CLARIFICATION ABOUT SHARES HELD IN UNLISTED COMPANEIS APPEARS TO BE WRONG AND WILL CREATE DIFFERENCES CAUSING LITIGATION.

[CA DEV KUMAR KOTHARI]

Just four days before the last date for filing of ITR in audit cases that is 30.09.2019, the CBDT has issued Circular No. 26 of 2019 vide  F. No. 370142/1/2019-TPL (Pt.-I) Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes (TPL Division).

The Circular addresses several issues which are important about filling in details in various ITR forms.

In this write-up only issue considered in clarification about details of shareholders of a companies whose shares are not listed are discussed. There are many other issues causing difficulties in filling details in ITR .

 The clarifications are issued in form of question and answers. The same are discussed below with observations of author: 

Question1: In the  Form ITR-6 an unlisted company, other than a start-up, is required to furnish details of shareholding in Schedule SH-1. In a case where shares have been acquired by way of transfer, please clarify how the columns on "Date of allotment", "Issue price" and" Amount received" should be filled up?

Answer: In case shares have been acquired by the shareholder by way of transfer, and not by way of allotment made by the company, the details of shareholding should be entered in the respective columns of the Table in Schedule SH-l, as under

(i)  Name of Shareholder: - Enter name of the person holding shares as on end of the previous year (current shareholder).

Observations:

This answer seems okay so far as details as on closing date are concerned. However, in Annual Return filed on website of MCA details of shareholders are given as on the date of Annual General Meeting. Therefore, in case Income Tax Department want to cross tally the information in ITR with Annual Return filed on MCA it will not be possible.

Another problem is about shares held by registered shareholder but sold to another person who has not lodged shares for transfer or even if shares have been lodged with company for transfer, but have not been registered by company. In such case company will show shares in name of registered shareholder as on 31.03.2019 but the same will not be found in holding of shareholder in his ITR.

Therefore, cross verification will be not possible and  therefore there will be need of  reconciliation.

(II) Date of allotment:-Enter date on which shares were transferred to the current shareholder as per companies register.

Observations:

This answer is patently wrong. How date of transfer can be considered as date of allotment, is not comprehensible. Allotment may be a very long past history. Date of allotment has its own significance for company and its shareholders. This is because usually only on or before date of allotment company get payment for issue price. There can also be cases of payment on application, allotment and calls. In such cases, shares may not be fully paid-up.

Dates of allotment , if taken as date of transfer, will lead to differences in records of company and shareholders and information on website of MCA.

This will lead to differences requiring need of clarifications and reconciliation. Company and shareholders are likely to face scrutiny and then harassment by the Tax officers – this is well known that scrutiny assessment is generally for harassment of taxpayers. This is also evident from fact that most of additions made in scrutiny assessments are deleted, if assesse properly pursue appeals and other proceedings.

(III)  Face value per share: - Enter the face value per share at which the shares had been originally allotted by the company.

Observations:

This answer is  not perfect and will lead to  wrong information in many situations. For example,  in case of  consolidation of shares, sub-division of shares, capital reduction, capital restructuring etc.

(iv) Issue price per share: - Enter the price at which shares were issued by the company to the original shareholder to whom the company had allotted the shares.

Observations:

This answer is not perfect and will lead to wrong information in many situations. For example, in case of consolidation of shares, sub-division of shares, capital reduction, capital restructuring etc. and also in cases where partly paid shares were transferred by original shareholders and balance amount was paid by transferee shareholder and meanwhile capital restructuring has taken place etc.

 (v) Amount received: - Enter the total amount received by the company from the original shareholder to whom the allotment of shares had been made, upto the end of the previous year.

Observations:

This answer is patently wrong. How the amount received from   original shareholder can be mentioned as amount received from present shareholder and that too on the date of transfer?

Company usually  receives issue price from original shares  and sometimes from original shareholder as well as from transferee  when original shareholder had transferred partly paid up shares . The entire amount might have been received by company in earlier years and in long past for example  in case of very old companies.

                In many cases no amount is received by company during the previous year for which ROI is being filed. Therefore, there will be mismatch in amount as per Balance Sheet and information if Schedule SH1.

Shares issued by start-ups companies:

The questions and answers are similar to that in case of other companies. An additional question is about share premium. Therefore, to avoid repetition, observations are not given for Q.1-5 as these will be mostly same. In case of Start-ups working will be easy because they are new companies and information can be easily compiled for original and transferee shareholders.

From circular with highlights:

In case of start-ups, the details of shareholding are required to be furnished in Schedule SH-2. In cases where shares of a start-up company have been acquired by the shareholder by way of transfer, the details of shareholding should be entered in the respective column of the table in Schedule SH-2, as under

1. Name of Shareholder: - Enter name of the person holding shares as on end of the previous year (current shareholder).
2.  (ii) Date of allotment:-Enter date on which shares were transferred to the current shareholder as per companies register.
3.  Face value per share: - Enter the face value per share at which the shares had been originally allotted by the company.
4.  Issue price per share: - Enter the price at which shares were issued by the company to the original shareholder to whom the company had allotted the shares.
5.  Paid up value per share: - Enter the amount received by the company for each share, from the original shareholder to whom the allotment of shares had been made, upto the end of the previous year.
6.  Share premium: - Enter the amount of premium per share at which shares were allotted by the company to the original shareholder.

Observations:

It is not understandable as to why information about share premium is asked from start-ups and not other unquoted companies. Public understanding is that the tax department has very soft corner for start-ups about share premium. Then why such information is asked only from start-up companies and not other companies.

Question 2: Please clarify whether it is mandatory to mention PAN number of shareholder in Schedule SH-1. In a case where shareholder is resident of a foreign country having no PAN, or in case where PAN of shareholder is not available for other practical reasons, it is not possible to fill up PAN of all shareholders in the Schedule SH-l.

Answer: PAN of shareholder should be furnished in Schedule SH-l, if available. However, in case the shareholder is a non-resident, having no PAN, a default value can be entered in place of PAN such as "NORES9999N". Similarly, in case PAN of the shareholder is not available due to any other reason, a default value can be entered in place of PAN such as "NOAVL9999N"

Observations:

Why answer is only for SH-1 and not for SH-2. Are start-ups not required to fill in PAN of shareholder at all.

Why the column is not allowed to remain blank or  allowed to be filled in  0 for not available.  and it is required to fill in different numbers in case of NRI and other shareholders that is  "NORES9999N" for NRI and  "NOAVL9999N"  for others when PAN is not available. Board must have simplification and less date entry in mind for ease in filling of ITR.

Question 3: An unlisted company registered under section 8 of Companies Act 2013 or Section 25 of the Companies Act 1956 does not have share capital. In such case, how the details required in Schedule-SH-l are required to be filled up?

Answer: In the departmental utility of ITR-6, at the beginning of Schedule SH-l, the taxpayer is required to answer the question -"Are you a company registered under Section 8 of Companies Act 2013 or Section 25 of Companies Act 1956?". In case the taxpayer selects "Yes" in the dropdown provided against the question, the details in Schedule SH-l are not required to be filled up.

Observations:

 A company registered under Section 8 of Companies Act 2013 or Section 25 of Companies Act 1956 can also have share capital. Therefore, in case company has share capital, information about shareholders can be asked.

Discussions to this article

[DEV KUMAR KOTHARI]

Annual Return under the Companies Act, 2013 vide S. 92.1 and prescribed Rules and Forms is prepared as on closing day of the FY. There was an inadvertent mistake in observations of author.

In case FY of company is not up to 31 March, then there will be difficulty in cross examination of details furnished in ITR and annual return in - MGT 7 form.