Sunday, 26 August 2018

Issues around CSR funding for Kerala flood relief

The recent floods in Kerala have caused incalculable misery and destruction. 
Three important question that several companies are asking us is:
1) Whether disaster relief is covered under Schedule VII of the Indian Companies Act 2013?
2) Whether CSR funds can be contributed to the Chief Minister’s Relief Fund (CMRF)?
3) Can a company contribute its own products like bottled water, medicines, toiletries, tea, coffee, biscuits etc., as part of it’s CSR activities?
1) Disaster relief is covered under Schedule VII
Ministry of Corporate Affairs (MCA) has under point No. 7 in the Annexure to General Circular dated: 18th June 2014 (21 of 2014) clarified that:  Disaster relief can cover wide range of activities that can be appropriately shown under various items listed in Schedule VII. 
For example:
i. medical aid can be covered under ‘promoting health care including preventive health care.’
ii. food supply can be covered under eradicating hunger, poverty and malnutrition.
iii. supply of clean water can be covered under ‘sanitation and making available safe drinking water’.

To read full text of MCA’s circular please go to:
2) Chief Minister’s Relief Fund
Clause viii of Schedule VII of the Indian Companies Act 2013 cites: “Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.”

Unfortunately, only the Prime Minister’s National Relief Fund or any other fund set up by the Central Government is cited under Schedule VII of the Indian Companies Act 2013 and thus contributing CSR funds to the Kerala Chief Minister's Relief Fund would not qualify as a specified CSR activity.

Recently, West Bengal Chief Minister, Ms. Mamata Banerjee and Odhisha Chief Minister, Mr. Naveen Patnaik have written letters to Prime Minister Narendra Modi urging him to consider the contribution of business houses to the Chief Minister’s Relief Fund (CMRF) as money spent on corporate social responsibility (CSR) activities.

On 25th July 2018, the Trinamool Congress also demanded an amendment to the Companies Act 2013 to make corporate social responsibility funds available to the Chief Minister's Relief Fund.

Interim options for companies
However, in the meantime, companies are at liberty to contribute non-CSR funds to Kerala CMRF and even enjoy 100% tax deduction for the same.

Companies may also contribute to Kerala CMRF if they wish to, through their corporate foundation.

Finally, companies could also partner with and contribute their CSR funds to credible NGOs with track record of at least three years of service in the field of disaster management. 

3) Contributing company products
Ministry of Corporate Affairs (MCA) has clarified in one of its FAQ that gift of articles or company products is not CSR. CSR has to be money spent.

MCA’s Answer to FAQ No. 18 is: “Section 135 prescribes ‘… shall ensure that company spends …’ The company has to spend the amount.”

Thus, once again, companies may voluntarily contribute their own products like bottled water, medicines, toiletries, tea, coffee, biscuits etc., but, it cannot be accounted for as "amount spent" under CSR activity as per Section 135 of the Indian Companies Act 2013.

Noshir H. Dadrawala

Monday, 30 July 2018

Hospitals directed to add “charitable” to their name

In our Blog post of 9th July 2018 we had written about the Maharashtra State Charity Commissioner Shiv kumar Dige issuing an order directing around 400 NGOs and trusts registered in the state to remove the words “corruption” and “human rights” from their names or risk suspension. 
Within less than a month he has now issued a new order on 19th July 2018, directing all government-aided private hospitals in Maharashtra run by public charitable trusts to add "charitable" to their names so that poor patients easily know they can avail free or concessional treatment under the reserved quota.
Facts & figures
Reportedly, there are more than four hundred such hospitals in Maharashtra; including over seventy in the city of Mumbai. We are informed that Lilavati hospital, Jaslok hospital, Nanavati hospital and Breach Candy are also among the hospitals affected by this new order.

In September 2017 Mr. Dige, pretending to be a poor patient, had visited Nanavati Hospital and was denied admission. Subsequently, he ordered a criminal case against the trustees of this hospital.

Between September 2006 and December 2017, 709,5000 patients were treated in private charitable hospitals; of these, 456,000 were treated in Mumbai.

Reservation of hospital beds
As per section 44A of the Maharashtra Public Trust Act, private charitable hospitals are mandated to reserve 10 per cent of their beds for poor patients and 10 per cent for economically weaker sections of the society. While those with income below Rs. 85,000 per annum are given free treatment at these hospitals, those with income of Rs. 1.6 lakh per annum are charged at concessional rates. Reportedly, under this provision the state of Maharashtra has 5,000 beds for poor patients and 5,000 for the weaker sections of society.

Everyone, including the State’s law and judiciary department is also aware that while reservation of these beds for the poor and needy is good, the advantage is often taken by persons who are far from poor and only because they are referred to the hospitals by politicians or political parties.

The rationale
The state charity commissioner is of the view that since the word charitable does not appear in the names of these hospitals, poor patients are often clueless whether these are charitable hospitals or not. But if "charitable" or "dharmaday" is added to the name of these hospitals, there would be no doubt in the minds of the patients wanting to get admission in these hospitals.

It is also argued that charitable hospitals get several benefits, including discounted land on long lease and subsidies in utility bills, waivers and exemptions from income tax etc., but most of them hardly pass these benefits to the needy patients.

Judicial activism
In our opinion, orders like this smack of judicial activism which means that instead of judicial restraint quasi-judicial authorities like the charity commissioner are becoming activists and are compelling or attempting to control organisations which they are only supposed to regulate within the frame-work of the law.

While the bard of Avon, William Shakespeare would have quipped that a rose by any other name would smell as sweet the charity commissioner does not seem to have taken into consideration the fact that official change in name would mean obtaining a new Permanent Account Number (PAN), changing the name in all bank accounts and with all other regulatory bodies.

Understandably, representatives of about twenty hospitals recently met Mr. Dighe and the Minister of State for Home Ranjit Patil asking them to review the directive since there are several legal hassles in officially changing the name of any institution. In our opinion, perhaps the term charitable could be added in parenthesis.

Scope of the word charity or charitable
In its widest sense, the word ‘charity’ denotes “all the good affections that men ought to bear towards each other”. 

While both the Maharashtra Public Trusts Act and the Income tax Act refer to “charitable purpose” (which includes “medical relief”), the term “charitable” is nowhere defined or explained.

It is a clearly established principle of the law of charity that a trust is not charitable unless it is directed to public benefit (unreported decision of the Bombay High Court in Appeal No.5 of 1975). Negatively, a trust is not a charitable trust if it confers only private benefits. In the case of trusts for educational purposes, the conditions of public benefit must be satisfied. A trust by a father for the education of his son is not a charity. The public element is not supplied by the fact that from that son’s education, all may benefit. But the establishment of a college or university is, beyond doubt, a charity.

Whether any particular object of a bounty falls within the definition of charity must, to a large extent, depend upon the standard of customary law and common opinion amongst the community to which the parties interested belong (Trustees of Tribunal Press vs. Commissioner of Income Tax, 66 IA. 241-A.I.R. 1939 P.C. 280-182 I.C. 882-41 BOM.L.R. 1150).

Eleemosynary element not essential
It is also interesting to note that in the matter of the trustees of ‘The Tribune’ [(1939) 7 ITR 415, 423)], it was held, “It is not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price.” In other words, an eleemosynary element is not essential. A trust may provide educational assistance to a student by way of a loan and not an outright non-refundable grant or gift. In law, if the purpose of the trust is charitable, it does not matter whether it is fulfilled by extending a “gift” or a “loan”.

It may also be pointed out that it is not necessary that a “charity” should benefit “only the poor” (unless clearly specified in the trust deed) to the exclusion of those who are “not so poor”. The House of Lords held in Commissioners for Special Purposes of Income Tax vs. Pemse [3 T.C. (53), 96, (1981) AC 531, 583 (H.C.)] that poverty is not a necessary element in a charitable trust.

Noshir H. Dadrawala

Wednesday, 18 July 2018

Director’s KYC in DIR-3

  • With a view to update its registry, Ministry of Corporate Affairs (MCA) will be conducting Know Your Customer (KYC) of all Directors of all companies (including Section 8 companies) annually through e-form DIR-3.
  • If you are a Director on the Board of a Company, including a not-for-profit company registered under section 8 of the Indian Companies Act 2013 (earlier Section 25 of the Indian Companies Act 1956) you are required to complete your Director’s KYC before 31st August, 2018 or face penalty of INR 5,000/-

Who should comply?
Every Director who has been allotted DIN on or before 31st March, 2018 and whose DIN is in ‘Approved’ status would be compulsorily required to file form DIR-3 KYC on or before 31st August, 2018.

Provisions of the law
e-Form DIR-3-KYC is required to be filed pursuant to Rule 12A and Rule 11(2) and (3) of The Companies (Appointment and Qualification of Directors) Rules, 2014 as amended by Companies (Appointment and Qualification of Directors) fourth Amendment Rules, 2018.

Rule 12A:
Every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall submit e-form DIR-3-KYC to the Central Government on or before 30th April of immediate next financial year.
Provided that every individual who has already been allotted a Director Identification Number (DIN) as at 31st March, 2018 shall submit e-form DIR-3-KYC on or before 31st August, 2018.

Rule 11(2):
The Central Government or Regional Director (Northern Region), or any officer authorized by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC within stipulated time in accordance with rule 12A.

Rule 11(3):
The de-activated DIN shall be re-activated only after e-form DIR-3-KYC is filed along with fee as prescribed under Companies (Registration Offices and Fees) Rules, 2014 as amended by Companies (Registration Offices and Fees) Third Amendment Rules, 2018.

What is required for filing e-form DIR-3-KYC?
1. Valid Mobile No. and email address for OTP verification
2. Digital Signature (DSC) of Director
3. Self-attested PAN card;
4. Self-attested Aadhar card with updated Mobile number with UIDAI;
5. Self-attested Passport or other valid address proof

Please note:
1. Filing of DIR-3 KYC would be mandatory for Disqualified Directors as well.
2. After expiry of the due date by which the KYC form is to be filed, the MCA-21 system will mark all approved DINs (allotted on or before 31st March 2018) against which DIR-3 KYC form has not been filed as ‘Deactivated’ with reason as ‘Non-filing of DIR-3 KYC’.
3. The form should be filed by every Director using his own DSC and should be duly certified by a practicing professional (CA/CS/CMA).
4. No fee shall be chargeable till the 31st August, 2018.
5. After the due date filing of DIR-3 KYC in respect of such deactivated DINs shall be allowed only upon payment of a late fee/ penalty of Rs. 5000/-.

Sunday, 15 July 2018

Relaxation under GST RCM

  • Forty-six amendments are proposed under the GST law. 
  • Amendment on Reverse Charge Mechanism (RCM) would be of consequence to NGO.
  • As per Section 9(4) of CGST Act 2017, any supply of goods or service from an Unregistered Supplier to a Registered Supplier requires the Registered Supplier to Pay GST to the Government in the form of RCM. 
  • Section 9(4) which has been deferred till 30-09-2018 is likely to be repealed and substituted by the new section 9(4) as: The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of taxable goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

RCM is sought to be applied only to “class of registered persons” and not all the registered persons.

The class of registered persons may be:
a) persons receiving goods or services falling under specific headings
b) persons engaged in specified outward supplies
c) Persons having inward supplies more than specified percentage

  • Don’t worry about payment of GST under Reverse Charge Mechanism till end of September
  • Hope and pray charitable institutions will not fall under “class of registered persons”

Monday, 9 July 2018

NGOs asked to remove ‘Human Rights’ or ‘Corruption’ from registered name

Maharashtra State Charity Commissioner Shiv kumar Dige has issued an order directing around 400 NGOs and trusts registered in the state to remove the words “corruption” and “human rights” from their names or risk suspension under the Maharashtra Public Trusts Act 1950.
Earlier the charity commissioner’s office in Pune had taken similar action against 16 NGOs with the word “corruption” in their names, including Anna Hazare’s Bhrashtachar Virodhi Jan Andolan, which has been suspended. The NGO’s case to regain its registration is pending in court.
According to press reports, the State Charity Commissioner is of the view that the government has the machinery to prevent corruption and protect human rights. “There were complaints that a few organisations were misusing these words and cheating people”, Mr. Dige is reported to have told the press. He also told the press: “eradicating corruption is the government’s duty and the government authorities have those rights. However, a few organisations are misusing the word ‘corruption’ and targeting an individual or some officials. But, they do not have the right to do this. This is misleading for the common people. Also, according to a high court judgment, the eradication of corruption cannot be the social objective of an organisation”.

Objecting to the use of the word “human rights” by organisations, Mr. Dige reportedly said the state Human Rights Commission can take care of issues of violation. “Many organisations use the words ‘human rights’ in their names. But, the state Human Rights Commission has written to us to take action against these organisations. Only government authorities can deal with human rights violations, and not private institutions. Therefore, I have issued the order to remove the words from these organizations’ names,” Mr. Dige told the press.

According to press reports, the charity commissioner’s office will issue notices to organisations to remove the words from their names. “If they do not follow the order, we will have to suspend the trustees of the organisation,” the Charity Commissioner has said.

Article 19(1) (c) of the Constitution of India guarantees to all its citizens the right “to form associations, or unions or Co- Operative Societies.” Under clause (4) of the Article 19, however, the State may by law impose reasonable restrictions on this right in the interest of public order or morality or the sovereignty and integrity of India.

The right to form association includes the right to form companies, societies, trusts, partnerships, trade union and political parties. The right guaranteed is not merely the right to form association but also to continue with the association as such. The freedom to form association implies also the freedom to form or not to form, to join or not to join, an association or union.

Several NGOs have objected to the State’s move, arguing that the charity commissioner’s office should have raised objections while registering their organisations. All India Anti-Corruption Committee which has two million members and has been working against corruption for 20 years has said that it will challenge the order in court!