Month: May 2020

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Direct Tax relaxations for tackling COVID-19

Various relaxations have been announced in the Income Tax Act, 1961 (“IT Act”) to provide some relief to businesses in the current situation. The relaxations proposed by the Finance Minister on 24th March 2020 have been given effect by way of Ordinance promulgated by the President on 31st March 2020. Central Board of Direct Taxes (“CBDT”) has also provided some relaxations by an order u/s 119 of the IT Act. These relaxations have been discussed below.

A. Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020

1. Time limits for compliance or completion of certain actions[1] under the specified acts[2] (as defined in the Ordinance) whose time limits fall during the period from 20th March 2020 to 29th June 2020[3] has been extended to 30th June 2020[4]. Certain actions whose time limit has been extended are as follows:

1.1. Completion of any proceedings or passing of any order or issuance of any notice, intimation, notification, sanction or approval or such other action by any authority, commission or tribunal under the provisions of the specified act;

1.2. Filing of an appeal, reply or application or furnishing of any report, document, return, statement or such other record under the provisions of the specified Act;

1.3. The following specific actions under the IT Act:

1.3.1. Making of investment, deposit, payment, acquisition, purchase or construction or any such other action for the purposes of claiming any deduction, exemption or allowance under the following provisions:

¾ Sections 54 to 54GB of the IT Act;

¾ Chapter VI-A of the IT Act under the heading “B – Deductions in respect of certain payments”; and

¾ Such other provisions of the IT Act as the Central Government may notify.

1.3.2. Beginning of manufacture or production of articles or thins or providing any services referred to in section 10AA of the IT Act, in a case where the letter of approval has been issued on or before 31st March 2020 in accordance with the provisions of Special Economic Zones Act, 2005 (“SEZ Act”).

Accordingly, the date of the following compliances under the IT Act, as listed in Table-I, has been extended:

Table – I
S. No.	Relevant sections under the IT Act	Compliance
i.	Section 139(4)	Filing of belated return for the Assessment Year (“AY”) 2019-20
ii.	Section 139(5)	Filing of revised return for the AY 2019-20
iii.	Section 143(1)	Sending an intimation after processing of return of income (ITR), if the return is filed: a) During Financial Year (“FY”) 2018-19 under section 139; b) During FY 2018-19 in response to a notice issued under section 142(1)
iv.	Section 149	Time-limit to issue a reassessment notice for the: a) AY 2015-16 if escaped income is less than Rs. 1 lakh; b) AY 2013-14 if escaped income is more than Rs. 1 lakh c) AY 2003-04 if escaped income is related to any asset (including financial interest in any entity) located outside India d) AY 2013-14, to a person who has been treated as an agent of a non-resident under section 163
v.	Section 200	Furnishing of TDS Statement: a) For the fourth quarter of the FY 2019-20 b) For the months of February, March and April 2020
vi.	Section 203	Issue of TDS certificate: a) In respect tax deducted from the salary paid during the FY 2019-20; b) In respect of tax deducted from payments other than salary for the quarter ending March 31, 2020; c) In respect of tax deducted under section 194-IA/194-IB/194M during the month of March, 2020 and April, 2020;
vii.	Section 206C	a) Furnishing of TCS Statement for fourth quarter of the FY 2019-20 b) Issue of TCS certificate for the fourth quarter of the FY 2019-20
viii.	Section 200A & Section 206CB	Due date to send the intimation for processing of statement of TDS/TCS filed during the FY 2018-19
ix.	Section 139A	Application for allotment of PAN of non-individual resident person, which enters into a financial transaction of Rs. 2.5 lakhs or more during FY 2019-20 and hasn’t been allotted any PAN
x.	Section 139AA	Linking of Aadhaar number and PAN
xi.	Section 139AA	PAN to be treated as inoperative due to non-linking it with Aadhaar number
xii.	Section 10AA	Commencement of operation by the SEZ units for claiming deduction under section 10AA where necessary approval has been received under the provisions of SEZ Act on or before March 31, 2020
xiii.	Section 54 to 54GB	Making Investments or completing construction / purchase for claiming deduction from capital gains arising during the FY 2019-20.
xiv.	Chapter VIA (Part B)	Making various investments or payments (Section 80C to 80GGC) for the FY 2019-20 such as Section 80C (LIC, PPF, NSC etc.), 80D (Medical claim), 80G (Donations), etc.
xv.	Section 285BA	Furnishing of Statement of Financial Transactions (SFT) for the FY 2019-20
xvi.	Section 3 of Direct Tax Vivad se Vishwas Act, 2020	Non-payment of additional 10% payment of disputed tax

2. In case where any due date specified in, or prescribed or notified under, the specified act for payment of any amount towards tax or levy falls during the period from 20th March 2020 to 29th June 2020[5] and such amount has not been paid within such date but has been paid on or before 30th June 2020[6], the following relaxation has been provided:

2.1. Interest shall be charged only @ 0.75% per month in respect of such amount for the ‘period of delay’[7]; and

2.2. No interest shall be levied and no prosecution shall be sanctioned in respect of such amount for the ‘period of delay’.

Accordingly, interest shall be charged @ 0.75% per month for the following amounts, as listed in Table-II, if they are not paid within the due date but have been paid on or before 30th June 2020:

Table – II
S. No.	Relevant sections under the IT Act	Amounts
i.	234B	Payment of advance tax for FY 2019-20
ii.	234C	Payment of first installment of advance tax for the FY 2020-21
iii.	201	Deposit of tax deducted during the month of March, April and May, 2020
iv.	206C	Deposit of tax collected during the month of March, April and May, 2020
v.	Section 170 of Finance Act, 2016	Deposit of equalization levy deducted during the month of March, April and May, 2020 in respect of payment made to a non-resident for online advertisement services
vi.	Section 104 of Finance (No. 2) Act, 2004	Deposit of Securities Transaction tax (STT) collected during the month of March, April and May, 2020
vii.	Section 123 of Finance Act, 2013	Deposit of Commodities Transaction tax (CTT) collected during the month of March, April and May, 2020
viii.	115-O and 115R	Payment of Dividend Distribution Tax (DDT) in respect of dividend declared, distributed or paid by any domestic or mutual fund (which is payable between 20-03-2020 and 31-03-2020)
ix.	115QA	Payment of additional income-tax in respect of buy-back of shares by the company (which is payable between 20-03-2020 and 29-06-2020)

3. The Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND) has been included 80G, thereby making donations to this fund by taxpayers eligible for deduction in computation of the total income.

B. CBDT’s order u/s 119 of the IT Act
CBDT has issued following directions:

Directions with respect to following applications are provided in Table-III:

1.1. Applications of payees u/s 195 and 197 of the IT Act for lower or nil rate of deduction of TDS[8] for FY 2020-21; and

1.2. Applications of buyers/ licensees/ lessees u/s 206C (9) of the IT Act for lower or nil rate of collection of TCS[9] for FY 2020-21.

Table – III
Cases	Particulars	Direction
Case I	a) Taxpayer has filed such application on the TRACES Portal for FY 2020-21; b) The application is pending for disposal; and c) Such taxpayer has been issued such certificate for FY 2019-20	Such certificate would be applicable till 30th June 2020 of the FY 2020-21 or disposal of their applications by the Assessing Officer (“AO”) whichever is earlier, in respect of the transactions and the deductor or collector for whom the certificate was issued for FY 2019-20.
Case II	a) Taxpayer could not file such application on the TRACES Portal for FY 2020-21; b) But such taxpayer has been issued such certificate for FY 2019-20	Such certificate will be applicable till 30th June 2020 of the FY 2020-21. However, such taxpayer will need to apply to the TDS/TCS AO as per the prescribed procedure[1] as soon as normalcy is restored or 30th June 2020, whichever is earlier
Case III	a) Taxpayer has not filed such application on the TRACES Portal for FY 2020-21; and b) Such taxpayer hasn’t been issued such certificate for FY 2019-20	A modified procedure for application and consequent handling by the TDS/TCS Assessing Officer has been laid down[2]. The certificate shall be issued up to 30th June 2020 or earlier date as specified by AO.
Case IV	a) Payments to Non-residents (including foreign companies) having Permanent Establishment in India; and b) Such payment is not covered in Case I and II above	Tax on payments made will be deducted @ 10% including surcharge and cess, on such payments till 30th June 2020 of F.Y. 2020-21, or disposal of their applications, whichever is earlier.

2. Direction[12] with respect to following applications are provided in Table-IV:

2.1. applications of payees u/s 195 and 197 of the IT Act for lower or nil rate of deduction of TDS for FY 2019-20; and

2.2. applications of buyers/ licensees/ lessees u/s 206C (9) of the IT Act for lower or nil rate of collection of TCS for FY 2019-20.

Table – IV
Particulars	Direction
a) Taxpayer has filed such application on the TRACES Portal for FY 2019-20; and b) The application is pending for disposal;	The taxpayer shall intimate the pendency of such application for FY 2019-20 vide an email addressed to the AO along with the required documents and evidences in filing of such application at the TRACES Portal. The AO shall dispose of such application by 27th April 2020 and communicate to the taxpayer regarding the issuance/rejection of the certificate. Such certificate shall be applicable only for the amounts credited/debited during the FY 2019-20 after the date of making such application but remained unpaid till the date of issuance of such certificate by the AO.

3. Direction with respect to submission of Form 15G and 15H to banks, other institutions etc. by some eligible persons for FY 2020-21 is provided in Table-V:

Table – V
Particulars	Direction
a) Taxpayer has not submitted Form 15G and 15H to bank and other institutions for FY 2020-21; and b) Taxpayer had submitted Form 15G and 15H to such bank and other institutions for FY 2019-20.	Such Form 15G and 15H will be valid[13] up to 30th June 2020 for FY 2020-21.

4. Direction with respect to ‘residency’ for individuals u/s 6 of the IT Act

4.1. For FY 2019-20:

Table – VI
Cases	Particulars	Direction
Case I	a) The ‘individual’ has come to India on a visit before 22nd March 2020; and b)The ‘individual’ has been unable to leave India on or before 31st March 2020.	The individual’s period of stay from 22^nd March 2020 to 31^st March 2020 shall not been taken into account in determination of his residential status u/s 6 of the IT Act.
Case II	a) The ‘individual’ has come to India on a visit before 22nd March 2020; b)The ‘individual’ has been quarantined in India due to Covid-19 on or after 1st March 2020; and c) The ‘individual’ has either – departed on an evacuation flight on or before 31^st March 2020, or – been unable to leave India on or before 31^st March 2020.	The individual’s period of stay from the beginning of his quarantine to his date of departure or 31^st March 2020, as the case may be, shall not been taken into account in determination of his residential status u/s 6 of the IT Act.
Case III	a) The ‘individual’ has come to India on a visit before 22nd March 2020; and d) The ‘individual’ has departed on an evacuation flight on or before 31st March 2020	The individual’s period of stay from 22^nd March 2020 to his date of departure shall not been taken into account in determination of his residential status u/s 6 of the IT Act.

4.2. For FY 2020-21:

The CBDT, in its press release, has provided that a circular shall be issued for excluding the period of stay of the ‘individual’ upto the date of normalization of international flight operations in India after the normalization thereof.

C. CBDT’s Interim Action Plan for First Quarter of FY 2020-21

The following directions, among others, have been issued by the CBDT to Income Tax Officers under the Interim Action Plan for the first quarter (April 2020 to June 2020) of the FY 2020-21:

At the outset, it has been directed that no communication with the taxpayer having an “adverse effect” is to be done during this first quarter until the issuance of fresh guidelines by the CBDT.
It has been directed to identify and be prepared for issuance of notice u/s 148 for ‘income escaping assessment’ by 30th June 2020. These notices will be issued to the taxpayers on receiving a fresh communication from the CBDT in this regard.
It has been directed to be prepared for disposal of applications by the taxpayers u/s 154 (rectification of mistake).
It has been directed to check all the pending demands for removal of all the duplicate demands.
It has been directed to dispose of all the applications u/s 12AA or 80G of the IT Act (charitable trusts) for grant of registrations received up to 31st March 2020.
It has further been directed to upload the manual orders u/s 147 (income escaping assessment) and 263 (revision of order prejudicial to revenue) of the IT Act.

[1] These actions do not include payment of any amount towards tax or levy whose due date falls during the period from 20th March 2020 to 29th June 2020 or such other date as the central government may specify by notification. This means that there has been no extension in the due date for payment of such amounts.

[2] It is defined as: (a) Wealth Tax Act, 1957; (b) The Income tax Act, 1961; (c) The Prohibition of Benami Property Transaction Act; (d) Chapter VII of the Finance (No.2) Act, 2004 (Securities Transaction Tax);

(e) Chapter VII of the Finance Act, 2013 (Commodities Transaction Tax);

(f) The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; (g) Chapter VIII of the Finance Act 2016 (Equalization Levy); and (h) The Direct Tax Vivad Se Vishwas Act, 2020.

[3] The Central Government can extend this time period by a notification.

[4] The Central Government can further extend this date of completion or compliance period by notification. In this regard, the Central Government can specify different dates for completion or compliance of different actions for the purpose of this extension.

[5] The Central Government can extend this time period by a notification

[6] The Central Government can further extend this date for payment of such amount for the purposes of this relaxation.

[7] It means the period between the due date and the date on which the amount has been paid.

[8] Tax Deduction at Source.

[9] Tax Collection at Source.

[10] As laid down in Case III.

[11] Annexure to “Order u/s 119 of The Income Tax Act, 1961 on issue of certificates for lower/nil deduction/collection of TDS or TCS u/s 195, 197 and 206C (9)” dated 31st March 2020 (F.NO.275/25/2020-IT(8))

[12] This direction has been issued to alleviate the hardship caused to the payees and buyers/ licensees/ lessees who have raised invoices in FY 2019-20 but have not received the payment for the same since they were not able to intimate the rate of deduction/collection on such amount to the payer and seller/ licensor/ lessor due to pendency of such application.

[13] The payer, who will not deduct tax on the basis of such extended validity of forms, shall be required to report details of such payments/credits in the TDS statement for the quarter ending 30th June 202 in accordance with the provisions of the prescribed rules.

Tags INCOME TAX

Key aspects of SEBI’s circular re relaxations relating to procedural matters in issues and listings

Introduction

In light of the recent developments relating to the COVID-19 pandemic (and its ongoing consequent impact on the Indian and global economy), the Securities and Exchange Board of India (“SEBI”), had recently, vide its two circulars, each dated April 21, 2020 (“April Circulars”), granted (a) temporary relaxations from compliance with certain provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”), and (b) one-time relaxation with respect to validity of SEBI observations, in respect of rights issues, with an intent to improve fund raising access to listed corporate entities as well as revive investor confidence in the securities market. With the aforesaid intention in mind, SEBI has issued another circular dated May 6, 2020 (Circular No. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) (“Circular”), for granting relaxation relation to (a) certain procedural matters in relation to rights issues, and (b) authentication of offer documents and inspection of documents electronically for all capital markets issues.

The Circular shall be applicable for all rights issues (including fast track rights issues) opening before July 31, 2020, and for all offer documents filed until July 31, 2020.

Key aspects of the Circular

A. Relaxation in respect of rights issues

i. Availability of letter of offer and other issue materials

Regulation 77(2) of the SEBI ICDR Regulations prescribes that the abridged letter of offer (along with application form), can be despatched either through registered post, speed post, courier service or by electronic transmission to all existing shareholders of the issuer company, prior to the opening of the issue.

However, keeping in mind the various practical challenges that may arise in the COVID-19 era, particularly in relation to engaging courier or postal services, SEBI has now specifically clarified that failure to dispatch the aforesaid offering material through registered post or speed post or courier services, due to prevailing COVID-19 related conditions, will not be treated as non-compliance, for rights issues opening up to July 31, 2020. To supplement the aforesaid relaxation, the following additional steps are required to be undertaken:

issuers are required to publish the letter of offer, abridged letter of offer and application forms on its website as well as on the websites of the lead manager(s) to the issue, registrar to the issue and stock exchanges; and
issuers as well as the lead manager(s) to the issue are required to undertake adequate steps to reach out to the shareholders through other means, including through SMS, ordinary post, audio-visual advertisements on television, as well as digital advertisements.

These measures help issuers negate the difficulties they may face in respect of physical distribution of offering material. The availability of offering material on the internet would ensure that potential investors get access to the same through virtual means. Having said that, digital modes of communication may not be preferred by a select set of investors, who are either not accustomed to such platforms, or may face challenges in receiving uninterrupted internet network connectivity.

Thus, the aforesaid clarification showcases SEBI’s positive intent towards making the Indian capital markets regime a technologically driven and an environment friendly one, and we may hope for increased usage of electronic transmission systems for dispatch of the aforesaid offering materials, not only during the next couple of months, but also in the coming years in the post COVID-19 era.

Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.

ii. Issue-related advertisements

Prior to the opening of the rights issue, the issuer is required to publish advertisement(s) in certain specific newspapers (“Statutory Newspapers”), containing the disclosures mandated under Regulation 84(1) of the SEBI ICDR Regulations (“Statutory Advertisement(s)”). However, given the difficulties in publishing physical advertisements (i.e. in newspapers, hoardings, banners, etc.) and the potential inefficacies with respect to their outreach in the COVID-19 era, SEBI has provided a few additional mechanisms for publication of Statutory Advertisements and other issue-related advertisements:

(a) issuers have the flexibility to publish the Statutory Advertisement confirming dispatch of abridged letter of offer and application form in newspapers other than the Statutory Newspapers;

(b) all such advertisements must also be made available on the websites of the issuer, lead manager(s) to the issue, registrar to the issue, and the stock exchanges; and

(c) issuers are also required to make use of advertisements through other electronic media such as television channels, radio and the internet for disseminating information relating to the application process. Further, for the first time, SEBI has permitted such advertisements to be made in the form of crawlers or tickers as well.

The Circular also requires issuers to disclose additional details in Statutory Advertisement(s), specifically in relation to the application process for shareholders who have not been served notice via electronic modes.

iii. Application by physical shareholders

In 2008, SEBI, while acknowledging the market practice of trading of rights entitlements in physical form, envisaged the establishment of a uniform and exchange driven mode of trading of rights entitlements, and released a paper for receiving public comments on the proposed electronic rights issue process and e-trading of rights entitlements. While the proposal for establishing an e-trading platform for rights entitlements did not see the light of the day, SEBI had issued a circular for streamlining certain aspects of the rights issue process on January 22, 2020 (“January Circular”), with the intention of, among other things, reducing issue timelines and permitting trading of rights entitlements in dematerialized form. Pursuant to the January Circular, rights entitlements would have to be mandatorily credited to the demat account of eligible shareholders in dematerialized form, and physical shareholders were required to provide their demat account details to issuer or the registrar to the issue for credit of rights entitlements (within a period of two working days prior to the issue closing date). However, given certain impossibilities during the COVID-19 era, investors (especially those holding securities in physical form) may face several hurdles while undertaking the process of opening a demat account or communicating their demat account details to the issuer or registrar, prior to the issue closing date. While the January Circular was introduced with an intention of establishing an efficient process of credit of rights entitlements to respective demat accounts (which in turn would facilitate the existence of a robust rights entitlements trading platform), the onset of the COVID-19 pandemic has forced SEBI to offer certain relaxations to shareholders.

Keeping in mind the aforesaid challenges, SEBI has, vide the Circular, allowed physical shareholders to submit their applications re the rights issue, irrespective of whether they are able to open demat accounts or communicate details of the demat accounts in accordance with the requirements prescribed in the January Circular. However, the submission of applications by such physical shareholders would be allowed, subject to (a) the institution of a mechanism by the issuer, lead manager(s) to the issue and other intermediaries for allowing such shareholders to apply in the rights issue, and (b) adequate steps being taken by the issuer and lead manager(s) to the issue for communicating the mechanism described in (a) hereinabove to the aforesaid shareholders prior to opening of the issue. Further, such physical shareholders availing of the aforesaid relaxation shall not be eligible to renounce their rights entitlements, and shall receive shares in dematerialized form only.

In light of the aforesaid, we believe that issuers and intermediaries may need to consider utilizing the issuer’s suspense accounts (including the one opened in accordance with Regulation 39 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”)) where such rights entitlements and shares (to be credited to the physical shareholders who have applied for allotment of equity shares), will be kept in abeyance in electronic mode by issuers, until the aforesaid shareholders provide details of their demat account particulars to the issuer or registrar, in accordance with the procedure as prescribed under Regulation 39 of the SEBI Listing Regulations.

iv. Non-cash based application process

Pursuant to the January Circular, all eligible shareholders are mandatorily required to use the application supported by blocked amount (“ASBA”) mechanism while applying for shares in a rights issue. However, the onset of the COVID-19 pandemic may have created certain practical roadblocks with respect to the transition to an ASBA only mechanism.

Shareholders who have not transitioned to using an ASBA account may face hurdles while trying to do so in the COVID-19 era, especially in light of the existence of a nation-wide lockdown. Further, an SCSB, a critical intermediary at the forefront of the ASBA process, may find it difficult to function optimally with reduced staff strength, given the remote working landscape that is now prevalent across industries.

In light of the practical difficulties and systemic challenges faced by both investors as well as intermediaries, SEBI has permitted issuers (along with the lead manager(s), the registrar, and other intermediaries) to institute optional mechanisms (non-cash mode only) to accept the application money from the shareholders. In view of the aforesaid, issuers and other intermediaries may look to establish mechanisms whereby application monies can be paid by way of online transfers into designated accounts. However, the Circular clarifies that no third party payments shall be allowed in respect of any application.

In order to ensure that relaxations provided hereinabove are utilised by the issuer and intermediaries towards achieving investor protection, SEBI has, vide the Circular, imposed a duty on the issuer and the lead manager(s) to the issue to ensure, in respect of the mechanisms referred in points (iii) and (iv) above, that:

(a) the mechanisms shall serve as an additional option, and would not be a replacement of the existing process, and efforts are made to adhere to the existing prescribed framework;

(b) the mechanisms function in a transparent and robust manner (with adequate checks and balances), and the transparency, fairness and integrity of such mechanisms are to the satisfaction of the lead managers and registrar to the issue, without imposing additional costs on investors;

(c) FAQs, a dedicated online investor helpdesk and helpline are created to guide investors through the application process, and to resolve difficulties faced on a priority basis; and

(d) the issuer, lead manager(s), registrar and other intermediaries are responsible for all investor complaints.

B. Relaxations in respect of all offer documents

i. Relaxations in relation to digital signatures and electronic inspection of material documents

In respect of all offer documents filed until July 31, 2020, SEBI has now permitted:

(a) usage of digital signature certifications for authenticating and certifying offer documents; and

(b) the issuer and lead manager(s) to establish a procedure for electronic inspection of material documents.

While the former is an option that may be used by the issuer, the latter appears to be a mandatory requirement. In light of the aforesaid, issuers may now be required to look for cost-effective ways of providing access to these documents, which may be through secured mechanisms, such as password-protected dedicated portal on the issuer’s website (wherein entry may be permitted via communications sent by way of SMS, emails, etc.).

Moreover, on a plain reading of the Circular, it appears that this part of the Circular shall be applicable for ‘all offer documents filed until July 31, 2020’ (and not just limited to rights issues alone), which may mean that inspection of material documents shall only be done electronically in case of all issues wherein the respective offer document (i.e. red herring prospectus, prospectus, shelf prospectus and letter of offer, as the case may be) is filed until July 31, 2020.

Conclusion

In these turbulent times of the COVID-19 pandemic, SEBI is trying to leave no stone unturned to revive Indian capital markets. With the issuance of the April Circulars and the Circular, it is quite evident that SEBI is looking to improve access to real-time fund raising options, with a specific focus on making the rights issue process technology friendly. While SEBI has tried to restore issuers’ and investors’ confidence in Indian capital markets with a slew of relaxations, it has kept in mind investor protection ideals and traditions while offering the same.

However, it must be borne in mind that issuers, lead manager(s), registrars and other market intermediaries may face increased costs in the process of setting up the mechanisms discussed hereinabove. Moreover, it must not be forgotten that advertisements and other publicity materials issued pursuant to these relaxations would still have to pass the rigours of publicity restrictions prescribed under the SEBI ICDR Regulations. Regardless of the aforesaid, the efficacy of these relaxations can be completely examined only after the completion of few rights issues and interaction with market intermediaries.

Please refer to the SEBI circular dated May 6, 2020 (circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/78) for more details.

This blog is authored by Arka Mookerjee, Siddhartha Desai, and Ananth Balaji Sundararaman.

Tags Capital Markets, LOCKDOWN, SEBI

Relaxations for Compliances under Indirect Tax Laws

In view of the nation-wide lockdown on account of the COVID-19 pandemic, the Government of India has issued various notifications to ensure compliances by embracing accessible technology and extending time limits for specified compliances.

Key relaxations provided by way of the notifications are summarised below:

1. GST returns can be furnished through electronic verification code (‘EVC’) – Notification No. 38/2020-Central Tax dated May 5, 2020

This notification amends Rule 26(1) of Central Goods and Services Tax Rules, 2017 (‘CGST Rules’), to allow a GST-registered person, registered under the Companies Act, 2013 to, during the period April 21, 2020 to June 20, 2020, furnish returns in Form GSTR 3B, which can be authenticated using an EVC sent to the registered mobile number. Such facility is made effective from April 21, 2020.
For an assessee who is required to furnish a Nil return in Form GSTR 3B, a new Rule 67A has been inserted in the CGST Rules, to allow furnishing of such return for a tax period through short messaging service (‘SMS’), verified by a registered mobile number-based one-time password (‘OTP’) facility. Such facility will be made effective from a date to be notified later.

2. Amendment of notification issued in relation to GST compliance by corporate debtors under Insolvency and Bankruptcy Code, 2016 – Notification No. 39/2020-Central Tax dated May 5, 2020

Time limit for interim resolution professionals (IRP) or resolution professionals (RP) to obtain new registration as a distinct person of the corporate debtor, has been amended to be 30 days from date of appointment of IRP/ RP or June 30, 2020, whichever is later (effective from March 21, 2020).
The class of persons covered under Notification No. 11/2020-Central Tax dated March 21, 2020 will not include corporate debtors who have furnished the GST returns for all tax periods prior to appointment of IRP/RP.

3. Extension of validity of e-way bills – Notification No. 40/2020-Central Tax dated May 5, 2020

The validity of e-way bills generated prior to March 24, 2020, and expiring during the period March 20, 2020 to April 15, 2020, has been extended till May 31, 2020.

4. Extension of time limit for filing annual return for FY 2018-19 – Notification No. 41/2020-Central Tax dated May 5, 2020

The time limit for furnishing annual returns in Form GSTR 9 and Form GSTR 9C for FY 2018-19 has been extended till September 30, 2020.

5. Due dates for filing return in Form GSTR 3B for the Union territories of Jammu and Kashmir and Ladakh – Notification No. 42/2020-Central Tax dated May 5, 2020

The said notification amends the due date for filing of return in Form GSTR 3B for registered persons whose principal place of business is in the Union Territories of Jammu and Kashmir and Ladakh as follows:

This notification is effective from March 24, 2020.

6. Extension of time limit for filing acknowledgement of declaration under Himachal Pradesh (Legacy Cases Resolution) Scheme, 2019 – Notification No. EXN-F-(10)-7/2019- Vol.-I dated April 27, 2020

On account of complete lockdown in the country due to COVID-19 pandemic, the time limit for filing acknowledgement of declaration as per the provisions of Himachal Pradesh (Legacy Cases Resolution) Scheme, 2019 has been extended till September 30, 2020.

Tags GST, LOCKDOWN

MCA clarification on holding annual general meeting

In a welcome move, and to soften the blow of the COVID-19 pandemic on companies, on 05 May 2020, the Ministry of Corporate Affairs (MCA), issued a circular authorising companies to conduct their Annual General Meetings (AGMs) through videoconferencing or other audio-visual means.

This comes on the heels of prior MCA relaxations such as:

Circulars dated 08 April 2020 and 13 April 2020 (the EGM Circulars), through which, companies were permitted to hold extraordinary general meetings (EGMs) through videoconferencing or other audio-visual means. The EGM Circulars prescribed detailed procedures for the conduct of such EGMs. (see our previous posts here and here.)
Circular dated 21 April 2020, which extended the last date for the conduct of AGM by companies whose financial year ended on 31 December 2019, to 30 September 2020.

Under the Companies Act, 2013, (Act) companies are mandated to hold their AGMs within 6 months from the closure of the financial year (9 months in case of first AGM), and no later than 15 months from the date of preceding AGM. In light of the challenges faced by companies due to the continuing restrictions on the movement of persons, both domestically and internationally, the MCA has now permitted all companies (on fulfillment of prescribed conditions) to conduct their AGM through videoconferencing or other audio-visual means, during the calendar year 2020.

The following are the requirements to be met by companies for conducting such meetings:

A.Companies which are required to provide for the facility of e-voting under the Act (i.e., all listed companies and companies having not less than 1,000 members

1.The framework for holding such meetings and the procedure regarding the issue of notice, as provided under the EGM circulars, shall apply

2.Other than ordinary businesses, only those special businesses which the Board considers to be unavoidable may be transacted at such a meeting.

3.In lieu of physical copies of the financial statements, including board’s report and auditor’s report, electronic/soft copies may be sent via email to the members, debenture-holders and all other persons entitled to receive it under the Act.

4.Before sending the notices and copies of financial statements, a public notice by way of advertisement must be published, at least once, in a vernacular newspaper and at least once, in an English newspaper, in each case being a newspaper having wide circulation in the district in which the registered office of the company is situated, specifying the following:

Statement that the AGM will be convened through videoconferencing or other audio-visual means;
The date and time of such AGM;
Availability of the notice on the website of the company (and, if the company is listed, on the stock exchange);
Manner of e-voting for members who hold physical shares or who have not registered their emails with the company;
Procedure for members to give mandates to receive dividends directly in their bank accounts through electronic clearing system etc.; and
Any other detail which the company thinks necessary.

If the company is unable to pay dividends to its shareholders by electronic mode, due to non-availability of details of bank account, the company shall dispatch the dividend cheque by post as soon as postal services are normalised.

In case the company has received permission from appropriate authorities for holding the AGM at its registered office, then, after due compliance with the advisories issued by the authorities, and in addition to the physical presence of some members, the company may also provide its members with the option of attending the AGM through video conferencing or other audio-visual means. Members attending the AGM through such facilities shall also be considered for the purpose of quorum for the purpose of the Act, on par with members in physical attendance.

B. Companies which are not required to provide the facility of e-voting under the Act:

1.AGM may be conducted through video conferencing or other audio-visual means only by such companies which in its records, has the email addresses of at least half of its total members, who also:

a.In case of Nidhi companies: hold shares of more than INR 1000 in face value or more than 1% of the total paid-up share capital, whichever is less;

b.In case of other companies having share capital: represent not less than 75% of such part of the paid-up share capital of the company as gives a right to vote at the meeting;

c.In case of companies not having share capital: have the right to exercise not less than 75% of the total voting power exercisable at the meeting.

2.The company shall take all necessary steps to procure and register the email addresses of all persons who have not registered their email addresses with the company.

3.The framework for holding such meetings and the procedure regarding issue of notice, as provided under the EGM circulars, shall apply

4.Other than ordinary businesses, only those special businesses which the Board considers to be unavoidable may be transacted at such a meeting.

5.In lieu of physical copies of the financial statements, including board’s report and auditor’s report, electronic/soft copies may be sent via email to the members, debenture-holders and all other persons entitled to receive it under the Act.

6.The company shall make adequate provisions for allowing members to mandate receipt of dividends directly in their bank accounts through the Electronic Clearing Service (ECS) or any other means. For shareholders whose bank account details are not available, the company shall, immediately upon the normalization of postal services, dispatch the dividend warrant/cheque to such shareholder(s) by post.

Companies are required to ensure that all other related compliances mandated under the Act and/or under its articles of association are made through electronic mode.

The MCA has also clarified that, if any company is not covered by the 21 April 2020 circular, or is unable to hold its AGM under the framework of this 05 May 2020 circular, they may apply to the Registrar of Companies for extension of time to hold their AGM.

Please refer to MCA Circular No. 20/2020.

[i] Section 108 of the Companies Act, 2013, read with Rule 20 of the Companies (Management and Administration) Rules, 2014

MHA Order for extension of Lockdown

The Ministry of Home Affairs, Government of India (“MHA”) has issued an updated order dated May 01, 2020 bearing No. 40-3/2020-DM-I(A) (“Order”) with the new guidelines on the measures to be taken by Ministries / Department of Government of India / States and State authorities for containing the spread of COVID-19. The Order and the new guidelines will come into effect from May 04, 2020 and will be valid for a period of two weeks i.e. till May 17, 2020.

Classification of Zones

As per the Order, the easing of the lockdown restrictions in the country will be applicable based on the risk profiling of the districts into red, orange and green zones (as defined in the Order and explained below).

A) Green zones: A green zone is a zone where there are no confirmed cases till date, or districts with no confirmed case in the last 21 days.

B) Red zones or hotspots: A red zone will be defined by Ministry of Health and Family Welfare, Government of India (“MHFW”) taking into account total number of active cases, doubling rate of confirmed cases, extent of testing and surveillance feedback.

C) Orange zones: all zone that are neither red zones nor green zones will be classified as orange zones.

The classification of the zones will be updated by the MHFW on a weekly basis. The Order specifically states that each State/Union Territory may classify additional districts as red or orange zones but cannot lower the classification of any district. In red zones and orange zones, containment zones will be demarcated by states and district administrations where strict lockdown restrictions will apply.

As per the Order, within containment zones, there will be strict perimeter control and no movement of population in and out of containment zones, will be permitted except for medical emergencies and for the supply of essential goods and services. The Order requires 100% implementation of the Aarogya Setu application in containment zones.

Common Central Restrictions

Irrespective of the zone, as per the Order, the following activities continue to be prohibited:

All domestic and international air travel except for medical or security purposes;
Passenger movement by trains except security purposes or as permitted by MHA;
Interstate bus transport except as permitted by MHA;
Metro rail services;
Interstate movement of individuals except for medical reasons or activities permitted by MHA;
All educational institutions;
Hospitality services other than those needed for frontline workers or stranded persons, or for quarantine;
All cinema halls, shopping malls, gyms, sports complexes, swimming pools, assembly halls and similar places;
All social, political and religious gatherings (please note that the annexure indicates that marriages and funerals can be held with limited participants and with social distancing);
Religious places of worship will not be open to public and religious congregations remain prohibited.

The Order additionally imposes the following conditions irrespective of the zone:

Imposition of a curfew and prohibition of movement of individuals for non-essential activities from 7 pm to 7 am;

Condition that persons above 65 years of age, persons with co-morbidities, pregnant women and children below 10 years are required to stay at home, unless there is a health-related issue or to meet essential requirements;

Opening of outpatient departments and medical clinics (except in containment zones) is permitted with social distancing norms.

Activities in Red Zones

As per the Order, the following activities are permitted in the red zones (outside containment zones) with restrictions as imposed by the authorities:

Movement of individuals and vehicles for permitted activities. Four wheelers will have a maximum of 2 passengers besides the vehicle driver and two wheelers will be permitted to ply with only one rider with no pillion.
Industrial establishments in urban areas: only the following are permitted – SEZs, EOUs, industrial estates and industrial townships with access control; manufacturing units of essential goods including drugs, pharmaceuticals, medical devices, their raw materials and intermediates, production units which require continuous process and their supply chain, manufacturing of IT hardware, jute industry, manufacturing units of packaging material.
All industrial activities permitted in rural areas.
Construction in urban areas – only in situ construction and construction of renewable energy projects. All construction activities are permitted in rural areas.
Shops selling essential goods in markets and market complexes permitted to be operational. All standalone shops permitted for both essential and non-essential goods.
E-commerce activities will be permitted only for essential goods.
Private offices can operate with 33% strength as per requirement, with remaining persons working from home.

The following activities are prohibited in red zones: Cycle rickshaws, auto rickshaws, taxis and cab aggregators, intra district and inter district buses, barber shops, spas and salons.

Activities in Orange Zones

As per the Order, inter district and intra district plying of buses will not be permitted in orange zones.

In orange zones, cabs and cab aggregators will be permitted to operate with one driver and two passengers. Inter district movement of individuals and vehicles will be permitted for permitted activities with four wheeler vehicles having a maximum two passengers besides the driver.

Activities in Green Zones

All activities will be permitted except those prohibited in all zones. Buses may operate with 50% seating and bus stations will be permitted to operate at 50% capacity.

The Order permits inter-state movement of goods/cargo, including empty trucks.

All other activities will be permitted, which are not specifically prohibited/permitted with restrictions in the various zones. However, the concerned State/Union Territories may allow only select activities from out of the permitted activities with restrictions as necessary based on their assessment of the situation.

The State/ Union Territories are not permitted to dilute the guidelines issued and are required to strictly enforce the same.

In addition to the standard operating procedures issued by the MHA earlier, Annexure I of the Order sets out certain directives which are required to be followed in public places and in workplaces for reducing the spread of COVID-19. Some of the directives are set out below:

All persons are compulsorily required to wear face masks in public places and in all workplaces which are permitted to re-open their office premises.
Employers are required to ensure that adequate supply of face masks is available to accommodate all employees and workers who are present in the workplace. Employers are required to ensure that social distancing as per the guidelines of the MHFW is strictly followed at all times at the workplace and in company transport. Employers may implement these norms by ensuring adequate gaps between shifts; and by staggering lunch breaks of staff.
All areas in the premises of the workplace which come into human contact (ex. door handles) are required to be frequently sanitized/ disinfected.
Employers are required to ensure that persons above 65 years of age, persons with co-morbidities, and pregnant women opt in for work from home policies and are not required to physically report to the workplace.
Employers (public or private) are required to ensure that all employees and workers of their establishment are using the Arogya Setu app.
Employers are required to avoid large physical meetings.
A list of hospitals/ clinics in the vicinity of the workplace is required to be displayed at the workplace at all times. Any employee who is showing symptoms of COVID-19 is required to be immediately sent to such facilities for a medical check-up. Employers are required to earmark designated quarantine areas in the workplace for isolating employees who are showing symptoms of COVID-19 till they are safely moved to the medical facilities.
Special transportation facility is required to be arranged for employees/ workers wherever the commute by personal/ public transport system is not feasible. Such special transportation facility is required to ensure compliance with the social distancing guidelines.
Employers are required to take up intensive communication and training on good hygiene practices.

Tags LOCKDOWN, SOCIAL DISTANCING

Extension of Lockdown – Order dated 03 May 2020 issued by the State Government of Tamil Nadu

The State Government of Tamil Nadu has vide notification no. G.O.(Ms)No.217 dated 03 May 2020, issued the following orders for the effective containment of COVID-19:

The lockdown period has been extended from 00.00hrs of 04.05.2020 to 24:00hrs of 17.05.2020.
Agricultural and other activities already permitted, would continue to be permitted during the lock-down period.
Existing restrictions for the below mentioned operations shall stand unaltered until further notification:

a. Schools, colleges, training centers, research institutions and all other educational institutions;

b. Public gatherings at place of worship and religious centers;

c. Theaters, shopping malls, gymnasiums, swimming pools, sports complexes, assembly halls and similar places;

d. Gatherings and processions of all nature including religious functions, social, political, sports, entertainment, academic and cultural and other gatherings;

e. Air, rail and public bus transport for passenger movement (except dedicated staff buss/Vans used by industries and establishments);

f. Taxi, auto, cycle rickshaw;

g. Metro rail services;

h. Inter-state public movement;

i. Hotels (excluding the employees’ accommodation), lodges and resorts;

j. Mall, barber shop, salon, spa, & beauty parlor;

k. Air-conditioned showrooms selling jewels, clothes and departmental stores will not be permitted;

l. Funeral procession with not more than 20 persons; and

m. Marriages upon adherence to existing restrictions.
No activity shall be permitted in the containment zones.
Strict surveillance will be done on gathering of more than 5 people.
The following activities are allowed in all areas falling under the jurisdiction of Greater Chennai Police (excluding containment zones):

a. Construction works, provided the workers reside in the place where the construction work is carried on. Workers from outside should be brought on a one time basis.

b. Construction works (including laying of roads) undertaken by Government and Public Sector Undertakings.

c. Undertakings functioning in SEZ, EOU and Export Units: provided that 25% workers alone (minimum 20 workers) shall be permitted upon such undertakings allowed after due inspection and assessment by Commissioner, GCC / District Collector. Strict access control must be ensured. Employees shall travel only in vehicles operated by the respective Organisation.

d. IT and ITes services, provided that 10% workers alone (minimum 20 workers) shall be permitted. Employees shall travel only in vehicles operated by the respective Organisation.

e. Shops selling essential commodities from 6.00 A.M till 5.00 P.M. shall be permitted.

f. E- Commerce services providers, handling food and essential commodities; shall be permitted based on the already permitted timings.

g. Restaurants shall be permitted from 6.00 A.M till 9.00 P.M. Parcels alone shall be permitted.

h. All Standalone and neighborhood shops (except saloons, spa and beauty parlours); construction hardware, cement, construction materials, sanitaryware, electrical items, mobile phone, computers, household appliances, electric motor and spectacles stores sold by standalone shops shall be permitted from 11.00 A.M till 5.00 P.M.

i. Self-employed workers such as plumber, electrician, air conditioner mechanics, carpenter, home care providers for persons with special needs and household workers shall be permitted after obtaining necessary permission received from Chennai Corporation Commissioner/ District Collector.
The following activities are allowed in all areas across the states (except for areas under the jurisdiction of Greater Chennai Police and containment zones)

a. All industries, including the textile industries, located outside the Corporation/Municipal limits of the state (except in containment zones) shall be allowed to function with 50% workers (minimum 20 persons). All industrial activities across the village and town panchayat areas shall be allowed.

b. However, in town panchayat having a population of more than 15,000, the District Collector should permit the operations of textile industries with 50% workers based on the local conditions.

c. Functioning of SEZ, EOU, industrial estates, industrial townships in rural and urban areas shall be allowed with 50 % workers.

d. Spinning Mills located in village and town panchayat area shall be permitted to operate with 50% workers on a shift basis by adhering to physical distancing norms.

e. The operations of leather and textile industries dealing with designing and sampling for export purposes shall be allowed in the Municipalities and Corporations with the District Collectors’ permission and with 30% workers after accessing the local situation.
f. Further, the District Collector may permit all export units in urban areas to operate with 50% workers, based on accessing the local condition.

g. IT hardware manufacturing unit are permitted to operate with 50% workers.

h. IT and ITeS services are permitted to operate with 50% employees (minimum 20 persons).

i. Construction works carried in urban areas; provided the workers reside in the place where the construction work is carried on.

j. Construction works (including laying of roads) undertaken by Government and Public Sector Undertakings;

k. Self-employed workers such as plumber, electrician, air conditioner mechanics, carpenter, shall be permitted to work upon permission received from District Collector.

l. Care givers for persons with special needs, physically challenged, elderly and sick patients, domestic helpers shall be permitted upon obtaining permission from the District Collector.

m. Printing press operations shall be permitted.

n. Shops selling construction hardware, cement, construction materials, sanitaryware, electrical equipment for enabling construction work shall be permitted to operate between 9.00 A.M. to 5.00 P.M. both in urban and rural area. There shall be no restriction on transportation of construction materials.

o. Standalone establishments including those for mobile phones, computers, home appliances, electric motor repair, spectacles sale and repair shall be permitted to operate between 10.00 A.M. to 5.00 P.M.

p. All the standalone establishments situated in rural areas shall be permitted to operate from 9.00 A.M. to 5.00 P.M.

q. Restaurants shall operate between 6 A.M. to 9.00 P.M. for takeaway only.

r. E-Commerce establishments shall operate as permitted earlier.

s. District Collectors may upon circumstances permit the operation of all the standalone shops shall operate between 10 A.M. to 5 P.M. except malls and market complexes located in municipalities and corporations (Salon, spa and beauty parlour are not permitted).
All industrial establishments shall strictly adhere to the SOPs listed out in Para VIII (Strict adherence to SOPs), Annexure I (SOP to be adhered with while restarting industries), Annexure II (SOP for construction industry) and Annexure III (SOP and measures to be taken if a COVID-19 positive is identified in a facility) of the notification.
All activities mentioned below shall be permitted to function along with those activities that were already permitted:

a. Agricultural and allied activities, plantation (including agro processing);

b. Marine and inland fishing subject to the instructions issued by the fisheries department;

c. Animal husbandry, milk, milk processing and poultry;

d. Healthcare institution including AYUSH centers, pharmacies, laboratories and diagnostics;

e. All manufacturing of essentials;

f. All continuous process industries;

g. In case of industries that are not permitted to operate – essential maintenance activities shall be carried on for safety purposes with minimal skeletal staff;

h. Manufacture and sale of agricultural implements, fertilizers, insecticides, pesticides, etc.;

i. Financial institutions like RBI, SEBI, Banks, NBFCs, ATMs and related services;

j. All media, postal services, telecom services;

k. Public utility services;

l. Social sector activities like home for senior citizens, etc.;

m. All goods carriers;

n. Logistics, warehousing and cold chain;

o. All seaports, airports and railways stations for cargo/goods movement, etc.;

p. Construction activities;

q. Mining activities and mineral production;

r. Amma canteens;

s. Hotels, e-commerce and shops selling food, grocery, and essential commodities;

t. MGNREGS activities
If it becomes difficult to ensure safety, shops/markets selling meat, fish, vegetables, etc. can be shifted to larger spaces;
Major industries, IT and ITes establishments, and construction activities shall be permitted after obtaining passes for the vehicles used for transportation of vehicles; Only 50% of the seating capacity shall be occupied;
No separate passes shall be required for MSME located in the specified areas. However, MSME employees should carry the ID card issued by the company.
All state government and central government offices shall function with 33% staff strength. However, all essential government services (including registration department) shall function with full strength; No separate pass shall be required while moving on duty.

The Tamil Nadu State Government has ordered the Greater Chennai Corporation and District Collectors to follow the above guidelines and accord necessary permissions to all permitted industries, enabling then to start their operations from 06 May 2020 onwards.

Violation of these measures shall be liable to be proceeded under Section 51 to 60 of the Disaster Management Act, 2005 besides legal action under Section 188 of Indian Penal Code and other relevant provisions

This notification is accessible at: https://cms.tn.gov.in/sites/default/files/go/revenue_e_217_2020_0.pdf

Tags LOCKDOWN, SEBI, SOCIAL DISTANCING, TAMIL NADU

Impact of COVID-19 on Leasehold Arrangements

Force Majeure is a French term and is commonly traced to French law. It denotes any event which is beyond the control of the parties. Force Majeure would include natural calamities like flood, earthquake, hurricanes, volcanic eruption etc., civil strife, military actions, health emergencies in the nature of epidemics.

While the expression force majeure is not explicitly used in the Indian Contract Act, 1872 (“ICA”), the ICA recognizes that an uncertain event on which the contract is dependent may become impossible (Section 32) and also that the act agreed to be done by the parties may become impossible or illegal (second para of Section 56). In the eventuality of Sections 32 and 56, the contract becomes void at the option of the party whose performance has been rendered impossible or frustrated.

The purpose of this article is to analyze the operability of force majeure in a lease agreement. Lease agreements are governed by the specific legislation, the Transfer of Property Act, 1882 (“TPA”).

The right of lease has been defined to mean among others, the right to enjoy an immovable property[1]. Hence the TPA recognizes the lessee’s right to avoid the lease if the property has been destroyed or rendered substantially and permanently unfit for the purposes for which it was let, by fire, tempest or flood, or violence of an army or of a mob, or other “irresistible force”[2].

Since the avoidance of lease on account of events impairing the property is at the option of the lessee, Courts have held that if the lessee does not exercise the option to treat the lease to be void after the property is rendered substantially unfit by fire, he will remain liable to pay rent[3]. Other than the aforementioned, the TPA does not recognise any other force majeure affecting the rights and obligations under a lease agreement.

The COVID-19 situation has caused the temporary vacation of leased premises across the nation, thereby creating a wave of requests from lessees for the exemption of the requirement of payment of rent for the period the premises was not occupied. The TPA does not recognize suspension of rental payment by the lessee on account of any grounds as already pointed out above.

It is not uncommon for lease deeds to have force majeure clauses. Such clauses typically absolve the parties from performing their respective obligations during the continuance existence of force majeure events. While such a clause will exempt the lessee from the consequence on non-performance of its obligation to keep the property in good condition, it is doubtful if such a clause would suffice to exempt payment of rent during the period of lockdown announced by the Government due to COVID-19. The obligation of a lessee to pay rent to the lessor, is not similar to his obligation to maintain the property in good condition. A lessee who has been put in possession of the property before COVID-19, continues to be in possession and occupation of the property, even if the lessee, his employees, customers or anyone else is unable to physically visit the property due to the restrictions imposed due to COVID-19. The lessee whose belongings are housed at the leased premises cannot say that he is not in possession and occupation of the premises. The obligation to pay rent is the consequence of being in possession of the premises.

Even in the context of executory contracts, it has been held that the performance of a contract is never discharged merely because it may become onerous to one of the parties[4]. Therefore, the fact that the lessee has not been able to carry out his business from the premises, may not be enough to be entitled to exemption from paying the rentals by relying on the force majeure clause in the lease deed. One has to remember that the COVID-19 has not rendered the property unfit for use as the lockdown is not on account of the property. Further, the party whose obligations are indeed put to immediate recusal on account of the lockdown are that of the lessor as he has been unable to make available the property. The inability of the lessor to perform his obligations should ideally therefore recuse the lessee from performing their obligations.

It will also have to be seen if the Courts will recognize the ancillary and long-term economic repercussions created by the COVID-19 pandemic as an economic force majeure exempting lessees from the obligation to pay rent during the period of lock-down. It is to be noted that while the Central Government has issued orders to protect migrant workers from demands for rent, no such protection has been extended to commercial leases[5].

Can lessees invoke the provisions of Sections 32 and 56 of the ICA? The answer is no, on account of the well settled position of law that since lease involves a transfer of interest in immovable property, a lease agreement is not an executory contract and therefore the provisions of the ICA will not be applicable over an executed contract[6].

In light of the above, lessees can evaluate the possibilities of termination of lease contracts and the commercial re-negotiation of the terms based on the requirements of the future, post the pandemic related lockdown.

[1] Section 105 of TPA.
[2] Section 108 (B) (e) of TPA.
[3] Sri Amuruvi Preumal Devasthanam v. KR Sabapathi Pillai and Ors (1962) 2 MLJ 452.
[4] Alopi Prasad & Sons vs. UOI, 1960 (2) SCR 793.
[5]https://mha.gov.in/sites/default/files/MHA%20Order%20restricting%20movement%20of%20migrants%20and%20strict%20enforement%20of%20lockdown%20measures%20%2029.03.2020.pdf
[6] Raja Dhruv Dev Chand vs Harmohinder Singh & Anr, AIR 1968 SC 1024; Lakshmipathi vs. Nithyananda Reddy, AIR 2003 SC 2427; Saha Ratansi Khimji v. Kumbhar Sons Hotel Pvt. Ltd, AIR2014SC2895.

Tags LOCKDOWN

Month: May 2020

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