Category: CS Professional

Crisis Management & Risk and Liability Mitigation – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions

Question 1.
POB Limited wants to design and implement an effective Enterprise Risk Management (ERM) system. Evaluate the challenges likely to be faced by the Company during implementation of ERM system.
Answer:
Risk management is also known as Enterprise Risk Management (‘ERM’), is a systematic and holistic approach for firms to address all their risks, whether operational, strategic or financial, Comprehensively. ERM focuses on identifying risks, developing and monitoring risk management system and reacting to risk events when they occur.

POB Limited may face the following challenges in designing and implementing an effective ERM system, including:
1. Effectively linking risk and strategy: Integrating risk management into the overall corporate strategy is a challenge for many Indian firms. The challenge is to have an ERM system that encompasses a process capable of being applied in strategy setting across the enterprise.

2. Implementing cost-effective risk management for small and medi¬um-sized enterprises: While the costs of risk management failures can be high, designing and implementing efficient ERM can also be quite costly, especially for small and medium-sized firms.

3. Addressing all major areas of risk: ERM requires a firm to take a portfolio view of risk; boards must consider how various risks inter-relate, rather than treating each business and risk individually. This is a significant challenge for many boards.

4. Mitigating new risks: In India, many complex areas of risks have emerged in the last decade or so, which has made risk management particularly challenging. For example, some traditional areas of risk, such as political instability and strikes and unrest, appear to have subsided while others, such as information and cyber security as well as terrorism and insurgency, have increased in prominence.

Companies operating in various industries have experienced the theft of data and sensitive information. For companies in major cities, the threat of terror attacks has become a growing cause for concern, which can be hard to manage by the company itself.

Question 2.
ABC & Co., Chartered Accountants, are the Statutory Auditors, as well as the Internal Auditors of Super Sky Limited. Evaluate whether the same is permitted under the Companies Act, 2013. If not, what are the penal provisions under the Companies Act, 2013?
Answer:
Yes, the additional fee does not absolve the Company from the liability of penalty or any other action under the Act for such default or failure. One of the significant changes brought in by the Companies (Amendment) Act, 2017 is the amendment in section 403 of the Companies Act, 2013.

Pursuant to the said amendment, the non-offence period of 270 days has been omitted from the Companies Act, 2013 and the filing of forms, returns or documents within the time prescribed under the relevant provision has been made mandatory.

Accordingly, the non-filing of forms, returns or documents within the time prescribed under relevant provision (for e.g., Form AOC-4 within 30 days of date of AGM) is now considered as a default or failure and the payment of additional fees does not absolve the company from the liability of penalty or any other action under the Act for such default or failure.

Question 3.
Distinguish between General Liability Insurance and Professional Liability Insurance.
Answer:
General Liability Insurance covers business from a few “general” lawsuits that any business could face. It triggers when a third party (Le., anyone who doesn’t work for the company) sues the business over:

1. Bodily injuries they incurred on the commercial premises,
2. Damage caused to their property,
3. Advertising injuries (e.g. slander, libel, misappropriation, and copyright infringement).

General Liability Insurance pays for the legal expenses (lawyers’ fees, court costs, and settlements or judgments). Any small-business owner, no matter their industry or the size of their business, can face these claims. That’s why many consider this policy to be the keystone of a business protection plan. Professional Liability Insurance is also known as “Errors and Omissions Insurance” or “Malpractice Insurance”. Its coverage focuses specifically on the lawsuits that stem from the professional services rendered.

Though this policy is especially important for service providers to carry, most small business owners can benefit from its coverage. It shields the insured from third-party lawsuits alleging:

• Negligent professional services.
• Failure to uphold contractual promises.
• Incomplete or shoddy work.
• Mistakes or omissions.

These torts are among the most expensive a business owner can face. One need not be at fault to be sued, an unhappy client may name the business in a lawsuit to recoup the “losses” they incurred because of the work carried out. “Crisis Management is not necessarily the same thing as risk management”.

Question 4.
What is Crisis Management and how is it different from risk management. Explain in detail guidelines/recommendations for establishing a good crisis management plan.
Answer:
1. Crisis management is the identification of threats to an organization and its stakeholders, and the methods used by the Organization to deal with these threats.

2. An organization may face various types of crises like natural crisis, technological crisis, confrontation crisis, etc.

3. Crisis management involves dealing with crises in a manner that minimizes damage and allows the affected organization to recover quickly. Dealing properly with a crisis can be especially important for a company’s public relations.

4. Businesses that effectively put a continuity plan in place in case of unforeseen contingencies can mitigate the effects of any negative event that occurs. The process of having a continuity plan in place in the event of a crisis is known as crisis management.

5. Crisis management is different from risk management. Unlike risk management, which involves planning for events that might occur in future, crisis management involves reacting to negative events during and after they have occurred. For example, an oil company may have a plan in place to deal with the possibility of an oil spill, but if such a disaster actually occurs, the magnitude of the spill, the backlash of public opinion, and the cost of clean-up can vary greatly and may
exceed expectations.

6. As Crisis may come in several forms and it is recommended in all cases that a company be prepared ahead of time with a crisis management plan.

The following guidelines are recommended for establishing good crisis management plans:

• Employ a professional crisis manager who can help in planning crisis management processes.
• Initiate frequent training and refresher courses on handling crisis. Drills and fake operations must frequently take place to keep refreshing stakeholders on emergency responses to crisis.
• Form a crisis team to work under Initiate systems that can effectively monitor or detect foreseeable crisis signals
• early enough in order to tackle the situation before it gets out of hand. ,
• Provide a list of key persons in case of a crisis and their contacts. The contact information must be displayed where anyone can see and easily access them.
• Identify the ground person to be notified immediately when a crisis occurs.
• Apart from a crisis manager, there must be a coordinating person among employees who possess firsthand news on a looming crisis. It should be the same person who can be trusted by his colleagues with vital information on any suspected crisis.
• Identify a central point where the employees can assemble and the exit points to use in case of a crisis. Emergency exit doors with ease of opening them must be labelled well and an emergency central place identified and properly labelled as well.
• Regular testing of the crisis management process and emergency equipment and updating them frequently or as needed the leadership of a crisis manager.
• Planning responses and crisis management processes for various potential crises is highly recommended. It takes several approaches and processes to address different crisis.

Question 5.
“Directors and Officers (D & O) insurance has become closely associated with broader management liabilities insurance, which covers liabilities of the corporate itself as well as the personal liabilities for the directors and officers of the company”. Enumerate the reasons to buy D & O policy.
Answer:
Directors and officers insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. The policy provides indemnity to the directors and officers in respect of Legal costs in defending proceedings brought against them alleging wrongful acts.

Key reasons to buy D&O insurance are:
1. Personal assets of directors are at risk: If a director has been accused of breaching duties, their personal assets are at risk in case they don’t have any D&O insurance.

2. Defending a legal action is an expensive affair: The legal costs and expenses in litigations involving directors are usually complex and costly.

3. Investors can file a case: If investors believe that they have incurred losses due to mismanagement of the company, they could approach the court to seek compensation.

4. Employees can sue: It is not only shareholders who can file a case against the directors as even employees reach the court to challenge the decision of the directors. It is a hard reality that in today’s corporate world, there has been a rise in the number of cases filed by employees, related to sexual harassment or wrongful dismissal.

5. Customers can take legal actions: In some cases, customers also reach the court against misrepresentations made in the advertisement materials and deceptive trade practices.

6. Enquiry initiated by regulatory authorities: Regulatory bodies like SEBI, Revenue Department, etc., can initiate enquiry against directors.

7. In case of bankruptcy or insolvency: If faced with bankruptcy, creditors can pursue legal action against directors if they think that they have not acted in their best interest.

8. Helps in attracting/retaining talent: Not having a comprehensive D&O may discourage talented employees from joining the company as they know will not be guarded against any legal case if arise in future.

9. D&O claims are not covered under any other policy: Most of the people believe that D&O claims are also covered under other liability insurance plans like professional indemnity.

Question 6.
“A legal compliance program is generally defined as a formal program specifying an organization’s policies, procedures, and actions with an in- lent to prevent and detect violations of laws and regulations”. Comment briefly.
Answer:
A legal compliance program is a set of internal policies and procedures of a company to comply with laws, rules, and regulations or to uphold business reputation. A compliance team examines the rules set forth by government bodies, creates a compliance program, implements it through¬out the company, and enforces adherence to the program.

Legal Compliance programs need to be tailored to the specific company’s needs, there are principles to consider in reviewing a program like:
There should be a strong “tone at the top” from the board and senior management emphasizing the company’s commitment to full compliance with legal and regulatory requirements, as well as internal policies.

There should be clear reporting systems in place both at the employee level and at the management level so that employees understand when and to whom they should report suspected violations and so that management understands the board’s or committee’s informational needs for its oversight purposes.

Question 7.
“Several large companies and financial institutions worldwide no Longer exist today as they neglected the basic rules of Corporate Governance, Risk Management and Control”.
Answer:
The importance of corporate governance in risk management is amply supported by the reasoning of the Kumar Mangalam Bina Committee on Corporate Governance to implement corporate governance in India.

Risk Management is an integral component of corporate governance and good management. There is a growing realization that corporate governance has an impact on enterprise risk management. Several large companies and financial institutions worldwide no longer exist or have been taken over precisely because they neglected the basic rules of risk management and control.

Some common risk management problems in relation to corporate governance that appeared in many financial institutions before and during the crisis according to the OECD (2009) was because of following reasons:

• Risks were frequently not linked to strategy which is a key issue to ensuring that risk management has a focus on the business context;
• Risk definitions are often poorly expressed. Better risk definitions (context, event, consequence) are contrary to a lot of current thinking in risk management which has shorten risk descriptions to the smallest number of words possible;
• Organizations weren’t always in a position to develop intelligent responses to risks;
• Boards didn‘t take stakeholders and guardians into account in detailing responses to risk
• Important parts of the value chain were outsourced to others

Question 8.
“Anticipating future risks is a key element of avoiding or mitigating those risks before they escalate into crisis.” Explain.
Answer:
The company’s risk management structure should include an ongoing effort to assess and analyze the most likely areas of future risk for the company, including how the contours and interrelationships of existing risks may change and how the company’s processes for anticipating future risks are developed.

This includes understanding risks inherent in the company’s strategic plans, risks arising from the competitive landscape and the potential for technology and other developments to impact the company’s profitability and prospects for sustainable and long-term value creation.

Anticipating future risks is a key element of avoiding or mitigating those risks before they escalate into crises. In reviewing risk management, the board or relevant committees should ask the company’s executives to discuss the most likely sources of material future risks and how the company is addressing any significant potential vulnerability.

Question 9.
“Errors and Omissions Insurance is a special type of coverage that protects a Company against claims that a professional service provided, caused client to suffer financial harm due to mistakes on the part of professional or because he may have failed to perform some service.”
Answer:
Professional indemnity insurance is also known as professional liability insurance and also as Errors & Omissions (E&O) insurance. It is a type of liability insurance that works to protect businesses and individuals who provide consultation and services with the compensation for full and hefty costs arising from the loss that they have caused to their client.

The coverage provided by the insurance company focuses on the alleged failure of the service delivery by the Company, which has led to the financial loss due to errors and omissions in the service or consultation.

Some reasons that might make it necessary to have E&O are as under:
High risk of lawsuits: Not having professional indemnity insurance may put a person at high risks as many companies may take advantage of the professionals since they are not completely secured. Moreover, it can put the Company/Professional in a financial loss if a case is filed against them.

Risk of losing business: Many clients prefer those companies which has such insurance for doing business, at times they are keen to know if the Company or any of its employees makes a mistake, whether it will be covered or not.

Question 10.
Taking a case of Crisis Management in corporate houses, throw light on its significance.
Answer:
1. Facebook’s silence about its data breach:
The social media giant reportedly chose to stay silent even though it had known for three years that Cambridge Analytica – the consulting firm hired by President Donald Trump’s 2016 campaign – improperly accessed information on millions of people.

Since then, the company has racked up misstep after misstep. From the failure to issue an immediate statement from Chief Executive Officer Mark Zuckerberg when Facebook finally admitted what happened to hiring a shady opposition research firm to investigate its critics. Facebook was the subject of more trouble when the New York Times reported that it shared even more user data with outside companies than previously acknowledged.

Significance of Crisis Management:
When the news broke, disclosure is the most effective strategy in a crisis because the truth always emerges. Companies and even the government need to explain what happened on their own terms and regain confidence by demonstrating that they have learned a lesson and are taking immediate steps to change course.

2. Coca-Cola PR Crisis Management:
Background:

• The company came under a storm of criticism after The New York Times charged that Coca-Cola was funding obesity research that attempted to disprove the link between obesity and diet and shift the problem to lack of exercise.
• The article says Coca-Cola, desperate to halt sliding sales, financed the new non-profit Global Energy Balance Network. Critics call it a front group created to espouse misinformation and deflect the role of soft drinks in the spread of obesity and Type 2 diabetes.

Kent’s reaction to the crisis:

1. Corporations under fire can look to Kent’s op-editorial for guidance when responding to attacks and considering apologies.
2. Kent outlines the company’s response and admits the company’s misstep while not exactly apologizing in his opinion, Coca-Cola: We’ll Do Better.
3. In a matter-of-fact tone, Kent takes the accusations head-on, acknowledging the accusations that it has deceived the public about its support for scientific research. He defends the company by saying it is attempting to tackle the global obesity epidemic and has always had good intentions.

A New Strategy:

• Kent also admits the company’s strategy “is not working.” “I am disappointed that some actions we have taken to fund scientific research and health and well-being programs have served only to create more confusion and mistrust,” he writes.
• He explains how the company will act going forward. First, he says it will act with even more transparency. The company will publish a list of health and well-being partnerships and research activities it has funded in the past five years on its website and will update the list every six months.
• The company will continue its efforts to provide healthy options, he says, such as waters, lower-calorie and lower-sugar drinks, diet soda and zero-calorie drinks. At the same time, he inserts a sales plug by referring to Coca-Cola’s wide range of beverage options.
• Opinion stresses the company’s commitment to fighting obesity. “We want to get focused on real change, and we have a great opportunity ahead of us,” he says. “We are determined to get this right.”

Kent successfully filled the three O’s of crisis management
Mark Braykovich, vice president at Atlanta-based The Wilbert Group, says Kent successfully filled the three O’s of crisis management: Own up to it. Assuming responsibility at some level usually helps the corporate reputation over the long run. Get the CEO Out front.

The CEO is the best spokesperson for the corporation. Most PR disasters happen when companies shield the CEO, or the CEO appears to have little interest in the problem. Make an Outsized response. Overaction is preferable to small measures or ignoring the critics.

Kent directs the president of Coca-Cola North America to create an oversight committee of independent experts to provide governance on company investments in academic research, and engage experts to explore opportunities for research and health initiatives. Brockovich says he gives Kent an A for using the three O’s.

Conclusion:
Coca-Cola’s response to accusations that it financed a front group to protect its interests at the expense of public health is a case study in PR crisis management. As opined by Coca-Cola CEO Muhtar Kent epitomizes a corporate response that contains the essential elements of effective corporate PR crisis management.

Question 11.
Do General Liability and Professional Liability Ever Cover the Same Claims?
Answer:

• Both policies cover certain liabilities, but they don’t cover the same liabilities. General Liability and Professional Liability Insurance are alike based on the following:
• Both policies deal with (separate) unavoidable liabilities. Small business owners have targets and bear the cost of civil tort if any.
• General Liability and Professional Liability policies work together to mitigate expenses when accidents and oversights lead the business owners in legal trouble.
• Client Contracts would also require either policies.
• In case of certain Construction contractors, there is a requirement by the general contractor to carry one’s own General Liability (and Workers’ Compensation Insurance) coverage.
• Big contracted projects including IT consultants, need Professional Liability coverage to address potential lawsuits.

Question 13.
Write a short note on Enterprise Risk Management (‘ERM’)
Answer:
1. Meaning ERM:
Risk management, also known as Enterprise Risk Management (“ERM”), is a systematic and holistic approach for firms to address all their risks, whether operational, strategic or financial, comprehensively.

2. ERM Focus:
ERM focuses on identifying risks, developing and monitoring a risk management system and reacting to risk events when they occur.

3. ERM an Effort:
As ERM is a firm-wide effort to manage all the firm’s risks, involvement by the company’s board of directors and senior management is imperative.

4. ERM in India a Fundamental Function of the Board:
In India, both the Companies Act, 2013 and the Listing Guidelines view risk management practices as one of the fundamental functions of the board of directors.

5. Committee of Sponsoring Organizations of the Treadway Commission role in ERM:
Beginning in the mid-1980s, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), initially formed in part to study fraudulent financial reporting, began to articulate a risk management framework.

6. In 2004, following several corporate governance scandals around the world, COSO issued a detailed report defining ERM as “… a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”

7. The COSO approach presents eight interrelated components of ERM:

• internal environment (the tone of the organization),
• setting objectives,
• event identification,
• risk assessment,
• risk response,
• control activities,
• information and communications, and
• monitoring

8. The significance of ERM can be seen in the value it creates when effectively implemented and the value it destroys when there are shortcomings in leadership and implementation.

9. ERM facilitates Value creation:
ERM is a critical component of value creation. ERM must play a central role in every substantive business decision. Effective ERM can enable a company to manage potential future events that create uncertainty and respond to uncertainty in a manner that reduces the likelihood of downside surprises. ERM supports a company to improve the quality of risk-taking and thereby, give the company a competitive advantage.

10. Avoiding value destruction:
A company cannot preserve its value if its ERM is below standard. This role of preserving corporate value is far more visible when ERM fails than when it succeeds.

11. Failures in risk management have contributed to some of the most significant scandals and losses suffered by companies.

Question 14.
Reasons to buy a Director and Office Insurance Policy.
Answer:
1. Personal assets of directors are at risk:
If a director has been accused of breaching duties, their personal assets are at risk in case they don’t have any D&O insurance.

2. Defending a legal action is an expensive affair:
The legal costs and expenses in litigations involving directors are usually complex and costly.

3. Investors can file a case against you It may sound unlikely, but things can go downward. If investors believe that they have incurred losses due to mismanagement of the company, they could approach the court to seek compensation. For instance, if any action of a director results in a drop in share price, which leads to loss to shareholders and investors, then there is a high possibility that they may bring a class-action lawsuit against the company and directors.

4. Employees can sue directors:
It is not only shareholders who can file a case against the directors as even employees each the court to challenge the decision of the directors. It is a hard reality that in today’s corporate world, there has been a rise in the number of cases filed by employees, related to sexual harassment or wrongful dismissal. For example, in 2016, a sacked software engineer won case against HCL Tech. The court called his dismissal unlawful and asked the company to reinstate the petitioner with continuity of service and paid full salary along with other benefits.

5. Customers can take legal actions:
In some cases, customers also reach the court against misrepresentations made in the advertisement materials and deceptive trade practices.

6. Enquiry initiated by regulatory authorities:
Regulatory bodies, like SEBI, Revenue Department, etc.; can initiate enquiry against directors.

7. In case of bankruptcy or insolvency:
If faced with bankruptcy, creditors can pursue legal action against directors if they think that they have not acted in their best interest.

8. Helps in attracting/retaining talent:
Not having a comprehensive D&O may discourage talented employees from joining the company as they know will not be guarded against any legal case if arise in future.

9. D&O claims are not covered under any other policy:
It is a belief that D&O claims are also covered under other liability insurance plans like professional indemnity. However, it is not true.

Question 15.
What are international laws and regulations relating to Cyber Security?
Answer:
1. General Data Protection Regulation (GDPR):
The European Union’s (EU’s) General Data Protection Regulation (GDPR), effective from May 2018, raises the regulatory bar, and it sweeps more broadly than some on-EU-based companies may realize.

The GDPR imposes stringent requirements on both data collection and data processing, including increased data security mandates, enhanced obligations to obtain data owner consent, and strict breach notification requirements.
GDPR is extra-territorial in its reach and carries severe penalties for non-compliance-up to 4% of worldwide revenue.

2. Issue of detailed and prescriptive regulations by the United States to protect Consumers Data
In the United States, the New York State Department of Financial Services (DFS) has implemented detailed and prescriptive regulations of its own, requiring covered institutions-entities authorized under New York State banking, insurance or financial services laws to meet strict minimum cybersecurity standards.

The revised regulations require, among other things that covered institutions have in place a cyber-security program designed to protect consumers’ private data, approved by boards of directors or senior corporate officers and accompanied by annual compliance certifications, the first of which was required to be filed on February 15, 2018.

3. Guidance for market disclosures issued by the SEC (Securities Exchange Commission) – 2011
The SEC has turned its attention to market disclosure and breach notification. Since 2011, when the SEC’s Division of Corporation Finance issued interpretive guidance regarding cyber security disclosures, public companies have been required to “disclose the risk of cyber incidents if they are among the most significant factors that make an investment in the company speculative or risky.”

4. SEC 2018
In February 2018, the SEC issued new guidance to clarify its expectations on such disclosures focusing on “reinforcing and expanding upon” the 2011 guidance, advising public companies to evaluate the materiality of cyber risks and incidents and make necessary disclosures in a timely fashion, while warning that the SEC is watching closely.

However, the 2018 guidance explores the board oversight, disclosure controls and procedures, insider trading and selective disclosures. As it regards risk oversight, the 2018 guidance advises that public companies should disclose the role of boards in cyber risk management, at least where cyber risks are material to a company’s business. Therefore, while most boards are likely already engaged in some form of cyber risk oversight, the call by the SEC for more public disclosure may prompt consideration of whether to deepen or sharpen that engagement.

5. SEC to take more aggressive approach on the Enforcement side
On the enforcement side, the SEC has signalled that it may move towards a more aggressive approach, alluding to the feasibility of disclosure-based enforcement actions, amid reports that it is engaged in investigations of companies like Yahoo and Equifax.

In its newly issued guidance, the SEC warns that “directors, officers, and other corporate insiders must not trade a public company’s securities while in possession of material non-public information, which may include knowledge regarding a significant cybersecurity incident experienced by the company.”

Question 16.
What are the different types of crisis?
Answer:
The different types of crisis are provided below
1. Natural Crisis
Disturbances in the environment and nature lead to natural crises. Such events are generally beyond the control of human beings. Tornadoes, Earthquakes, Hurricanes, Landslides. Tsunamis. Flood, Drought all result in natural disasters.

2. Technological Crisis
Technological crisis arises as a result of failure in technology. Problems in the overall systems lead to technological crises. Breakdown of machines, corrupted software and so on give rise to technological crisis.

3. ConfrontatIon Crisis

• Confrontation crises arise when employees fight amongst themselves. Individuals do not agree to each other and eventually depend on non-productive acts Like boycotts, strikes for indefinite periods and so on.
• In such a type of crisis, employees disobey superiors; give them ultimatums and force them to accept their demands.
• Internal disputes, ineffective communication and Lack of coordination give rise to confrontation crisis.

4. CrisIs of Malevolence

• Organizations face crisis of malevolence when some notorious employees take the help of criminal activities and extreme steps to fulfil their demands.
• Acts like kidnapping company’s officials, false rumours all lead to crisis of malevolence.

5. Crisis of Organizational Misdeeds

• Cases of organizational misdeeds arises when management takes certain decisions knowing the harmful consequences of the same towards the stakeholders and external parties.
• In such cases, superiors ignore the after-effects of strategies and implement the same for quick results.

Crisis of organizational misdeeds can be further classified into following three types:
Crisis of Skewed Management Values: Crisis of Skewed Management Values arises when management supports short term growth and ignores broader issues.

Crisis of Deception: Organizations face crisis of deception when management purposely tampers data and information. Management makes fake promises and wrong commitments to the customers. Communicating wrong information about the organization and products lead to crisis of deception.

Crisis of Management Misconduct: Organizations face crisis of management misconduct when management indulges in deliberate acts of illegality like accepting bribes, passing on confidential information and so on.

6. Crisis due to Workplace Violence:
Such a type of crisis arises when employees are indulged in violent acts such as beating employees, superiors in the office premises itself.

7. Crisis due to Rumours:
Spreading false rumours about the organization and brand lead to crisis. Employees must not spread anything which would tarnish the image of their organization.

8. Bankruptcy:
A crisis also arises when organizations fail to pay its creditors and other parties. Lack of fund leads to crisis.

9. Crisis Due to Natural Factors:
Disturbances in environment and nature such as hurricanes, volcanoes, storms, floods; droughts, earthquakes etc. result in crisis.

10. Sudden Crisis:
As the name suggests, such situations arise all of a sudden and on an extremely short notice. Managers do not get warning signals and such a situation is in most cases beyond any one’s control.

11. Smouldering Crisis:
Neglecting minor issues, in the beginning, lead to smouldering crisis later. Managers often can foresee crisis but they should not ignore the same and wait for someone else to take action. Warn the employees immediately to avoid such a situation.

Question 17.
What are the special considerations regarding Cyber Security Risk?
Answer:
1. Increasing dependency of technology increases chances to Cyber Crime:
The ever-increasing dependence on technological advances that characterizes all aspects of business and modern life has been accompanied by a rapidly growing threat of cybercrime, the cost of which, according to a 2017 report by Herjavec Group, is expected to grow to more than $6 trillion annually by 2021.

As recent examples (e.g., the hacking of computer networks belonging to the SEC and to Equifax) have highlighted, network security breaches, damage to IT infrastructure and theft of personal data, trade secrets and commercially sensitive information are omnipresent risks that pose a significant financial and reputational threat to companies of all kinds. With computing devices increasingly embedded in everyday items and connected to the “Internet of Things,” virtually all company functions across all industries are exposed to cyber security risk.

2. Attention towards Cyber Security Risk:
In light of the growing number of successful cyber-attacks on even the most technologically sophisticated entities, lawmakers and regu¬lators in the United States and abroad have increased their attention to cybersecurity risk.

3. Guidance by General Data Protection Regulation (GDPR):
In the United States, regulatory and enforcement activity relating to cybersecurity has continued to ramp up at the state level. Internationally, the European Union’s General Data Protection Regulation (GDPR) will take effect in May 2018, significantly increasing data handling requirements for companies with even a minimal European nexus. Companies are thus facing a two-front storm, with regulatory risks compounding the security threat.

4. Implementation of comprehensive cyber security risk mitigation pro-grams with recent defensive technologies having adequate focus on security procedures:
In response, engaged corporate leaders should implement comprehensive cyber security risk mitigation programs, deploying the latest defensive technologies without losing focus on core security procedures like patch installation and employee training, executing data and system testing procedures, implementing effective and regularly exercised cyber incident response plans, and ensuring that the board is engaged in cyber risk oversight.

5. As cyber security risk continues to rise in prominence, so too has the number of companies that have begun to specifically situate cyber security and cyber risk within their internal audit function.

6. Role of Director to ensure technical expertise and relevant time for Internal Audit Function:
Directors should assure themselves that their company’s internal audit function is performed by individuals who have appropriate technical expertise and sufficient time and resources to devote to cyber security risk. Further, the internal audit team should understand and periodically test the company’s risk mitigation strategy, and provide timely reports on cyber security risk to the board’s audit committee.

7. Boards preparedness for Cyber security breach:
In satisfying their risk oversight function with respect to cyber security, boards should evaluate their company’s preparedness for a possible cyber security breach, as well as the company’s action plan in the event that a cyber security breach occurs.

Question 18.
Write note on “A Strategic Cyber-Roadmap for the Board” released in November 2016.
Answer:
With respect to preparation by the boards for a possible cyber security breach the board should consider the following actions, several of which are also addressed in The Conference Board’s “A Strategic Cyber-Roadmap for the Board” released in November 2016:
1. Identify the company’s “Crown Jewels”-Le., the company’s mission-critical data and systems-and work with management to apply appropriate measures outlined in the National Institute of Standards and Technology (NIST) Framework;

2. Ensure that an actionable cyber incident response plan is in place that, among other things, identifies critical personnel and designates responsibilities; includes procedures for containment, mitigation and continuity of operations; and identifies necessary notifications to be issued as part of a pre-existing notification plan;

3. Ensure that the company has developed effective response technology and services (e.g., off-site data backup mechanisms, intrusion detection technology and data loss prevention technology).

4. Ensure that prior authorizations are in place to permit network monitoring.

5. Ensure that the company’s legal counsel is conversant with technology systems and cyber incident management to reduce response time; and

6. Establish relationships with cyber information sharing organizations and engage with law enforcement before a cyber-security incident occurs.

Question 19.
Write a short note on “Scenario of D&O Policy in India”.
Answer:
I. India – OpenIng and Growth of Economy:
Almost 25 years have passed since India ushered in a new era of commercial liberalization and reform. This continuous and gradual opening up of the economy, driven by a rapid growth in domestic consumer demand, has resulted in an influx of foreign investment, which in turn has strengthened private Indian companies.

2. Lack of Professionalism in Indian Companies:
Economic growth also has its dark side. India is a victim of corporate fraud and scams. Significance cultural differences in Indian companies function vis-à-vis their international counterparts, Indian companies are often seen as less professional.

3. Trends Prevalent In Indian Companies:
Though the scenario may be changing, the ‘family business’ outlook of many Indian enterprises and an occasionally backward approach to various compliance and disclosure requirements continue to prevail. Siphoning of funds through related-party transactions, accounting irregularities, and corruption are just a few of the common, unfortunate trends that are prevalent in Indian companies.

4. Management and Promoted driven Frauds In India:
In the case of Satyam. Lilliput, or NSEL, numerous instances of Management and promoter-driven fraud have come to light.

The concern surrounding director liability has also been highlighted by the arrests of Stefan Schlipf, the managing director of BMW India Financial Services, and William Pinckney, managing director and chief executive officer of Amway India, along with two other directors.

5. Liability of Corporate Directors
The ubiquitous issue of corruption and the high risk of internal fraud raise serious concerns about the liability of corporate directors. American litigators representing Indian companies or advising clients interested in becoming corporate officers in India would advise on the director and officer liability under Indian law.

6. Director liability in India can be divided into two principal areas:

1. liability under the Companies Act of 1956 (the 1956 Act), which has now transitioned to the Companies Act of 2013 (the 2013 Act); and
2. liability under other Indian statutes. There has been a seminal shift in the Indian corporate legal regime with the enactment of the 2013 Act and more recent amendments.

7. Critical failure of Indian corporate law highlighted:
Critical failure of Indian corporate law highlighted during corporate and financial scams, such as the Harshad Mehta episode or the Satyam fiasco. Various investors also discovered that money had been siphoned off by promoters through related-party or customer-vendor transactions.

8. Directors and officers (D&O) liability insurance:
Directors and officers (D&O) liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of such a suit.

9. Applicability of Directors and officers (D&O) liability insurance:
Directors and officers liability insurance applies to anyone who serves as a director or an officer of a for-profit business or non-profit organization.

A directors and officers liability policy insures against personal losses, and it can also help reimburse a business or non-profit for the legal fees or other costs incurred in defending such individuals against a lawsuit.

10. Payment of Directors and officers (D&O) liability insurance:
Directors and officers liability insurance is paid to directors and officers of a company, or to the organization(s) itself, for losses or reimbursement of defence costs if a legal action is brought against them. Coverage can extend to criminal and regulatory investigations/trials defence costs. Civil and criminal actions are often brought against directors and officers simultaneously.

D&O insurance has become closely associated with broader management liability insurance, which covers liabilities of the corporation itself as well as the personal liabilities for the directors and officers of the corporation.

11. Increased liability under the Companies Act, 2013 beneficial for accountability of directors:
Shareholder disputes, the increased liability under the 2013 Act are beneficial to increase pressure on defaulting directors, nominating shareholders, or promoters. Resignation may protect a director from subsequent defaults, an erstwhile director may still continue to be liable for any defaults that took place during his or her tenure under section 168(2) of the 2013 Act.

The Companies Act, 2013 prompted concerns about the role, accountability, and responsibility of non-executive, nominee, and independent directors, who could be caught on the wrong side of the company’s disputes.

Question 20.
Enumerate what is Professional Liability Insurance? How does a Professional Liability Insurance Work?
Answer:
Professional liability insurance – How does it work:
1. Professional liability insurance policies are usually arranged on a claims-made basis, which means coverage is good only for claims made during the policy period.

2. Typical professional liability policies will indemnify the insured against loss arising from any claim or claims made during the policy period by reason of any covered error, omission or negligent act committed in the conduct of the insured’s professional business during the policy period.

3. Incidents occurring before the coverage was activated may not be covered, although some policies may include retroactive date.

4. Coverage does not include criminal prosecution, nor all forms of legal liability under civil law, only those listed in the policy.

5. Cyber liability, covering data breaches and other technology issues, may not necessarily be included in core policies. However, insurance that covers data security and other technology security-related issues is available as a separate policy.

6. Some professional liability policies tightly worded. Number of policy wordings are designed to satisfy a stated minimum approved wording, which makes them easier to compare, others differ dramatically in the coverages they provide.

7. Example, breach of duty may be included if the incident occurred and was reported by the policyholder to the insurer during the policy period.

8. Wordings with major legal differences can be confusing. Example, coverage for “negligent act, error or omission” indemnifies the policyholder against loss/circumstances incurred only as a result of any professional error or omission, or negligent act (Le., the modifier “negligent” does not apply to all three categories, though any non-legal reader might assume that it did).

9. Meanwhile, a “negligent act, negligent error or negligent omission” clause is a much more restrictive policy, which would deny coverage in a lawsuit alleging a non-negligent error or omission.

Question 21.
Explain what are Legal Compliance Programs.
Answer:
1. Appropriate review of the company’s legal compliance programs Senior management should provide the board or committee with an appropriate review of the company’s legal compliance programs and how they are designed to address the company’s risk profile and detect and prevent wrongdoing.

2. Compliance programs to be well-tailored to the specific needs of the company
The compliance programs will need to be tailored to the specific company’s needs, there are a number of principles to consider in reviewing a program. There should be a strong “tone at the top” from the board and senior management emphasizing the company’s commitment to full compliance with legal and regulatory requirements, as well as internal policies.

A well-tailored compliance program and a culture that values ethical conduct continue to be critical factors that the Department of Justice (DOJ) will assess under the Federal Sentencing Guidelines in the event that corporate personnel engage in misconduct.

3. In addition, while Deputy Attorney General Rosenstein has announced a review of all DO enforcement guidance memos, including the 2015 “Yates memo” on holding individuals accountable for wrongdoing, we expect that an emphasis on individual accountability will remain a key feature of the enforcement landscape, highlighting the continued importance of companies swiftly and responsibly investigating and remediating indications of possible misconduct.

4. A compliance program should be designed by persons with relevant expertise and will typically include interactive training as well as written materials.

5. Compliance policies should be reviewed periodically to assess their effectiveness and to make any necessary changes. Policies and procedures should fit with business realities.

6. There should be consistency in enforcing stated policies through appropriate disciplinary measures.

7. Clear reporting systems in place both at the employee level and at the management level so that employees understand when and to whom they should report suspected violations and so that management understands the board’s or committee’s informational needs for its oversight purposes.

8. A company may choose to appoint a chief compliance officer and/ or constitute a compliance committee to administer the compliance program, including facilitating employee education and issuing periodic reminders. If there is a specific area of compliance that is critical to the company’s business, the company may consider developing a separate compliance apparatus devoted to that area.

Question 22.
What are the challenges faced by the Board of Directors in developing the ERM
Answer:
Challenges facing Boards of Directors in developing ERM:
Over the past several years, corporate India has become much more engaged with and sensitized to ERM. Leading companies have formed risk management and compliance teams that are integrated within the firm and that provide valuable information to the board. Nevertheless, there is room for improvement.
Indian boards face significant challenges in designing and implementing an effective ERM system, including:

(a) Effectively linking risk and strategy:
Integrating risk management into the overall corporate strategy is a challenge for many India firms. The challenge is to have an ERM system that encompasses a process capable of being applied in strategy setting across the enterprise. “Effective risk management is not about eliminating risk-taking, which is a fundamental driving force in business and entrepreneurship.” In other words, taking appropriate risk needs to be at the heart of corporate strategy. The board must understand and guide the company’s appetite and ability to take risk, and communicate the same to the company’s risk management team.

Operationally, ‘tying risk with strategy’ means that risk managers must be integrated in implementing the company’s strategy and must not be separated from the board and management so that the actual risk taken is tied to the company’s risk appetite and ability. ERM programs must be developed with input from various functions in the organization, such as finance, sales, legal etc.

(b) Implementing cost-effective risk management for small and medium-sized enterprises:
While the costs of risk management failures can be high, designing and implementing efficient ERM can also be quite costly, especially for small and medium-sized firms.

Hiring consultants or the necessary staff to develop stress-testing and early warning systems to alert the board regarding significant risks can be difficult to do in smaller companies.
While large firms can establish a ‘chief risk officer’ function with direct report to the board, doing so is much harder for smaller companies.

(c) Addressing all major areas of risk: ERM requires a firm to take a Portfolio view of risk;
Boards must consider how various risks inter-relate, rather than treating each business and risk individually. This is a significant challenge for many boards.

(d) Mitigating new risks:
In India, many complex areas of risks have emerged in the last decade or so, which has made risk management particularly challenging. For example, some traditional areas of risk, such as political instability and strikes and unrest, appear to have subsided while others, such as information and cyber security as well as terrorism and insurgency, have increased in prominence.

Companies in a wide variety of industries have experienced the theft of data and sensitive information. For companies in major cities, the threat of terror attacks has become a growing cause for concern, which can be hard to manage by the company itself. According to a 2015 survey, the top five risks for Indian firms include:

• corruption, bribery and corporate fraud;
• information and cyber security;
• terrorism and insurgency;
• business espionage; and
• crime.

Resolution of Corporate Disputes Non-Compliances & Remedies Notes

Inspection, Search, Seizure and Arrest, Penalties, Demand and Recovery Under GST – Advanced Tax Laws and Practice Important Questions

Question 1.
Which are the applicable provisions for the purpose of recovery of tax short paid or not paid or amount erroneously refunded or input tax credit wrongly availed or utilized under CGST Act?
Answer:
Section 73 and Section 74 of the CGST Act, 2017 deals with the recovery of tax short paid or not paid or amount erroneously refunded or input tax credit wrongly availed or utilized.

In particular, Section 73 of the CGST Act, 2017 deals with the cases where there is no invocation of fraud/suppression/mis-statement etc. and Section 74 deals with cases where the provisions related to fraud/suppression/ mis-statement etc. are invoked.

Question 2.
Green & Green Private Limited has been issued a show cause notice (SCN) on 15th March, 2019 under section 73(1) of the CGST Act, 2017 on account of short payment of tax for the month of April, 2018. Green & Green Private Limited contends that the show cause notice so issued is time-barred in law. You are required to examine the technical veracity of the contention of Green & Green Private Limited in the context of provisions of the CGST Act, 2017.
Answer:
The show cause notice (SCN) under section 73(1) of the CGST Act, 2017 shall be issued at least 3 months prior to the time limit specified for issuance of order under section 73(10) and adjudication order under section 73(10) has to be issued within 3 years from the due date for furnishing of annual return for the financial year to which the short-paid/not paid tax relates to.

Thus, SCN under section 73(1) of the CGST Act, 2017 can be issued within 2 years and 9 months from the due date for furnishing of annual return for the financial year to which the short-paid/not paid tax relates to.

The SCN has been issued for the period April, 2018 which falls in the financial year 2018-19. Due date for furnishing annual return for the FY 2018-19 is 31-12-2019 and 3 year’s period from the due date of filing annual return lapses on 31-12-2022.

Thus, SCN under section 73(1) ought to have been issued latest by 30-9-2022, which in the given case, the notice has been issued on 15-3-2019, and therefore the same is in time. The contention of Green & Green Private Limited that the SCN is time barred is wrong.

Question 3.
(i) Deepak Garg started supply of goods within the state of Rajasthan from 1st December 2018. His turnover exceeded ₹20 lakh on 25th January 2019. However, he didn’t apply for registration. Determine the amount of penalty, if any, that may be imposed on Deepak Garg under CGST Act, 2017 on 31st March 2019, if the tax evaded as on said date, on account of failure to obtain registration is ₹8,000.
(ii) Kishore, an unregistered person under GST, purchases the goods supplied by Sanjay who is a registered person without receiving a tax invoice and thus helps in tax evasion. Determine maximum amount of penalty that may be imposed on Kishore under CGST Act, 2017.
Answer:
(i) Under section 122(1) of CGST Act, 2017 where a taxable person who is liable to be registered under this Act but fails to obtain registration, shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded whichever is higher.

Hence Deepak Garg is liable for penalty of ₹10,000

(ii) Under section 122(3) of the CGST Act, 2017 any person who aids or abets any of the offences specified in clauses (i) to (xxi) of sub-section (1), he/she shall be liable to a penalty which may extend to twenty five thousand rupees. Hence, Kishore is liable for maximum penalty of ₹25,000 since he is helping in the tax evasion which is an offence under the CGST Act, 2017.

Question 4.
Mrs, Poomima started a business in supply of goods on 12-12-2017 at Salem, Tamil Nadu. During the year ended 31-3-2018, the details of the supplies effected at her Chennai office are as under:
(a) Supply of Taxable goods within the state: ₹16,00,000
(b) Supply of Exempt goods ₹5,00,000
She has not taken any GST registration. Determine the amount of penalty, if any, which may be imposed on her on 31-3-2018. In respect of taxable goods, SGST is 6% and CGST is 6%.
Note: Assume that she crossed the ? 20,00,000 limit on 25-1-2018.
Answer:
In given case, aggregate turnover of Financial Year 2017-18 is ₹21,00,000 (₹16,00,000 + ₹5,00,000). Where the aggregate turnover of a supplier making supplies exceeds ₹20 lakhs in a financial Year, he is liable to be registered under the Act of the concern state or union territory as the case may be. The said supplier must apply for registration within 30 days on which he becomes liable for registration.

However, in the given case, Mrs. Poornima became liable to registration on 25-1-2018, she did not apply for registration within 30 days of becoming liable to registration.

Section 122(1)(xi) of the CGST Act, 2017 enjoins that a taxable person who is liable to be registered under the CGST Act, 2017 but fails to obtain registration shall be liable to pay penalty of

(a) ₹10,000; or;
(b) An amount equivalent to the tax evaded. Whichever is higher.

In the given case, (b) is 12% of ₹1,00,000 i.e. ₹12,000. Hence a sum of ₹12,000 will be levied as penalty for failure to get himself registered.

Note:
GST is payable only when a person is registered/becomes liable to register under GST. Hence, GST liability in this case would arise only on Turnover beyond ₹20,00,000. Hence, it is computed on ₹1,00,000. It is assumed that all supplies after 25-1-2018 are taxable supplies.

Question 5.
Explain the concept of recovery in instalments under Section 80 of CGST Act 2017 giving the circumstances in which such facility can be allowed and will not be allowed to the defaulter.
Answer:
Recovery in instalments (Sections 80 of the CGST Act, 2017)

Commissioner can allow payment with interest by defaulter in monthly instalments not exceeding 24 instalments.

In case of default in payment of any one instalment on its due date, the whole outstanding balance payable on such date shall become due.

For seeking instalment facility, taxable persons can file application electronically in form GST DRC-20.

The instalment facility will not be allowed if:

The taxable person has already defaulted on the payment of any amount under GST law and recovery process is already undergoing;
The taxable person has not been allowed to make payment in instalments in the preceding financial year under GST law; and
The amount for which instalment facility is sought is less than ₹25,000.

Question 6.
What are the modes of recovery of tax available to the proper officer under GST laws?
Answer:
Section 79 of CGST Act, 2017 deals with the modes of recovery of dues. In terms of the said provision, the proper officer may recover the dues in following manner:

(a) Deduction of dues from the amount owned by the tax authorities payable to such person.

(b) Recovery by way of detaining and selling any goods belonging to such person.

(c) Recovery from other person, from whom money is due or may become due to such person or who holds or may subsequently hold money for or on account of such person.

(d) Distrain any movable or immovable property belonging to such person, until the amount payable is paid. If the dues not paid within 30 days, the said property is to be sold and with the proceeds of such sale the amount payable and cost of sale shall be recovered;

(e) Through the Collector of the district in which such person owns any property or resides or carries on his business, as if it was an arrear of land revenue;

(f) By way of an application to the appropriate Magistrate who in turn shall proceed to recover the amount as if it were a fine imposed by him;

(g) Through enforcing the bond/instrument executed under this Act or any rules or regulations made there under;

(h) CGST arrears can be recovered as an arrear of SGST and vice versa.

Question 7.
What is the meaning of the term “Search”?
Answer:
The term ‘search’ has not been expressly defined in the GST statutes. However, the powers of the GST officers to search any premises have been contained in section 67 of the CGST Act, 2017.

Section 67(2) of the CGST Act, 2017 provides that where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things.

Further, section 67(10) of the CGST Act, 2017 provides that the provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to search and seizure, shall, so far as may be, apply to search and seizure under this section subject to the modification that sub-section (5) of section 165 of the said Code shall have effect as if for the word “Magistrate”, wherever it occurs, the word “Commissioner” were substituted.

Question 8.
What are the powers of the proper officer during the search?
Answer:
The officer authorised under to carry out inspection shall have the power to seal or break open the door of any premises or to break open any almirah, electronic devices, box, receptacle in which any goods, accounts, registers or documents of the person are suspected to be concealed, where access to such premises, almirah, electronic devices, box or receptacle is denied. (Section 67(4) of the CGST Act).

Question 9.
Who can order for Search and Seizure under the provisions of CGST Act?
Answer:
An officer of the rank of Joint Commissioner or above can authorize an officer in writing to carry out search and seize goods, documents, books or things. Such authorization can be given only where the Joint Commissioner has reasons to believe that any goods liable to confiscation or any documents or books or things relevant for any proceedings are hidden in any place.

Question 10.
What is a Search Warrant and what are its contents?
Answer:
The written authority to conduct search is generally called search warrant. The competent authority to issue search warrant is an officer of the rank of Joint Commissioner or above. A search warrant must indicate the existence of a reasonable belief leading to the search. Search Warrant should contain the following details:

• the violation under the Act,
• the premise to be searched,
• the name and designation of the person authorized for search,
• the name of the issuing officer with full designation along with his round seal,
• date and place of issue,
• serial number of the search warrant,
• period of validity i.e. a day or two days etc.

Question 11.
What is the meaning of the term “Inspection”? Who can order for carrying out “Inspection” and under what circumstances?
Answer:
The term ‘Inspection’ has not been expressly defined under the GST statutes. However, section 67(1) of the CGST Act, 2017 provides that where the proper officer, not below the rank of Joint Commissioner, has reasons to believe that

(a) a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act; or

(b) any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act,

He may authorise in writing any other officer of central tax to inspect any places of business of the taxable person or the persons engaged in the business of transporting goods or the owner or the operator of warehouse or godown or any other place.

Question 12.
What powers can be exercised by an officer during valid search?
Answer:
An officer carrying out a search has the power to search for and seize goods (which are liable to confiscation) and documents, books or things (relevant for any proceedings under CGST/SGST Act) from the premises searched. During search, the officer has the power to break open the door of the premises authorized to be searched if access to the same is denied.

Similarly, while carrying out search within the premises, he can break open any almirah or box if access to such almirah or box is denied and in which any goods, account, registers or documents are suspected to be concealed. He can also seal the premises if access to it denied.

Question 13.
Can a CGST/SGST officer access business premises under any other circumstances?
Answer:
Yes. Access can also be obtained in terms of Section 65 of CGST/SGST Act. This provision of law is meant to allow an audit party of CGST/SGST or C&AG or a cost accountant or chartered accountant nominated under section 66 of CGST/SGST Act, access to any business premises without issuance of a search warrant for the purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

However, a written authorization is to be issued by an officer of the rank of Commissioner of CGST or SGST. This provision facilitates access to a business premise which is not registered by a taxable person as a principal or additional place of business but has books of account, documents, computers etc. which are required for audit or verification of accounts of a taxable person.

Question 14.
What is meant by the term ‘Seizure’?
Answer:
The term ‘seizure’ has not been specifically defined in the GST Law. In Law Lexicon Dictionary, ‘seizure’ is defined as the act of taking possession of property by an officer under legal process. It generally implies taking possession forcibly contrary to the wish of the owner of the property or who has the possession and who was unwilling to part with the possession.

Question 15.
What are the safeguards provided in GST Act(s) in respect of Search or Seizure?
Answer:
Certain safeguards are provided in section 67 of CGST/SGST Act in respect of the power of search or seizure. These are as follows:
(i) Seized goods or documents should not be retained beyond the period necessary for their examination;

(ii) Photocopies of the documents can be taken by the person from whose custody documents are seized;

(iii) For seized goods, if a notice is not issued within six months of its seizure, goods shall be returned to the person from whose possession it was seized. This period of six months can be extended on justified grounds up to a further period of maximum six months;

(iv) An inventory of seized goods shall be made by the seizing officer;

(v) Certain categories of goods to be specified under CGST Rules (such as perishable, hazardous etc.) can be disposed of immediately after seizure;

(vi) Provisions of Code of Criminal Procedure, 1973 relating to search and seizure shall apply. However, one important modification is in relation to sub-section (5) of section 165 of Code of Criminal Procedure – instead of sending copies of any record made in course of search to the nearest Magistrate empowered to take cognizance of the offence, it has to be sent to the Principal Commissioner/Commissioner of CGST/ Commissioner of SGST.

Question 16.
What is the lime limit for issuance of SCN in respect of seized goods?
Answer:
The SCN in respect of seized goods is to be issued within six months from the date of seizure of goods, otherwise the goods shall be returned to the person from whose possession they were seized. However, the period of six months, on sufficient cause being shown can be extended by the proper officer for a further period not exceeding six months. (Section 67(7) of the Act.)

Question 17.
When can the proper officer authorize ‘arrest’ of any person under CGST/SGST Act?
Answer:
The Goods and Services Tax Authorities are empowered under section 69 of CGST Act, 2017 to arrest persons accused of offences specified under Section 132 of the CGST Act, 2017 (‘CGST Act’). The Commissioner of CGST(Central Goods and Services Tax), by order, can authorize any CGST officer to arrest a person, if he has reasons to believe that such person has committed an offence specified in clause (a) or clause (b) or clause (c) or clause (d) of section 132(1) of CGST Act, 2017 which is punishable under H clause (i) or (it) of section 132(1) or section 132(2) of the CGST Act, 2017.

This essentially means that a person can be arrested only when the amount of tax evaded or the amount of input tax credit wrongly availed or utilized or the amount of refund wrongly taken exceeds ₹1 Crore (imprisonment for a term up to 1 year with fine) or ₹5 Crores (imprisonment for a term up to 5 years with fine).

The word arrest usually comes within the realm of criminal jurisdiction. Offences can be classified into 3 major categories:

1. Tax evasion
2. Wrong/fraudulent availing of Input tax credit
3. Wrong/fraudulent obtaining of Refund

The punishment for offences in Section 132(a), (b), (c), (d) of CGST, 2017 where the quantum involved is more than 5 crore is cognizable and non-bailable. All other offences with lesser quantum are non-cognizable and bailable.

If the Commissioner of CGST/SGST believes a person has committed an offence u/s 132 of CGST Act, he can be arrested by any authorised CGST/SGST officer. The arrested person will be informed about the grounds of his arrest. He will appear before the magistrate within 24 hours of arrest in case of cognizable offence.

Question 18.
What are cognizable and non-cognizable offences under CGST Act?
Answer:
In section 132 of CGST Act, 2017 it is provided that the offences relating to taxable goods and/or services where the amount of tax evaded or the amount of input tax credit wrongly availed or the amount of refund wrongly taken exceeds ₹5 crores, shall be cognizable and non-bailable. Other offences under the act are non-cognizable and bailable.

Question 19.
When can the proper officer issue summons under CGST Act?
Answer:
Section 70 of CGST/SGST Act, 2017 gives powers to a duly authorized CGST/SGST officer to call upon a person by issuing a summon to present himself before the officer issuing the summon to either give evidence or produce a document or any other thing in any inquiry which an officer is making.

A summons to produce documents or other things may be for the production of certain specified documents or things or for the production of all documents or things of a certain description in the possession or under the control of the person summoned.

Question 20.
What can be the consequences of non-appearance to summons?
Answer:
The proceeding before the official who has issued summons is deemed to be a judicial proceeding. If a person does not appear on the date when summoned without any reasonable justification, he can be prosecuted under section 174 of the Indian Penal Code (IPC).

If he absconds to avoid service of summons, he can be prosecuted under section 172 of the IPC and in case he does not produce the documents or electronic records required to be produced, he can be prosecuted under section 175 of the IPC. In case he gives false evidence, he can be prosecuted under section 193 of the IPC. In addition, if a person does not appear before a CGST/ SGST officer who has issued the summons, he is liable to a penalty up to ? 25,000 under section 122(3)(d) of CGST/SGST Act.

Question 21.
What are the guidelines for issue of summons?
Answer:
The Central Board of Indirect Taxes and Customs (CBIC) has issued guidelines from time to time to ensure that summons provisions are not misused in the field. Some of the important highlights of these guidelines are given below:

(i) summons is to be issued as a last resort where assessees are not co-operating and this section should not be used for the top management;

(ii) the language of the summons should not be harsh and legal which causes unnecessary mental stress and embarrassment to the receiver;

(iii) summons by Superintendents should be issued after obtaining prior written permission from an officer not below the rank of Assistant Commissioner with the reasons for issuance of summons to be recorded in writing;

(iv) where for operational reasons, it is not possible to obtain such prior written permission, oral/telephonic permission from such officer must be obtained and the same should be reduced to writing and intimated to the officer according such permission at the earliest opportunity;

(v) in all cases, where summons are issued, the officer issuing summons should submit a report or should record a brief of the proceedings in the case file and submit the same to the officer who had authorized the issuance of summons;

(vi) senior management officials such as CEO, CFO, General Managers of a large company or a Public Sector Undertaking should not generally be issued summons at the first instance. They should be summoned only when there are indications in the investigation of their involve¬ment in the decision-making process which led to loss of revenue.

Question 22.
What are the precautions to be observed while issuing summons?
Answer:
The following precautions should generally be observed when summoning a person:

(i) A summon should not be issued for appearance where it is not justified. The power to summon can be exercised only when there is an inquiry being undertaken and the attendance of the person is considered necessary.

(ii) Normally, summons should not be issued repeatedly. As far as practicable, the statement of the accused or witness should be recorded in minimum number of appearances.

(iii) Respect the time of appearance given in the summons. No person should be made to wait for long hours before his statement is recorded except when it has been decided very consciously as a matter of strategy.

(iv) Preferably, statements should be recorded during office hours; however, an exception could be made regarding time and place of recording statement having regard to the facts in the case.

Question 23.
What are the prescribed offences under CGST/SGST Act?
Answer:
The CGST/SGST Act codifies the offences and penalties in Chapter XVI. The Act lists 21 offences in section 122 of CGST Act, 2017, apart from the penalty prescribed under section 10 for availing compounding by a taxable person who is not eligible for it. The said offences are as follows:-

1. Making a supply without invoice or with false/incorrect invoice;
2. Issuing an invoice without making supply;
3. Not paying tax collected for a period exceeding three months;
4. Not paying tax collected in contravention of the CGST/SGST Act for a period exceeding 3 months;
5. Non-deduction or lower deduction of tax deducted at source or not depositing tax deducted at source under section 51;
6. Non-collection or lower collection of or non-payment of tax collectible at source under section 52;
7. Availing/utilizing input tax credit without actual receipt of goods and/ or services;
8. Fraudulently obtaining any refund;
9. Availing/distributing input tax credit by an Input Service Distributor in violation of Section 20;
10. Furnishing false information or falsification of financial records or furnishing of fake accounts/documents with intent to evade payment of tax;
11. Failure to register despite being liable to pay tax;
12. Furnishing false information regarding registration particulars either at the time of applying for registration or subsequently;
13. Obstructing or preventing any official in discharge of his duty;
14. Transporting goods without prescribed documents;
15. Suppressing turnover leading to tax evasion;
16. Failure to maintain accounts/documents in the manner specified in the Act or failure to retain accounts/documents for the period specified in the Act;
17. Failure to furnish information/documents required by an officer in terms of the Act/Rules or furnishing false information/documents during the course of any proceeding;
18. Supplying/transporting/storing any goods liable to confiscation;
19. Issuing invoice or document using GSTIN of another person;
20. Tampering/destroying any material evidence;
21. Disposing of/tampering with goods detained/seized/attached under the Act.

Question 24.
What is meant by the term penalty?
Answer:
The word “penalty” has not been defined in the CGST/SGST Act but judicial pronouncements and principles of jurisprudence have laid down the nature of a penalty as: a temporary punishment or a sum of money imposed by statute, to be paid as punishment for the commission of a certain offence; a punishment imposed by law or contract for doing or failing to do something that was the duty of a party to do.

Question 25.
What is the quantum of penalty provided for in the CGST/SGST Act?
Answer:
Section 122(1) of CGST Act, 2017 provides that any taxable person who has committed any of the offences mentioned in section 122 shall be punished with a penalty that shall be higher of the following amounts: The amount of tax evaded, fraudulently obtained as refund, availed as credit, or not deducted or collected or short deducted or short collected; or; A sum of ₹10,000.

Further Section 122(2) of CGST Act, 2017 provides that any registered person who has not paid tax or makes a short payment of tax on supplies shall be a liable to penalty which will be the higher of: 10% of the tax not paid or short paid; or; ₹10,000.

Question 26.
Is any penalty prescribed for any person other than the taxable person?
Answer:
Yes. Section 122(3) of CGST Act, 2017 provides for levy of penalty extending to ₹25,000 for any person who aids or abets any of the 21 offences, deals in any way (whether receiving, supplying, storing or transporting) with goods that are liable to confiscation, receives or deals with supply of services in contravention of the Act, fails to appear before an authority who has issued a summon, fails to issue any invoice for a supply or account for any invoice in his books of account.

Question 27.
What action can be taken for transportation of goods without valid documents or attempted to be removed without proper record in books?
Answer:
If any person transports any goods or stores any such goods while in transit without the documents prescribed under the Act (i.e. invoice and a declaration) or supplies or stores any goods that have not been recorded in the books or accounts maintained by him, then such goods shall be liable for detention along with any vehicle on which they are being transported.

Where owner comes forward:
Such goods shall be released on payment of the applicable tax and penalty equal to 100% tax or upon furnishing of security equivalent to the said amount. In case of exempted goods, penalty is 2% of value of goods or ₹25,000 whichever is lesser.

Where owner does not come forward:
Such goods shall be released on payment of the applicable tax and penalty equal to 50% of value of goods or upon furnishing of security equivalent to the said amount. In case of exempted goods, penalty is 5% of value of goods or ₹25,000 whichever is lesser.

Question 28.
What is meant by confiscation?
Answer:
The word ‘confiscation’ has not been defined in the Act. The concept is derived from Roman law wherein it meant seizing or taking into the hands of emperor, and transferring to Imperial “fiscus” or Treasury. The word “confiscate” has been defined in Aiyar’s Law Lexicon as to “appropriate (private property) to the public treasury by way of penalty; to deprive of property as forfeited to the State.” In short in means transfer of the title to the goods to the Government.

Question 29.
When do goods become liable to confiscation under the provisions of CGST/SGST Act?
Answer:
As per section 130 of CGST/SGST Act, goods become liable to confiscation when any person does the following:

• supplies or receives any goods in contravention of any of the provisions of this Act or rules made thereunder leading to evasion of tax;
• does not account for any goods on which he is liable to pay tax under this Act;
• supplies any goods liable to tax under this Act without having applied for the registration;
• contravenes any of the provisions of the CGST/SGST Act or rules made thereunder with intent to evade payment of tax.

Question 30.
Can any conveyance carrying goods without cover of prescribed documents be subject to confiscation?
Answer:
Yes. Section 130 of CGST Act, 2017 provides that any conveyance carrying goods without the cover of any documents or declaration prescribed under the Act shall be liable to confiscation. However, if the owner of the conveyance proves that the goods were being transported without cover of the required documents/declarations without his knowledge or connivance or without the knowledge or connivance of his agent then the conveyance shall not be liable to confiscation as aforesaid.

Question 31.
What is Prosecution?
Answer:
Prosecution is the institution or commencement of legal proceeding; the process of exhibiting formal charges against the offender. Section 198 of the Criminal Procedure Code defines “prosecution” as the institution and carrying on of the legal proceedings against a person.

Question 32.
Which are the offences which warrant prosecution under the CGST/ SGST Act?
Answer:
Section 132 of the CGST/SGST Act codifies the major offences under the Act which warrant institution of criminal proceedings and prosecution. 12 such major offences have been listed as follows:

(a) Making a supply without issuing an invoice or upon issuance of a false/incorrect invoice;
(b) Issuing an invoice without making supply;
(c) Not paying any amount collected as tax for a period exceeding 3 months;
(d) Availing or utilizing credit of input tax without actual receipt of goods and/or services;
(e) Obtaining any fraudulent refund
(f) evades tax, fraudulently avails ITC or obtains refund by an offence not covered under clauses (a) to (e);
(g) Furnishing false information or falsification of financial records or furnishing of fake accounts/documents with intent to evade payment of tax;
(h) Obstructing or preventing any official in the discharge of his duty;
(i) Dealing with goods liable to confiscation i.e. receipt, supply, storage or transportation of goods liable to confiscation;
(j) Receiving/dealing with supply of services in contravention of the Act;
(k) tampers with or destroys any material evidence or documents;
(l) Failing to supply any information required of him under the Act/Rules or supplying false information;
(m) Attempting to commit or abetting the commission of any of the of¬fences at (a) to (t) above.

Question 33.
What is the punishment prescribed on conviction of any offence under the CGST/ SGST Act?
Answer:
The scheme of punishment provided in section 132(1) is as follows:

Question 34.
What is a culpable state of mind?
Answer:
While committing an act, a “culpable mental state” is a state of mind – wherein the act is intentional;

the act and its implications are understood and controllable;
the person committing the act was not coerced and even overcomes hurdles to the act committed;
the person believes or has reasons to believe that the act is contrary to law.

Section 135 of the CGST Act, 2017 provides that in any prosecution for an offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution. The explanation to the said provision further provides that:-

(i) the expression “culpable mental state” includes intention, motive, knowledge of a fact, and belief in, or reason to believe, a fact;
(ii) a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability

Question 35.
Can a company be proceeded against or prosecuted for any offence under the CGST/ SGST Act?
Answer:
Yes. Section 137 of the CGST/SGST Act provides that every person who was in-charge of or responsible to a company for the conduct of its business shall, along-with the company itself, be liable to be proceeded against and punished for an offence committed by the company while such person was in-charge of the affairs of the company. If any offence committed by the company

has been committed with the consent/connivance of, or
is attributable to negligence of any officer of the company then such officer shall be deemed to be guilty of the said offence and liable to be proceeded against and punished accordingly.

Question 36.
Are there any monetary limits prescribed for compounding of offence?
Answer:
Yes. The lower limit for compounding amount is to be the greater of the following amounts:
50% of tax involved; or;
₹10,000.
The upper limit for compounding amount is to be greater of the following amounts:
150% of tax involved; or;
₹30,000.

Question 37.
What is the procedure for compounding of offences?
Answer:
The applicant has to make an application in form GST CPD-01 to the Commissioner for compounding of an offence. The application is not allowed unless the tax, interest and penalty liable to be paid have been paid in the case for which the application has been made On receipt of the application, the Commissioner shall call for a report from the concerned officer with reference to the particulars furnished in the application, or any other information, which may be considered relevant for the examination of such application.

The Commissioner, after taking into account the contents of the said application, may, by order in FORM GST CPD-02, on being satisfied that the applicant has cooperated in the proceedings before him and has made full and true disclosure of facts relating to the case, allow the application indicating the compounding amount and grant him immunity from prosecution or reject such application within ninety days of the receipt of the application. The application shall not be decided without affording an opportunity of being heard to the applicant and recording the grounds of such rejection.

Inspection, Search, Seizure And; Arrest, Penalties, Demand And Recovery Under Gst Notes

Sections involved:
a. Inspection, Search, Seizure and Arrest: Sections 67 to 72 of CGST Act.

• Power of inspection, search, seizure and arrest.
• Inspection of goods in movement.
• Power to arrest.
• Power to summon persons to give evidence and produce documents.
• Access to business premises.
• Officers to assist proper officers.

b. Offences and penalties: Sections 122 to 138 of CGST Act:

• Penalty for certain offences (21 offences covered): X 10,000 or tax evaded/not deducted/not collected/Input Tax Credit availed of or passed on or distributed irregularly/claimed fraudulently, whichever is higher.
• Penalty for supplies on which tax has not been paid or short paid or erroneously refunded, or where ITC has been wrongly availed or utilised.

For any reason other than fraud: X 10,000 or 10% of the tax due from such person, whichever is higher.
For the reason of fraud: X 10,000 or 100% of the tax due from such person, whichever is higher.

• Penalty for any person other than the taxable person: (who aids or abets any of 21 offences): Penalty up to ₹ 25,000.
• Penalty for failure to furnish information return: ₹ 100 for

each day of the period during which failure to furnish such return continues or; ₹ 5,000, whichever is higher. 10.1

• Fine for failure to furnish statistics: ₹ 10,000 (maximum) + if continuing offence: ? 100 each day after the first day during which offence continues but a maximum ₹ 25,000.
• General Penalty: For person contravening any of provisions of this Act or any rules made thereunder for which no penalty is separately provided: maximum penalty – ₹ 25,000.
• No penalty to be imposed for minor breaches
• Power to waive penalty or fee or both in certain notified cases
• Power of detention or seizure of goods/conveyances
• Power of Confiscation of goods or conveyances and levy of penalty
• Cognizable and Non-cognizable offences.
• Provisions relating to the liability of officers and certain other persons
• Compounding of Offences

c. Demand and recovery: Sections 73 to 84 of CGST Act.

• Concept of Show Cause Notice (SCN)
• Time limit for issue of SCN:

a. Where fraud is not involved:
At least 3 months prior to the time limit specified for passing the order determining the amount of tax, interest and penalty payable by the defaulter. Further, the said order is to be passed within 3 years from the due date of furnishing the annual return for F.Y. to which tax not paid, etc. relates.

Thus, the time limit for issuance of SCN is 2 years and 9 months from the due date of filing the Annual Return for the financial year to which demand pertains or from the date of erroneous refund.

b. Where fraud is involved:
At least 6 months prior to the time limit specified for passing the order determining the amount of tax, interest and penalty payable by the defaulter. Further, the said order is to be passed within 5 years from the due date of furnishing the annual return for F.Y. to which tax not paid, etc. relates. Thus, the time limit for issuance of SCN is 4 years and 6 months from the due date of filing the Annual Return for the financial year to which demand pertains or from the date of erroneous refund.

• Quantum of Penalty:

a. Where fraud is not involved:
1096 of tax or ₹ 10,000, whichever is higher. However, NO PEN-ALTY if tax and interest are paid within 30 days of the issue of notice.
Note: Penalty continues to be payable if self-assessed tax is not paid within 30 days from the due date of payment of such tax (i.e. even if SCN is not issued, the penalty is payable if tax is paid beyond 30 days from the due date of payment of tax.)

b. Where fraud is involved:
The penalty is equivalent to tax i.e. 10096 of tax.
However, if voluntary payment of tax and interest, before SCN: 1596 of tax
If Tax, Interest paid within 30 days of issue of SCN: 2596 of tax. If Tax, Interest paid within 30 days of communication of adjudi¬cation order: 5096 of tax.

• General provisions relating to the determination of tax.
• Provisions relating to tax collected but not paid to Government.
• Provisions relating to initiation of recovery proceedings.
• Provisions dealing with the recovery of tax.
• Payment of Tax and other amounts in instalments.
• Transfer of property to be void in certain cases.
• Tax to be the first charge on property as per section 82 of CGST Act.
• Provisional attachment to protect revenue in certain cases.
• Provisions regarding continuation and validation of certain recovery proceedings.

CS Professional Advance Tax Law Notes

Life Insurance – Finance – Insurance Law and Practice Important Questions

Question 1.
With the deferment of applicability of IFRS in insurance business by IRDAI to year 2021, discuss relevant provisions and implications as Applicable to insurance contracts from a CS perspective. Will this accounting reform bring in a positive stride for insurance business in India?
Answer:
IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This Standard was published on 18th May 2017, effective for the Annual period on or after 01 January 2021 IFRS-17 is applicable to 3 types of insurance contracts:

• Insurance contracts, including inward reinsurance contracts accepted.
• Reinsurance contracts ceded.
• Investment contracts with discretionary participation features, by an entity which issues insurance contracts as well.

Separating components from an insurance contract may contain one or more components that would be within the scope of another standard if they were separate contracts. For example, an insurance contract may include an investment component or a service component (or both).

Unit Linked Life insurance policies, for example, have an insurance component and investment component. It is a contract bundled with insurance element and investment element and is like Term insurance + Mutual fund. In such cases, this principle applies. The standard provides the criteria to determine when a non-insurance component is distinct from the host insurance contract.

Investment component to be separated from a host insurance contract only if that investment component is distinct. The entity shall then apply IFRS 9 to account for the separated investment component. After performing the above steps, separate any promises to transfer distinct non-insurance goods or services. Such promises are accounted under IFRS I5 ‘Revenue from Contracts with Customers.

Level of aggregation:
IFRS 17 requires entities to identify portfolios of insurance contracts, which comprises contracts that are subject to similar risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if they are managed together. (IFRS 17:14)
Each portfolio of insurance contracts issued shall be divided into a minimum of: (IFRS 17:16)

• A group of contracts that are onerous at initial recognition, if any,
• A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and
• A group of the remaining contracts in the portfolio, if any.

An entity is not permitted to include contracts issued more than one year apart in the same group. If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity’s practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group.

Recognition: An entity shall recognise a group of insurance contracts it issues from the earliest of the following:

• the beginning of the coverage period of the group of contracts
• the date when the first payment from a policyholder in the group becomes due; and
• for a group of onerous contracts, when the group becomes onerous.

Measurement:
On initial recognition, an entity shall measure a group of insurance contracts at the total of:

• the fulfilment cash flows'(“FCF”), which comprise.
• estimates of future cash flows.
• an adjustment to reflect the time value of money (”TVM”) and the financial risks associated with the future cash flows, and
• a risk adjustment for non-financial risk.
• the contractual service margin (“CSM”).

An entity shall include all the future cash flows within the boundary of each contract in the group. The entity may estimate the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups of contracts. The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the information available to the entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with observable market prices. (IFRS 17:33)

Premium allocation approach:
An entity may simplify the measurement of the liability for remaining coverage of a group of insurance contracts using the Premium Allocation Approach (PAA) on the condition that at the inception of the group:

• the entity reasonably expects that this will be a reasonable approximation of the general model, or
• the coverage period of each contract in the group is one year or less.
• (iii) Where, at the inception of the group, an entity expects significant, variances in the fulfilment cash flows (FCF) during the period before a claim is incurred, such contracts are not eligible to apply the PAA.

Investment contracts with a DPF (Discretionary Participating Features) An investment contract with a DPF (Discretionary Participating Features) is a financial instrument and it does not include a transfer of significant insurance risk. It is in the scope of the standard only if the issuer also issues insurance contracts. The requirements of the Standard are modified for such investment contracts.

Reinsurance contracts held:
The requirements of the standard are modified for reinsurance contracts held, in estimating the present value of future expected cash flows for reinsurance contracts, entities use assumptions consistent with those used for related direct insurance contracts. Additionally, estimates include the risk of reinsurer’s non-performance.
Modification of an insurance contract Derecognition

An entity shall derecognise an insurance contract when it is extinguished, or if any of the conditions of a substantive modification of an insurance contract are met.
Presentation in the statement of financial position
An entity shall present separately in the statement of financial position the carrying amount of groups of:

• insurance contracts issued that are assets
• insurance contracts issued that are liabilities
• reinsurance contracts held that are assets; and
• reinsurance contracts held that are liabilities.

Insurance service result:
An entity shall present in profit or loss revenue arising from the groups of insurance contracts issued, and insurance service expenses account arising from a group of insurance contracts it issues, comprising incurred claims and other incurred insurance service expenses. Revenue and insurance service expenses shall exclude any investment components.

Disclosures:
An entity shall disclose qualitative and quantitative information about:

• the amounts recognised in its Financial Statements that arise from insurance contracts
• the significant judgements, and changes in those judgements, made when applying IFRS 17; and
• the nature and extent of the risks that arise from insurance contracts.

Transition:
An entity shall apply the standard retrospectively unless impracticable, in which case entities have the option of using either the modified retrospective approach or the fair value approach.

Question 2.
Explain the schedules prepared in the financial statements of an insurance company.
Answer:
Financial Statement of Insurance Company:
The Financial statements of Insurance Company are prepared in accordance with the Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.

Schedule A of the regulation contains following parts:
1. PART I of Schedule A the regulation contains ‘Accounting principles for preparation of financial statements and while preparing the Financial Statement for the insurance companies in India, these principals are to be followed.

2. PART II of Schedule A of the regulation contains the details of Disclosures which are forming part of Financial Statements in the Insurance Company.

3. PART III of Schedule A of the regulation contains General instructions for preparation of Financial Statements.

4. PART IV of Schedule A of the regulation contains the Contents of Management Report.

5. PART V of Schedule A of the regulation Contains the formats for Preparation of Financial Statements of a life insurance company. Similarly, Schedule B of the regulations contain Part I, Part II, Part III, Part IV and Part V which contains the above-stated information about General Insurance companies.

As per the above-said Regulations, following financial statements are to be prepared by Insurance Companies

• Form of Revenue Account (Policyholders account)
• Form of Profit and Loss Account (Shareholders Account)
• Form of Balance Sheet (Policyholders and Shareholders)
• Schedules to Financial Statements
• Notes to accounts giving the significant accounting policies and actuarial assumption
• Disclosures on regulatory actions taken by any enforcement authority
• Details of directorships, if any, held by persons in charge of management
• ageing analysis of policyholders unclaimed amounts
• Details of payments made to Statutory Auditors
• Summary of related party transactions
• Key accounting ratios.

CS Professional Insurance Law and Practice Notes

Applications of Life Insurance – Insurance Law and Practice Important Questions

Question 1.
Ricky has a personal accident policy that covers death by accident but excludes death by disease. He falls from his horse and suffers leg injuries. He is admitted to hospital but his leg wound turns septic and one week later he dies as a result of the disease septicaemia.
Explain whether the personal accident insurers are liable under the policy referring to relevant case law in support of your answer.
Answer:
The issue here is causation- the insurers would need to establish whether original accident was the proximate cause of Ricky’s death or was his death as result of septicaemia.
Where there is a ‘chain of events, the insurers are liable where the loss flows in an unbroken chain directly from an insured peril.

Equally, there is no liability if the loss flows from an excluded peril. Etherington v Lancashire and Yorkshire Accident Insurance Company (1909): The insured fell from the horse and suffered some injuries that force him to lie in cold and damp conditions so that he contracted pneumonia, of which he eventually died. It was held that the proximate cause of his death was the original ‘accident’ if the fail from the horse and not the disease that ultimately killed him (which was excluded).

Mardon Accident Insurance Co. (1903): The insured scratched his leg with his thumbnail while removing his socks, Six days later the wound turned septic, on the tenth day septicaemia set in and on the twentieth day the injured dies of septicaemia. The policy covered death by accident but excluded death by disease.

The Court in this case held that the proximate cause of death was accident and not the ensuing disease.
In this scenario, the ‘chain of events’ was unbroken in the sense that septicaemia was a natural consequence of Ricky falling from his horse and suffering the leg injury. The personal accident insurers would therefore be liable even though he died from septicaemia and excluded peril.

Question 2.
What is your opinion in linking insurance buying to Income tax sops? Discuss the tax benefits available to an individual for life insurance policies.
Answer:
A policyholder who takes a Life Insurance Policy is entitled to the following income tax benefits. Section 80C of the Income-tax Act, 1961 any premiums paid for Life Insurance Policy on the life of the person, his/her spouse or children is eligible for a deduction from the Gross Total income of the person.

The deduction is subject to the following conditions:
(i) The premiums paid in any year by the policyholder are allowed as a deduction up to a maximum amount not exceeding 10% (15% in case of certain persons with specified illness of ailments) of the Actual Capital Sum Assured under the Policy. Any amount in excess of the said 10%/15% will not qualify for deduction.

This deduction is not applicable to deferred annuity policies. Actual Capital Sum. Assured is the amount guaranteed to be paid by the Life Insurance Company on the happening of the events insured under the policy. However, such Actual Capital Sum Assured shall not include premiums agreed to be returned and Bonuses declared from time to time.

(ii) If the policyholder (other than annuity policy) discontinues the Policy within two policy years, no benefit is available in the second policy year. Besides, the deduction given in the first policy year will be treated as an income in the second policy year.

(iii) Deduction is allowed for the policies taken on the life of an individual, his wife/ husband and children.
(iv) Life Insurance Policies including deferred annuity policies are eligible. Pension policies are treated separately under section 80CCC of the Income-tax Act, 1961 hence, not eligible under section 80C of the Income-tax Act, 1961.

(v) Under section 80C of the Income-tax Act, 1961, many tax saving instruments are eligible for deduction and Life Insurance Policies is one amongst them.

(vi) The maximum amount which can be claimed as a deduction under section 80C,80CCC (deduction for pension policies) and 80CCD of the Income-tax Act, 1961 (contributions under the New Pension Scheme) cannot exceed ₹ 1,50,000/-.

Under section 80CCC of the Income-tax Act, 1961, the premiums paid for a pension policy issued by a Life Insurance company is eligible for deduction. Any amount received under a Pension Policy on account of surrender of the Policy or as pension (annuity payments) is taxable on receipt. The limit is ₹ 1,50,000/- which is subject to overall limit of deduction under all the three sections 80C, 80CCC and 80CCD of the Income-tax Act, 1961 all put together.

Section 80CCD of the Income-tax Act, 1961:
Central Government has notified contributions made under the New Pension Scheme administered by the Pension Funds Regulatory and Development Authority (PFRDA) as eligible for deduction under section 80CCD of the Income-tax Act, 1961. PFRDA collects contributions from subscribers and invests them as per fund options with some limited flexibilities, which can be selected by the Subscribers. PFRDA invests the funds of the subscribers like a Mutual Fund and manages them.

Private Sector, as well as self-employed persons, can join the New Pension Scheme and subscribe to the Scheme. Upon attaining the age of Superannuation at least 40% of the corpus must be utilized to purchase an annuity Policy from empanelled Life Insurance Company, who will then pay monthly annuity to the subscriber depending on the annuity option chosen.

Up to 60 years of the corpus can be withdrawn as commuted value at the time of superannuation. While the basic contribution under section 80CCD (I) of the Income-tax Act, 1961 is subject to the overall deduction under sections 80C, 8iOCCC and 80CCD of the Income-tax Act, 1961 put together, Section 80CCD (1B) of the Income-tax Act, 1961, provides additional ₹ 50,000/-deduction only for the contributions to the Pension scheme notified under the section by the Central Government i.e. PFRDA’s New Pension Scheme. The amount of contribution from employees is limited to 10% of salary.

Section 80DDD of the Income-tax Act, 1961:
A Life Insurance Policy taken by an individual who has a dependent with some specified disabilities under the Section will be eligible for deduction up to ₹ 75,000 per year for taking the Life Insurance Policy for such dependents. The deduction increased to ₹ 11,25,000 per year where such dependents have serious disabilities.

Such policies are taken by the Caretaker of such dependent (who must be a relative having insurable interest) on his own life and the dependent shall be the nominee who will get the benefits under the Policy. Upon the death of the caretaker. If the dependent predeceases the Caretaker, the amount allowed as deduction shall be deemed to be an income in the year in which such amount is received by caretaker and shall be taxed accordingly.

Section 10(10D) of the Income-tax Act, 1961:
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included any sum received under a life instance policy, including the sum allocated by way of bonus on such policy, other than:

any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA of the Income-tax Act, 1961; or

any sum received under a Keyman insurance policy; or

any sum received under an insurance policy issued on or after the 1st day of April 2003 but on or before the 31st day of March 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or

any sum received under an insurance policy issued on or after the 1st day of April 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:

Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:
Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C of the Income-tax Act, 1961 or the Explanation to sub-section

(2A) of section 88 of the Income-tax Act, 1961, as the case may be:
Provided also that where the policy, issued on or after the 1st day of April 2013, is for insurance on life of any person, who is

• a person with disability or a person with severe disability as referred to in section 80U of the Income-tax Act. 1961; or
• suffering from disease or ailment as specified in the rules made under section 80DDB of the Income-tax Act, 1961, the provisions of this sub-clause shall have effect as if for the words “ten per cent”, the words “fifteen per cent” had been substituted.

Question 3.
What are the tax implications in life insurance under the Income Tax Act of India?
Answer:
Tax Law Implications In Life Insurance:
Historically life insurance in India has been driven mainly by benefits doled out under the Income Tax Act, 1961. Different Sections under Income Tax Act, 1961 deal with benefits at the purchase, renewal and claim stages of a life insurance policy. Life insurance policies have been used a effective tax planning tools. Following are some of the Sections under the

Income Tax Act, 1961 dealing with tax benefits for life insurance policies:
Deductions under Sections 80C/80CCC/80D:
Under Section 80C of the Act, premiums paid by the Assessee on policies held by himself, spouse or children is eligible for deduction from gross total income. This is also applicable to a Hindu Undivided Family (HUF) where the Karta of he HUF pays premiums on policies held by any member of the HUF. Where the premiums payable under the policy exceeds 10% of the actual capital sum assured, the deduction is limited to 10% of the sum assured.

Section 8OCCC deals with contributions to approved pension products. It lays down that an individual assessee who has paid premiums out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation 04 India or any other insurer for receiving pension from the fund aPproved under Section 10 (23AA8).

he shall be allowed a deduction in the computation of his total income, of the whole of the amount paid or deposited (excluding interest o bonus accrued or are(i.ted to the assessee’s account, it any) up to a maximum of ₹ 1.00.000 With previous year.

Section 80CCD deals with contributions to approved pension products by an individual assessee. It lays down that where an assessee. being an individual has In the previous year paid or deposited any amount in his account under a notified pension scheme. he shaM be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed 10% of his salary (in case of Central Government employees) or 10% of his gross total income (in any other case) In the previous year.

CS Professional Insurance Law and Practice Notes