Economics of Corporate Survival and Theory of Governance Gap vis-à-vis the Companies (Amendment)Act, 2017



The Companies Amendment Act, 2017 ushers in a new regime of corporate governance with greater emphasis on self-governance by corporates. Corporate form of business has been in existence for over 150 years now. Over time, the management of the company is controlled by professionals as part of management team. With the advent of corporate governance norms under the Companies Act, 2013 encouraging independent decision making at board level, roles of those charged with governance and those charged with management have been segregated. Theories of corporate governance have drawn a line between governance and management advocating the policy of non-interference without realizing that the line has the risk of turning into a gap – called as ‘governance gap’. The Companies Amendment Act, 2017 has further liberalized the provisions making doing business easier reposing faith in democratic corporate set ups. The present article, while propounding a new ‘Theory of Governance Gap’ defining governance gap, indicating the stages involved and its components, examines how it affects the governance gap. The corporate survival depends on recognizing, identifying, considering and correcting the governance gap. The components of governance gap have been described with examples from real corporate world. The ultimate aim should be to bridge the gap to ensure the best performance.


Survival is the most dreaded term in the corporate world. Company boards discuss growth strategies but do not discuss survival; it is assumed. The focus remains on policy and strategy formation leaving implementation to the top management. Governance concentrates on strategic decision making defining core aspects – values, mission and vision. It is the “framework of accountability to users, stakeholders and the wider community, within which organisations take decisions, and lead and control their functions, to achieve their objectives [1]. Management, on the other hand, is believed to be concerned about working within the confines of strategies and policies. “The Board is responsible for the governance of the company but the Board does not look after the day-to-day management of the company. The Board of Directors meets periodically and makes policy decisions setting out the goals of the company. Achieving these goals effectively is the function of the management. The management function is left to the key officers of the company. In the business world, these key officers are commonly referred to as the top management. The top management shoulders the responsibility of all the functions of the company, be it administration, marketing, operation, finance, secretarial, human resources etc. [2]Corporate governance norms across the world support this practice. The scholarship available on the governance and management role restricts itself to this concept.

Governance Gap

Indisputably, there is separation between governance and management though “the boundary between governance and management is not hard and fast” [3]. Corporate culture and structure determines the dividing line. It settles on its own over a period of time as an accepted norm. Typically, for effective corporate governance, the board functions include policy management, risk analysis, encouraging disclosure and transparency, oversight of management functions, protecting stakeholder’s interests and strategic guidance [4]. Illustratively management functions include implementation of policies and plans, administrative control, compliances, communication and performance. In a way, Ordinarily, management functions start where governance ends with presumptions of no overlapping. In reality, however, there exists a gap between governance and management in every corporate entity, let’s term it as governance gap; though the extent may differ. No one has ever realized that defining and assigning governance and management functions this way results in governance gap.

 Governance Gap

 Identifying Missing Pieces

The missing link between the governance and management belongs to governance gap. Smart governance may not result in smart management but it will definitely create an atmosphere of management accountability. The converse may not be true at all. On paper, the dividing line between governance and management looks judicious; no one trips over the other with the existence of recognised separation. The principle of separation has been articulated so well over the years that it now resides in the sub-conscious mind of every governance and managerial personnel. The scholarship on corporate governance elaborately deals with the subject to ensure that governance functionaries know their boundaries and the management personnel are aware that their functions start where governance ends. With this assertion over the years, governance leaders have realised that their role is restricted to strategic decision making in board or committee meetings presuming that the policies framed by them will be implemented by management functionaries. This approach is enshrined in corporate governance norms across the countries. The weakness of this approach is that it fails to recognise the existence of governance gap. The governance and management are not separated by a line but there exists a gap – governance gap.

Stages of Governance Gap

Governance gap differs from one entity to another. Not only the size of governance gap may vary but also the elements constituting it. Ignoring governance gap may lead to disaster; understanding governance gap will reduce chances of its occurrence. The governance gap has four step routines called as governance gap stages. The corporates have to shift their focus on governance gap and they must deploy their resources to trace the gap through the stages. The four stages of governance gap are recognition, identification, consideration and correction. Briefly, the stages of governance gap are explained as follows.

Stage 1 – Recognition

The corporates have to recognize the governance gap.  Recognising involves understanding the factors that contribute to governance gap. This understanding is possible with open discussion between those who govern and those who manage. Governance leaders have to take the lead and ensure that the management team gets a fair chance to state their views. Balanced discussion is the key. Expert involvement in the discussion should be encouraged. Recognising the existence of governance gap is the most difficult step as it calls for free and frank dialogue between the two sets of leaders. Board members should take care not to dominate the discussion.

Stage 2 – Identification  

Having recognized the existence of gap, the next step calls for identification of the missing pieces. It emerges out of the analysis of the discussion. The process of identification calls for impartial study of discussion points gathered during recognition stage. Firstly, on macro basis, broad categories of governance gap should be identified. Thereafter, then micro level identification of the factors is required to be carried out.

Stage 3 – Consideration

Having identified the categories of governance gap broadly, the next stage involves analysing the causes of governance gap. What has triggered the governance gap is the question that needs to be answered in this stage? It is the reflection on cause and effect relationship. The analytical study of reasons behind the governance gap are bound to provide a useful insight. The evaluation of the causes should also be an independent exercise having unbiased view of the situation. Preferably, it should be carried out by an outside expert.

Stage 4 – Correction  

Correction involves joining the dots. Corrective measures will help in bridging the governance gap. The smaller is the governance gap, the higher will be the efficiency, performance and growth. Corrective steps mean paying special attention to the causes and finding out the specific solution. It may not be possible to remove altogether the causes but an attempt should be made to reduce the gap over a period of time. Correction also includes watching the impact of corrective measures.

 Governance Gap Components

Unique in its design, the stages will reveal causes of the governance gap. The task of identifying the factors will be followed by categorization of these factors into components of governance gap. The reasons will be unique to each company. Much would depend on existing governance and management structure of the company. Broad categorisation is necessary to understand the root of the problem. Once this exercise is over, micro level identification is necessary being an essential element to bridge the gap.

First Component – Perception Gap

Intuitive understanding and insight creates a veil of perception. The greater degree of difference of opinion between governance leadership and top management is the root cause of perception gap. The documents containing vision, mission and objectives of a corporate are ornamental pieces with elaborate use of elegant phrases which turn out to be confusing at the best. The top management’s perception of goals must be in sync with the governance leaders. The board of directors in their role of governance may envision company goals in a different perspective than the management leaders. Opinions may differ but understanding of the strategy calls for perfection. A Company, for example, in its manifesto, may have the mission to keep its ‘Customers First’. While it sounds good from governance perspective, the management team must know its elements to achieve it. Whatever the management does, they must keep this goal in view. The governance leadership must realise that they cannot remain detached but must ensure that their mission of keeping customers happy is implemented by carrying out with random scrutiny of execution steps. The perception gap is the most difficult to decode. This calls for constant discussion and understanding of the perception of each set of leaders.

Second Component – Communication Gap

The governance leaders usually come only for board or committee meetings with little interaction between two sets of corporate leadership. It results in non-meeting of minds with ever widening gap of communication. Board members rightly perceive themselves as non-interfering in the day-to-day functioning of the company, yet this does not mean that there should be a communication break between the two sets. The communication between the board members usually happens only when the board or committee meetings are organised. Communication link breaks no sooner the board or committee meeting is over. Consistent and effective communication will keep governance leaders abreast of company’s functioning on a continuous basis. Regular communication also helps in changing the perception. In India, for example, a board meeting of a company can be held at a maximum gap of 120 days. Ordinarily, the time of communication between the board and management starts with sending out board meeting notice and agenda and ends with minutes being circulated.  There remains no communication in between the board meetings. ‘No communication’ for over three months is a sure recipe for disaster.

Third Component – Strategy Gap  

 The corporate strategy flows from the top. The goals are defined once the strategy is known. Strategical policies should be concrete, realistic and implementable. Understanding the intent behind the strategy is the key. Strategy gap will breed disastrous results More often than not, strategy documents contain objects ignoring practical considerations. Governance and management leaders must understand each other’s view point. Policy implementation is dependent on and follows strategic management. For example, a company with five subsidiaries may decide, as part of strategy, to merge all subsidiaries with the parent company to reap tax benefit. But implementation may pose difficulties as each company may have different management style and culture. While finalising strategy, the governance leaders ought to consider the anticipated problems in implementation rather than merely looking at tax angle. The strategy gap can be understood to be the gap between ‘framing’ and ‘implementation’ of the strategy. Policy framework should be flexible recognising the real-world difficulties. Management leaders have a dominant role to play in the strategy gap. Lucid explanation of the complications involved in accomplishing the goals may become necessary for the governance heads to understand. The extent and severity of the problem is to be understood by the board members in the way the management team perceives it. Of all the components, strategy gap remains the most prominent.

Fourth Component – Performance Gap

Unarguably, management is responsible for operations and performance. The governance team, drawn from diverse vocation, has limited awareness how the business is run. They are experts in their own domain but not necessarily in the business of the company. Imperfect knowledge of corporate functioning leads to uncertainty. The governance theories, thus far, propagate ‘non-interference’ of governance leaders into management domain. The corporate governance regulations across the world are based on the doctrine of non-interference. Advancing this opinion for over a quarter century now, it has turned into conviction and a mandatory principle. The oversight of performance functions calls for thorough business understanding. Questioning operational style does not necessarily mean interference. Contrarily, the management style will undergo improvement, if judged by the governance leaders. For example, mere appointment of a professional CEO does not absolve the governance leaders with their oversight responsibility. Let the governance leaders understand the specific action planned by CEO for achieving the goals. Performance would improve if the board members understand the modus operandi adopted by the management in achieving the company’s goals. The board members have to shed their inhibition of extremely publicised norm of ‘non-interference’. Governance styles are not iron cast. Breaking free from dogmatic principles is the key to achieve higher trajectory growth. The governance leaders must, however, respect the independence of the management team. Governance does not involve monitoring on daily basis. Performance gap can be closed with effective understanding of the management approach.

Fifth Component – Compliance Gap

Compliance failure is the greatest indicators of corporate failure. Management team is primarily responsible for compliances but under the governance regulations those responsible for governance become liable for non-compliances. The governance leaders cannot be mere spectators to non-compliances. The delinquency in compliances is bound to be problematic for those in-charge of governance. The directors are under the threat of being responsible for something they did not bargain [5]. Rules of compliances must be understood by them and close interaction with the management at short intervals will keep them abreast of non-compliances in the company. More often than not, bank defaults are not immediately brought to the notice of the governance leaders. Keeping them under wrap till the last moment makes it difficult for the governance leaders to take corrective measures. The management filters the information supplied to the board in the hope of a correction in a short time. Such filtered information serves no useful purpose and affects decision making by the board. Corrective steps are not possible if the information about defaults of the company are concealed. Due diligence at regular intervals will reveal the existence of veil. The due diligence must, however, be carried by independent experts directly reporting to the committee chairs or the board. For example, secretarial due diligence must be carried out by the qualified company secretaries in practice with straight reporting to the audit committee or the board. The directors must build a safety net around them for protection. The safety net is a conscious effort on the part of directors to protect themselves from the legal penalties and liabilities under [the laws of any country]. The safety net is essentially an attempt to save the directors from unsolicited troubles. The safety net may work towards protecting the directors from the acts of omissions or commissions for which they are not party or have no role to play” [6].

Bridging the Governance Gap

Bridging the governance gap calls for seriousness to look within and take corrective steps. Once the factors causing the governance gap are determined, component stacking would make it easier for corrective action to follow. Ignoring the governance gap may continue to cause conflict between those charged with governance and those charged with management. Understanding the governance gap theory will lessen the impact of friction between two sets with positive consequence of better governance and better management. “The directors should adopt ‘liberalative approach’. It is a rare combination of rich board experience and knowledge of systems, business and regulations. It is gained and earned through classroom environment and exposure to real business situations [7]”. The earlier the gap is bridged, the better it is for the functioning of the company. The corporate survival hinges on early closure of governance gap.

Impact of Companies Amendment Act, 2017 on Corporate Survival and Governance Gap

The Companies Amendment Act, 2017, assented to by the President on 3rd January 2018 makes pragmatic changes in the Companies Act, 2013 to address the issues of corporate governance, survivability and gap that occurs in governance. The amendment in the definition of key managerial personnel permits those charged with governance to designate any officer in whole-time employment as key managerial personnel. This is step forward towards bridging the governance gap. The amendments also repose confidence in the board of the companies to decide remuneration payable to the managerial personnel. It cuts the power of the Central Government to sit in judgment approving the remuneration. This empowers the board of directors who can incentivize the good performance of managerial personnel. It helps in lessening the gap as it encourages open and deeper communication to understand the working of managerial personnel. The provision relating to evaluation of performance of the Board, under the amendment Act, permitting an independent external agency to carry out such evaluation is a measure which will help weed out underperforming and passive directors thereby improving the quality of the board members. Such an exercise will also keep the directors on their toes making them understand their role to make a discernible effort to curtail the governance gap.


[1] United Kingdom Audit Commission, October 2003, Corporate Governance: Improvement and Trust in Local Public Services, p. 4.

[2] Chapter 12 – Key Managerial Personnel, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[3] grpp_sourcebook_chap12.pdf, para 12.3

[4] Adapted from OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris.

[5] Chapter 26 – Safety Net, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[6] Chapter 26 – Safety Net, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[7] Chapter 19 – Corporate Governance – Practice and Procedure, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.


Credit : Published in The Chartered Secretary, February 2018 

Dear NCLT : Till Now We Believed Circulars Do Not Override Law?


While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija:

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Has NCLT interpreted provisions of Insolvency & Bankruptcy Code judicially? Analyzing Judgment of Principal Bench under section 7 of Insolvency & Bankruptcy Code, 2016 in AMR Infrastructures Limited

Legal interpretation of provisions of Insolvency & Bankruptcy Code, 2016 (IBC 2016 or IBC) commences with judgment of Principal Bench of National Company Law Tribunal rendered on 23rd January, 2017 in the matter of AMR Infrastructures Limited. IBC brings in new regime in insolvency of corporates. As opposed to provisions of the Companies Act, IBC 2016 provides for resolving the bankruptcy, staring at the companies. The provisions are now ‘corporate debtor friendly’ as against ‘creditor friendly’ under the earlier regime. IBC 2016 is premised on allowing a chance of fresh start to the companies in financial and business strain. In the AMR judgment, NCLT was called upon to interpret the definition of ‘financial creditor’ and ‘financial debt’ and the meaning of ‘time value of money’ appearing in financial debt definition.

Analyzing the judgment brings to the fore following questions: –

  1. Does IBC 2016 in any way comes to the aid of investors having paid substantial sums to the company in return of their promise to deliver flats or apartments or office premises?
  2. Was the NCLT correct in arriving at a conclusion that an agreement containing assured return does not satisfy the requirement of a financial debt?
  3. Was the NCLT competent to entertain the application under section 7 of IBC 2016 in view of fact that provisional liquidator stands appointed by orders of High Court, as noted by NCLT in its order?

These are early days under IBC and one judgment cannot be held to be conclusive in interpretation of the provisions of IBC. IBC 2016, for the uninformed, allows either a financial creditor or operational creditor to initiate corporate insolvency resolution process. IBC provides that a financial creditor or an operational creditor can apply to NCLT for initiating the corporate insolvency resolution process at the trigger point of default being committed by the company. ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Commitment of default comprises one part; the other part being the eligibility criteria, that is, the applicant should either be a financial creditor or an operational creditor. Instead of using the generic term ‘creditor’, IBC has categorized them into financial and operational creditor with specific meaning attached to these two terms. Not all but only a financial creditor or operational creditor can initiate the resolution process. The only possible logic in segregating the creditors into financial and operational seems to be providing a preferential treatment to the financial creditor in as much as the occurrence of default by the company becomes the cause of action for a financial creditor whereas in the case of operational creditor, a secondary process of sending a notice of demand to the corporate debtor is to be fulfilled prior to initiating the resolution process. Instead of defining the operational creditor the way it has been done in IBC, the purpose of providing a preference to financial creditor would have served by only defining the financial creditor and treating the rest of the creditors as ‘non-financial creditors’ i.e. all creditors other than financial creditors. This would have simplified the interpretation process of the phrases ‘financial creditor’ and ‘operational creditor’ saving precious judicial time.

Let us examine the consequences of specific definitions of financial creditor and operational creditor. By implication, it seems reasonable to presume that the creditor should either be a financial creditor or operational creditor and in some circumstances may be both. Under IBC, a third possibility has emerged that the creditor is neither a financial creditor nor an operational creditor. Was this intended? By doing this, grave injustice has been done to several creditors who might have invested huge sums of money in a company engaged in constriction of real estate. The amount paid by customers would neither fall under the definition of financial debt nor operational debt. In these cases, the amount invested is generally substantial and in many cases the investors pay their life savings in the hope of getting their home or office. NCLT has come to a conclusion that amount paid under MOU for real estate, even though the MOU has ‘assured return’ clause after the expiry of period of promised delivery of property, is not a financial debt and hence the creditor does not fall under the category of ‘financial creditor’. NCLT has also concluded that ‘assured return’ clause would not satisfy the requirement of ‘time value of money’ appearing in the definition of ‘financial debt’. Looking at the definition of ‘operational debt’, the payment made for promised delivery of homes or offices will also not be treated as operational debt, there being no claim of ‘goods’ or ‘services’ against the corporate debtor. Immovable property cannot, by any stretch of imagination, be treated as ‘goods’. It is neither the ‘service’ to be rendered by the corporate debtor. Such investors having invested huge sums of money have been left to fend for themselves by invoking civil remedies. The anomaly seems unintentional but a clear cut case of drafting error. Under the existing regime of winding-up of companies under the company law, such creditors were being permitted to file petition for winding-up with the High Court against defaulting corporate debtors. Once the provisions of Companies Act, 2013 are repealed, the investors, like these, will only live in mirage of invoking the resolution process.

‘Assured return’ is a committed payment which the corporate debtor undertakes to pay in the event of failure on its part to make promised delivery. The ‘assured return’ partakes the character of compensation in terms of money, that is, it becomes the obligation of the corporate debtor to recompense the loss incurred by the investor for having remained invested longer than desired. With due respect, had the NCLT examined the assured return in this view, probably it would have come to a different conclusion. It tangled itself in mere technicalities of the phrases ‘time value of money’ and ‘financial debt’. The definition of ‘financial debt’ is an inclusive definition and should have been construed broadly rather than in a narrow spectrum.

Lastly, the NCLT has ignored the provisions of Section 446 read with Section 441 of the Companies Act, 1956 (these provisions are still effective). Having noted that provisional liquidator has been appointed in AMR, there was no occasion for the NCLT to entertain application under IBC in view of the clear cut bar provided in Section 446 of the 1956 Act. It should have saved its precious judicial time by dismissing the application in limine or should have kept it in abeyance till such time leave of the High Court was obtained by the applicant without entering the domain of interpreting the phrases ‘financial debt’, ‘financial creditor’ and ‘time value of money’ in a hurry.

This is just the beginning and it is expedient that NCLT should don the mantle of judicious interpreter to chart the path to be tread in times to come by the litigants. The interpretations will have far reaching impact and it is expected that provisions are examined deeply looking at Indian judicial precedents and cross-border jurisdictions as well.

Keep watching this space for more analysis of NCLT/NCLAT judgments.

© Ashish Makhija:

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.


#Wake up CAs! Don’t Miss the Opportunity – Are YOU Ready for NCLT/NCLAT?

2013 Companies Act proposes to establish all powerful National Company Law Board (NCLT) and National Company Law Appellate Tribunal ((NCLAT) for dealing with all legal matters involving corporate world. The NCLT will enjoy powers to deal with matters hitherto dealt by CLB, High Courts and BIFR. The professionals like CAs are not entitled to appear before High Court dealing with appeals arising from CLB, mergers and amalgamations and winding-up cases. With the paradigm shift under 2013 Act, CA fraternity is all good for appearing before NCLT for such matters. They can also handle appeals before NCLAT.

NCLT & NCLAT are going to be a reality soon. But Are CAs Ready?

It is a big question with a possible answer – probably not. CA fraternity needs to change this. The change is possible with some effort – effort to learn how to draft petitions or appeals, effort to present arguments cogently and in a pursuasive manner, effort to improve research ability, effort to learn interpretation of statutes, effort to gain knowledge about legal principles; in short, effort to prepare themselves before these forums.

The competition CAs are going to face will be fierce – from lawyers and other professionals. But with excellent financial knowledge, CAs are bound to be a potent force provided they acquire the above mentioned skills. Only those CAs will succeed who are ready to learn, adapt and change and that too quickly.

Time to wake up is NOW. Surprisingly, neither the ICAI, Regional Councils, Branches and Study Circles have paid considerable attention to this. This area presents a huge opportunity and deserves better treatment by these bodies.

Hope is still not lost. The programs should be organized to prepare CAs for this abundant opportunity. Corporate Law is an interesting field BUT requires thorough knowledge of the subject.

Time, Effort and Will is what is required to change the status quo.

Wake up CAs!!

© Ashish Makhija:

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Income Tax Return Filing Extension: No Winner Here!


Watching from sidelines, it seemed unending like a Saas-Bahu serial. The whole saga of income tax extension had many twists and turns and all actors played their part well. Suspense continued till the end. No one was willing to yield. The episode in a CA election year was blown out of proportion thanks to candidates, whatsapp and facebook posts.

On a serious note, is there a winner? Few may disagree with me (and they have right to be so) but there in No Winner Here. Let us look at gains and losses of each interested party: –

Chartered Accountants’ fraternity

Strangely the demand for extension was initiated by the Chartered Accountants (CA’s). Curiously, no assesse demanded extension in date of filing tax return. Some may argue, it is the CA’s who have to conduct tax audit and the time was not enough. No disagreement here but why there was not even a whisper in support of extension by any Chamber of Commerce or business bodies. They speak out very well when their rights are infringed. They also knew that CA’s are burdened and there is likelihood of delay in filing of tax returns. No support was lent. The CA’s took the gauntlet and started filing writs in various high courts as if some race is going on. The pressure led the President of CA Institute to have audience with Finance Minister. Reportedly, their request was declined. That should have been the end of matter. But no, few CA’s or their Associations took CBDT to courts. End result shows that CA’s have burnt bridges with CBDT and Finance Ministry and the repair will definitely take time. The extension of date for filing of tax return in 3 States and 1 Union Territory leads us to conclude that CA fraternity is definitely not a winner here.

CA’s ignored the most important point. They had ample time to conduct tax audit. Mere notification of new form with minor changes (I have no idea on changes made but a senior tax practitioner has confirmed that form contains minor changes) does not make good ground for extension. Filling of form is procedural (generally by a articled assistant in a CA’s office) after an expert team consisting of a CA has conducted audit. It is not understandable why there was such a hue and cry over extension of time. If we are not prepared for, say, Diwali festival (due to pre-occupation or otherwise), would we demand change in Diwali date?

CA’s command huge respect in society and they should concentrate on what they are best known for – their handwork, commitment and quality. Extension or no extension, CA’s must give confidence to the clients that they are capable of handling all. They have been doing this since long. Trust is not built in a day and CA’s should  continue this never ending exercise.

High Courts

No one but judiciary knows its role better. Respect for Indian judiciary is also known. Delhi High Court refused to be dragged into executive function such as extension of time in filing tax return though it rightly directed CBDT to declare forms much in advance. It refused to entertain writ on this issue by a CA Association. Few high courts dismissed writs in similar fashion. Punjab & Haryana High Court differed with this view and directed CBDT to extend time upto 31st October 2015. Another high court passed a similar order. Legal experts are still debating which court is correct. But one thing is clear, the difference in opinion of various courts does not make them winner here. The fate of court orders will be decided finally if and when CBDT decides to challenge the orders directing them to extend the time in a higher court. The interesting issue that needs answer is whether the judiciary should step on the routine executive function of deciding the date of filing tax return. Till the time the order is challenged and set aside, CBDT has no option but to comply.

CBDT/Finance Ministry

CBDT has been known for extending dates in past years. This year clear adamancy ruled out any extension. Rules are to be followed by all citizens. CBDT was not convinced with reasons of extension and hence ignored requests from CA fraternity. Social media energized CA’s and the demand became louder and louder with each passing day. Having stuck to its grounds, CBDT was dragged into various courts where it stoutly defended its decision till Punjab & Haryana High Court directed CBDT to extend time. Faced with the order directing it to extend time till 31.10.2015, CBDT sprung a surprise (no one can question the legal brilliance available at Finance Ministry) by extending the time for the states whose high courts have passed the direction. They have a right to do so. Yet, one fact cannot be lost sight of. The present government won on a heavy mandate including seemingly almost one-sided support of CA fraternity. Extension of 15 days if not 30 days would have made them happier. Now the trust deficit has widened. Neither CBDT nor Finance Ministry (read Government) is the winner here.

The battle is yet not over. Last word, it seems, is yet to be written on this. Watch this space!

© Ashish Makhija:
Disclaimer : This blog has been written solely to present an analysis of the manufactured situation of extension of time in filing tax returns. It means no offence to any fraternity or authority and least of all the courts.  

#Applicability of CARO for FY 2014-15 audits

Applicability of CARO 2003

Confusion exists amongst auditing fraternity as to applicability of CARO 2003 for audits for Financial Year 2014-15. The confusion arose because of notification of certain provisions of Companies Act 2013 effective 1st April 2014.

The confusion stems from the presumption that with Companies Act 2013 notified w.e.f 1.4.2014, the corresponding provisions of Companies Act 1956 and rules/orders made/issued thereunder stand repealed. Let us examine whether this premise is correct.

There is a specific section in Companies Act 2013 dealing with repeal of Companies Act 1956 – Section 465. The repeal section has not yet been notified by the Central Government. This means that the Companies Act 1956 and rules/orders made/issued under it continue to be valid. It is not correct to say that Companies Act 1956 is not effective from 1st April, 2014.

Legally, we would examine this in the light of ‘doctrine of implied repeal’. The doctrine of implied repeal suggests that with new enactment coming into effect on the same subject, the previous enactment stands repealed. The Courts are, however, slow in applying this doctrine. The first attempt of the courts is to apply both the provisions by applying the principles of harmonious construction unless the provisions are so repugnant to each other that both of them cannot be applied simultaneously. The repugnancy test assumes significance. We should also not lose sight of the fact that all the rulings in which doctrine of implied repeal was applied had a situation where there was no express provision of repeal in the new enactment/statute.

In the present case, the test of repugnancy fails, as the Central Government has not notified any Order similar to CARO 2003 under Companies Act 2013. There being no repugnancy, CARO 2003 continues to be applicable.

Even otherwise, there is express repeal provision in Companies Act 2013 and the same is yet to be notified. Under such circumstances, in my opinion, there is no question of considering or applying ‘Doctrine of Implied Repeal’.

It can thus be concluded that CARO 2003 continues to apply for audits for FY 2014-15 and beyond till such time the Central Government exercises its powers under Section 143(11) and issues any new Order.

The Central Government would do well to issue a clarificatory circular on these lines and not spend its precious time in issuing a hurried up Order at this stage. The new Companies Act contains various stringent provisions and unless they are taken into account carefully, any Order prepared or assimilated in a hurry will create more confusion.

Unless the Central Government notifies a new Order under section 143(11), CARO 2003 continues to apply for all audits conducted even under Companies Act, 2013.

Does this compounds the confusion already existing?

The last word is yet to be written on this.


Ashish Makhija:

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.