes.
4. CASE DIRECTORS
AUROBINDO PHARMA LTD. v. ANIL KUMAR PODDAR [Decided on 14-
8-2009]
Companies Act, 1956 – Section 284(4) – Removal of directors – Notice by
shareholder seeking removal of director for failure to supply records sought
for – Documents sought for supplied and inspection of records offered –
Rights of member abused – Whether company should place notice before
general body meeting – Held, No.
4. 5. CASE DIRECTORS
RANBAXY LABORATORIES LTD. v. DR. JAYARAM CHIGURUPATI
[Decided on 21-10-2009]
Companies Act, 1956 – Sections 260 and 287(2) – Quorum for Board
Meeting – Board meeting convened by single director on account of
resignation of two directors to appoint two additional directors to constitute
quorum – Whether such appointment is valid – Held, Yes.
6. CASE DIRECTORS
1994 (5) TMI 232 - HIGH COURT OF RAJASTHAN
HerdilliaUnimers Ltd. VersusArunBansal
Offences against the act to be cognizable only on complaints by registrar,
etc.
category of offences enumerated under section 545 of the Companies Act.
Considering the facts of the case that the complaint has been filed just to
harass the petitioner-company and is a frivolous complaint, the same has
no force. Even on a specific query whether under any law or any section of
the Companies Act the complainant is competent to file the complaint,
when he is not a shareholder and when there is no dispute regarding
payment of the money by the company, counsel for the complainant failed
to point out any provision where under such complaint can be entertained.
If such proceedings are allowed to continue, then it will be an abuse of the
process of the court. In such circumstances and in view of the provisions of
section 621 of the Companies Act, 1956, the proceeding in Case No. 59 of
1993, ArunBansal v. HerdilliaUnimers Ltd., before the Special Court of
5. Judicial Magistrate (Economic Offences) Rajasthan, Jaipur, is quashed.
Consequently, this petition is allowed.
7. CASE DIRECTORS
T. P. Sokkalal Ram Sait Factory ... vs T. P. S. H. SelvaSarojaAnd
Others. on 2 April, 1974
To this petition, the applicants mother and the managing director of the
company has filed a counter-affidavit. It is pointed out in the counter
affidavit that Company Petition No. 84 of 1969 was filed by a person
claiming to be a next friend of the applicant, who was a minor at the time of
the application. On his mothers application the said next friend was
removed by an order in O. S. As Nos. 43 to 46 of 1970. By that time the
applicant had attained majority and he filed an affidavit stating that the
allegations of mismanagement were unfounded and that he was not
desirous of prosecuting
debtor of the company could not be put in issue in the proceedings in
Company Petition No. 84 of 1969, which was one under sections 397 and
398 of the companies Act, 1956, relating to the management and
administration of companys affairs. It is averred that the applicants denial
of his debt was not bona fide and that he owed large sums to the company
to the tune of Rs. 5,54,866 as on August 16, 1973. Another point taken in
the affidavit is that the applicant could not require this court to adjudicate on
the issue of his liability to the company and seek to stay the tax recovery
proceedings against the company.
6. 8. CASE : AMALGMETION
SEQUENT SCIENTIFIC LTD. In re., Khanwilkar A. M. J [Decided on 16-
6-2009]
Companies Act, 1956 – Sections 391 and 394 – Scheme of amalgamation -
Objection by intervenor having supply agreement with transferor company
that scheme in breach of agreement – Whether objection tenable – Held,
No.
9. CASE: AMALAGMETION
MEKASTER VALVES AND ENGINEERING SERVICES P. LTD.,
[Decided on
06.05.2008]
Companies Act, 1956 - Section 394 - Scheme of amalgamation -
shareholders approved the scheme - Whether provisions of sections 17,
21, 94 and 97 of the Act have to be separately complied with - Held, No.
10. CASE AMALGEMETION
RAMCO SUPER LEATHERS LTD. v. DHANALAKSHMI BANK LTD
[Decided on 17-8-2009]
7. Companies Act, 1956 – Sections 391 & 394 – Scheme of amalgamation
and demerger – Secured creditor – Banks – Stipulations in loan
agreements that company would not undertake any amalgamation or
reconstruction without prior permission of banks – Material facts not placed
before sanctioning court – Scheme sanctioned without notice to banks –
Order of sanction modified to be subject to approval of secured creditors –
Whether the modification is valid –
Held, Yes.
Case study (Book) amalgamation
CASE STUDY:
198.2 – P1 X owns a block of assets (consisting of plants A & B,
depreciation rate 15 %. On April 1, 2009, depreciated value of the block is
Rs. 10, 40,000. On July 7, 2009, the block of assets is transferred by X to Y
for Rs. 30, 70,000. Find the tax consequences under the following
situations ―
1. X is amalgamating company and Y, being an Indian company, is the
amalgamated company and the block of assets is transferred by X to Y in a
scheme of amalgamation. Y does not own any other asset.
2. Suppose in (1) (supra) Y is a foreign company.
8. 3. Suppose in (1) Y owns a block of assets (consisting of plants A and B,
depreciation rate 15 %) on April 1, 2009. Depreciated value of the block of
asset being Rs. 6, 40,000. Y purchases plant E, an office appliance (rate of
depreciation 15 %0 on March 10, 2010 for Rs. 2, 90,000. It is put to use on
the same day.
4. X is partnership firm. It is converted into Y company. The conversion
satisfies the conditions of section 47(xiii). Y does not own any other asset.
5. X is a firm. The business of X is taken over by Y, a partner in the firm.
On April 1, 2009, Y owns plants C and D (depreciation rate 15 %, actual
cost Rs. 36,000). It is put to use on the same day. On March 13, 2010, Y
sells plant C for Rs. 26, 40,000.
Solution:-
Computation of depreciation allowance on Plants A & B
Rs.
Depreciated value of block on April 1, 2009
10, 40,000
Depreciation @ 15% 1,
56,000
Apportionment between X and Y Rs.
No. of days when assets are held by X (from April 1, 2009 to July 6, 2009)
97 days
9. No. of days when assets are held by Y (365 days – 97 days)
268 days
Depreciation available to X (Rs 1, 56,000 * 97 / 365) 41, 458
Depreciation available to Y (Rs. 1, 56,000 * 268 / 365)
1,14,542
Tax consequences in the hands of X and Y
Situatio
n 1
Situatio
n 2
Situatio
n 3
Situatio
n 4
Situati
on 5
Tax consequences
in hands of X:
Depreciation
Short term capital
gain under sec. 48
read with sec. 45
Depreciation in
hands of Y:
Depreciated value
of block of block on
April 1, 2009.
Add: Actual cost of
assets acquired
from X
Add: Actual cost of
plant E acquired by
41,458
Nil1
Nil
10,40,0
41,458
20,30,0
002
Nil
41,458
Nil1
6,
40,000
41,458
Nil3
Nil
30,70,0
41,458
20,30,0
00
60,78,0
00
10. Y
Less: Assets sold
during the year
Written down value
of block
Depreciation:
On asset acquired
from X
On Plant E
On other assets
00
-
-
30,70,0
00
-
-
10,40,0
00
2,90,00
0
-
00
-
-
30,70,0
00
36,000
26,40,0
00
10,40,0
00
1,14,54
2
-
-
30,70,0
00
1,14,54
2
-
-
19,70,0
00
1,14,54
2
21,7504
96,0005
30,70,0
00
1,14,54
2
-
-
65,44,0
00
1,14,54
2
2,7006
5,15,70
07
Total depreciation
Written down value
1,14,54
2
1,14,54
2
2,32,29
2
1,14,54
2
6,32,94
2
11. of the block on
April 1, 2010
9,25,45
8
29,55,4
58
17,37,4
58
29,55,4
58
59,11,0
58
Notes:
1. It is exempt under section 47(vi).
2. As the amalgamated company is not an Indian company, the provisions of
the section 47(vi) are not applicable.
3. It is exempt under section 47 (xiii).
4. It is 15% of ½ of Rs. 2, 90,000 as Plant E is put to use for less than 180
days during the previous year.
5. It is 15% of (Rs. 19, 70,000 – Rs. 10, 40,000 – Rs. 2, 90,000).
6. It is 15% of ½ of Rs.36, 000.
7. It is 15% of (Rs. 65, 44,000 – Rs. 30, 70,000 – RS. 36,000).
8. In the above problem, situation 4 covers the case if a firm is converted into
company by satisfying conditions of section 47(xiii). The tax treatment will
be same in the following cases [except exemption under section 47(xiii)] ―
a. if X is a firm & the business sis taken over by Y a partner in the firm;
b. if X is HUF & the business is taken over by Y a member of the family;
c. if X is a sole proprietor & business is taken over by Y, a firm in which
X is one of the partners.
d. if X is a sole proprietor & business is taken over by a company in
which X is of the shareholders.
In (d) if conditions of section 47(xiv) are satisfied, exemption will be
available to X under that section.
9. In situations 2, 4 and if the Assessing Officer is satisfied that fair market
value of Plants A and B is less than Rs. 30, 70,000 (being the consideration
paid by Y), then he can take action under Explanation 3 to section 43(1).
12. 11 CASE : MEMBERSHIP
Mismanagement in family companies - a case study - Company Law in
India
There was a closely held company floated by all family members. All the
family members own shares in the Company. The family has active
participation in other companies too. In the company as referred to, few
members are actively involved in day-to-day management of the company
and few other members are not involved in day-to-day management. While
this is the case, one of the family members who are qualified to approach
the Company Law Board under section 399 of the Companies Act, 1956,
approaches the Company Law Board alleging some mismanagement in the
Company. The applicant before the Board refers to many irregularities and
especially the action of the majority in selling the company properties for
throw away price. The majority has taken a stand denying the allegation
that the properties of the company are sold for a throw away price and also
specifically alleges that the applicant before the CLB did not participate in
the day-to-day affairs of the Company. The Board has given an exit option
to the applicant rather looking into the issue of irregularities.
The issues for consideration in the above case are like:
1. Will the majority be allowed to contend that they are privileged in the
company as they run the company and participate in the day- to-day affairs
of the company?
2. How to deal with the issue of undervaluation of company properties in
the given case?
3. Whether the applicant before the Board be forced to exercise exist
option on the ground that he did not participate in the day-to-day affairs of
the Company.
Study of case and the issues:
With regard to the first issue, barring the rights provided under the
Companies Act, 1956, the majority can never contend that it is privileged as
it is involved in day-to-day affairs of the Company. It is same even in family
companies as company is a company irrespective of its shareholding
pattern or kind. The Act deal with the issue of incorporation and functioning
of the company and in a family companies, the understanding and the
regulations contained in the Articles matters more. But, no where it is
provided in the Act that the a person or a group which is taking care of the
13. day-to-day affairs of the Company is privileged over the minority keeping
the provisions of the Act apart. A shareholder is a shareholder and he has
every right to question the misdeeds in the company and he need not
participate in day-to-day affairs of the company thinking that the directors
are expected to act fairly in the interest of all the shareholders. As such, in
my opinion, the issue of non-participation in the affairs of the company or
its functioning can not be given significance under company law.
The second issue is very very complicated. Some companies over values
its properties and procures loan. Few other companies under values the
company properties in order to get away from paying taxes to the
Government. The overvaluation may not create much problem to the
shareholders and the creditors are duty bound to inquire and looking into
the issue of overvaluation when the company approaches them for a loan.
But, the issue of undervaluation is very very dangerous. The problem with
the undervaluation is that most of the money goes unaccounted. The
minority may allege that the valuable properties of the company are sold for
a throw away price and the majority may show the guideline value at the
area. It is very very complicated issue to deal with. Because, once the
properties are sold, then, the purchasers' interests are also to be
considered. The issue of Board's power in setting aside the deeds to be
looked into so carefully.Its one of the very complicated areas under section
397/398. The applicant before the Board who alleges oppression and
mismanagement in the company should be able to prove that the
properties are sold for a throw away price and for that he should resort to
the enquiry as is being done by the Rent Control Courts while fixing the fair
rent. What I feel is that the second issue as referred to above is always
complicated.
With regard to the third issue, though the Board is empowered with many
powers in the interests of the Company and as provided under section
397/398 of the Act, I don't think that it is right to force the applicant to
exercise exist option on the ground that the applicant did not participate in
the day-to-day affairs of the Company.
14. 12 CASE: RECONSTUCTION
ADVANCED MEDICAL OPTICS INDIA P. LTD., [Decided on 28-1- 2009]
Companies Act, 1956 – Sections 78 and 100 to 104 – Capital reduction-
Reduction to write off accumulated losses – Articles of association
permitting reduction – Special resolution passed accepting reduction –
Creditors’ rights not prejudiced – No objection from any person to proposed
reduction- Whether Reduction could be sanctioned- Held, Yes.