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2023 (12) TMI 451 - KERALA HIGH COURT Customs

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Issues: (i) Whether the accused retracted the statement recorded under section 108 of the Customs Act through Ext. D1; (ii) Whether the statements recorded under section 108 of the Customs Act could be relied upon; (iii) Whether any admission in the statement under section 313 of the Code of Criminal Procedure, 1973 could sustain the prosecution case; (iv) Whether the acquittal required interference in appeal.

Issue (i): Whether the accused retracted the statement recorded under section 108 of the Customs Act through Ext. D1.

Analysis: Ext. D1 was produced from official custody pursuant to summons, but its contents were not proved through any witness. Mere marking of a document does not establish its contents, and the requirements for dispensing with formal proof under section 294(3) of the Code of Criminal Procedure, 1973 were not shown to have been satisfied. Since the retraction itself was not proved in evidence, the document could not be treated as a proved retraction.

Conclusion: The accused did not succeed in proving a valid retraction through Ext. D1.

Issue (ii): Whether the statements recorded under section 108 of the Customs Act could be relied upon.

Analysis: A statement under section 108 is admissible only if it is voluntary and trustworthy. The surrounding circumstances, the form and content of the statements, and the inconsistencies noticed in the prosecution evidence created doubt about voluntariness and reliability. In the absence of independent corroboration and in view of the suspicious features in the statements, the burden of proving voluntariness was not discharged to the required standard.

Conclusion: The statements under section 108 of the Customs Act could not be relied upon as voluntary and trustworthy evidence.

Issue (iii): Whether any admission in the statement under section 313 of the Code of Criminal Procedure, 1973 could sustain the prosecution case.

Analysis: The statement under section 313 did not contain any clear admission of the offence. Even assuming some admission, such a statement is not substantive evidence and cannot by itself fill gaps in the prosecution case. It can only be used to corroborate otherwise proved prosecution evidence.

Conclusion: No conviction could be founded on the statement under section 313 of the Code of Criminal Procedure, 1973.

Issue (iv): Whether the acquittal required interference in appeal.

Analysis: Interference with an acquittal is warranted only when the trial court's view is perverse or impossible. The prosecution evidence contained material contradictions regarding the place of interception and the manner of seizure, while the best available evidence was not produced. The declaration form and the other surrounding circumstances also supported the trial court's view, and the record did not justify reversal of the acquittal.

Conclusion: The acquittal did not call for interference.

Final Conclusion: The prosecution failed to establish a reliable and voluntary confession or any substantive basis to upset the acquittal, and the appellate court declined to disturb the trial court's finding.

Ratio Decidendi: A confession under section 108 of the Customs Act can be acted upon only if its voluntariness and truth are established by reliable evidence, and an acquittal cannot be reversed unless the trial court's view is perverse.

Customs statement evidence requires proven voluntariness and corroboration; unproved retraction and weak admissions could not upset acquittal.
A statement under section 108 of the Customs Act can support conviction only when its voluntariness and truth are proved by reliable evidence; here, inconsistencies, lack of independent corroboration, and suspicious surrounding circumstances meant the prosecution did not discharge that burden, so the statement was not relied on. The alleged retraction in Ext. D1 was also not proved, because mere production of the document did not establish its contents. The section 313 CrPC statement contained no clear admission and could not, by itself, sustain the case. As the trial court's view was not perverse and the evidence showed material contradictions, the acquittal was left undisturbed.

Retraction of confessional statement - admissibility and proof of document in evidence - voluntariness and reliability of confession - scope of appellate interference in an order of acquittal - evidentiary value of statements recorded under Section 108 of the Customs Act - use of answers recorded under Section 313 Cr.P.C as corroborative material - exception under Section 294 Cr.P.C dispensing with formal proof of documentsRetraction of confessional statement - admissibility and proof of document in evidence - exception under Section 294 Cr.P.C dispensing with formal proof of documents - Ext. D1 cannot be treated as a proved retraction of the statements recorded under section 108 of the Customs Act - HELD THAT: - Ext. D1 was produced from official custody pursuant to a summons but was not proved by evidence of the person who signed, received, or kept it. Section 294 Cr.P.C applies only where a party has been called upon to admit or deny genuineness after a list of documents is furnished; no such procedure occurred and the accused cannot claim benefit of Section 294. Marking a document as an exhibit does not prove its contents; the execution and contents must be proved by witnesses with requisite knowledge. Because the contents of Ext. D1 were not spoken to by any witness and the formal stages of marking, admissibility, proof of contents and evaluation were not satisfied, the document cannot be relied on as a retraction of the confessional statements. [Paras 14, 15, 18, 20, 21]Ext. D1 is not proved and therefore does not amount to a retraction of the statements under Section 108 of the Customs Act.Evidentiary value of statements recorded under Section 108 of the Customs Act - voluntariness and reliability of confession - The statements recorded under section 108 (Ext. P8, P8(a), P8(b)) are not reliable and cannot be acted upon - HELD THAT: - The prosecution bears the initial burden to prove voluntariness of a statement under Section 108. The court must scrutinise the circumstances surrounding the confession to assess voluntariness and trustworthiness. The three statements display indicia of being dictated or prepared by others: use of technical terms and statutory references unlikely to be known to the foreign accused, repeated use of the term 'Mahazar', inclusion of third party passport and mobile numbers, and suspicious computer printouts with signatures placed inconsistently. These cumulative suspicious circumstances, together with admissions by PW9 about a retraction in the bail application, cast doubt on voluntariness and veracity. In the absence of independent corroboration and given these defects, the statements cannot be relied upon as trustworthy confessions. [Paras 23, 24, 25, 26, 27]The statements Ext. P8, Ext. P8(a) and Ext. P8(b) are not voluntary or trustworthy and cannot be relied upon by the prosecution.Use of answers recorded under Section 313 Cr.P.C as corroborative material - No conviction can be founded solely on answers given under Section 313 Cr.P.C - HELD THAT: - A statement under Section 313 Cr.P.C is not given on oath and does not amount to substantive evidence capable of filling gaps in the prosecution case. Such answers may be used only to the extent they corroborate independent evidence. The Court could not identify any clear admission in the accused's Section 313 answers that would suffice to convict in the absence of proved and reliable evidence of the essential ingredients of the offence. [Paras 28]The Section 313 Cr.P.C answers do not constitute admissible substantive evidence to support a conviction and can only be used corroboratively.Scope of appellate interference in an order of acquittal - admissibility and proof of document in evidence - evidentiary value of statements recorded under Section 108 of the Customs Act - The trial court's judgment of acquittal is not perverse and does not warrant interference - HELD THAT: - An appellate court may disturb an acquittal only if the trial court's conclusion is perverse or impossible. The prosecution's case contained material inconsistencies and omissions: contradictory evidence about the place of interception, non production of available CCTV footage, non production of the seized invoice at trial (though its seizure was admitted), and lack of independent evidence of prior smuggling. The accused had encircled the customs declaration form and produced an invoice (marked Ext.D2); prosecution failed to produce the best evidence and to establish previous illegal conduct. Coupled with the unreliability of the confessional statements and the unproved status of Ext.D1, the trial court's view was a possible and reasonable one and not susceptible to reversal on appeal. [Paras 9, 29, 30, 31, 32]The acquittal recorded by the trial court is sustainable and the appeal is dismissed.Final Conclusion: The High Court upholds the trial court's acquittal: Ext. D1 is unproved and not a retraction, the Section 108 statements are neither voluntary nor trustworthy, Section 313 answers cannot sustain a conviction alone, and the acquittal is not perverse; appeal dismissed.

2023 (12) TMI 450 - KERALA HIGH COURT Customs

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Valuation-linked customs disputes fall within Supreme Court appellate route, barring High Court jurisdiction under the Customs Act.
High Court appellate jurisdiction under the Customs Act is excluded where the Tribunal's order directly and proximately turns on valuation of goods for assessment. The Tribunal's findings on misdeclaration of value, confiscation, and denial and recovery of drawback made value an integral issue, bringing the matter within the appellate route to the Supreme Court under Section 130E(b). The statutory structure under Section 130, read with Section 129A, therefore barred the Revenue's appeal before the High Court, and the challenge had to be taken to the Supreme Court instead.

Valuation of goods for purposes of assessment - appeal to the Supreme Court under Section 130E of the Customs Act - jurisdiction of Appellate Tribunal in drawback appeals under Section 129AValuation of goods for purposes of assessment - appeal to the Supreme Court under Section 130E of the Customs Act - Whether the Revenue's appeals are maintainable before the High Court when the Appellate Tribunal's order involves valuation of goods for assessment. - HELD THAT: - The Tribunal's order upheld findings of mis declaration of export and import values, circular trading, denial and recovery of drawback and confirmed confiscation, thereby necessarily involving determination of the value of goods for assessment. The Court held that where an appellate order involves questions directly and proximately relating to the rate of duty or the value of goods for purposes of assessment, such appeals lie to the Supreme Court under Section 130E rather than to the High Court. Reliance is placed on the statutory scheme and on precedent treating alteration of assessment value as a matter falling within the scope of appeals to the Supreme Court. Consequently, the appeals framed by the Revenue are not maintainable before the High Court. [Paras 2]The appeals are not maintainable before the High Court because the Tribunal's order involves valuation of goods for assessment and, therefore, the proper forum is the Supreme Court under Section 130E.Jurisdiction of Appellate Tribunal in drawback appeals under Section 129A - Whether the Appellate Tribunal had jurisdiction to decide the respondents' appeal against the Commissioner (Appeals) in respect of payment of drawback under Chapter X. - HELD THAT: - Section 129A contains a proviso precluding appeals to the Appellate Tribunal in respect of orders under clause (b) if such order relates to payment of drawback as provided in Chapter X. The impugned Tribunal order appears to have entertained and decided an appeal that concerned entitlement to drawback and recovery of drawback amounts. The High Court observed this potential jurisdictional infirmity but declined to decide the question in the present proceedings because the preliminary determinative finding that valuation issues attract Supreme Court jurisdiction rendered these appeals before the High Court unsustainable. The Court therefore refrained from expressing a conclusive view on whether the Tribunal lacked jurisdiction under Section 129A and indicated that the matter is more appropriately examined by the Supreme Court in the Revenue's appeal. [Paras 3, 4]The question of the Appellate Tribunal's jurisdiction under Section 129A in relation to drawback disputes is noted as potentially problematic but left undecided for consideration by the Supreme Court.Final Conclusion: The High Court held that the appeals are not maintainable before it because the Tribunal's order involves valuation of goods for assessment, which falls to be appealed to the Supreme Court under Section 130E; a separate contention about the Tribunal's jurisdiction in drawback matters under Section 129A was observed but deliberately left undecided for the Supreme Court to consider.

2023 (12) TMI 429 - PUNJAB & HARYANA HIGH COURT Indian Laws

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Compounding of cheque dishonour offence on voluntary settlement can lead to acquittal and setting aside conviction.
Section 138 NI Act offences may be compounded on the basis of a voluntary settlement between the parties, and compounding can be permitted even in revision. The court noted that Section 147 of the NI Act makes such offences compoundable notwithstanding the Criminal Procedure Code, and that once composition occurs, Section 320 CrPC treats it as an acquittal. Because the parties had amicably settled the dispute and payment was made towards the cheque liability, the basis for sustaining the conviction no longer survived. The conviction and sentence were therefore set aside and the accused was acquitted.

Compoundable offence under the Negotiable Instruments Act - compounding of offence under Section 138 by settlement between parties - power of High Court in revision to permit compounding under Section 320 Cr.P.C. - effect of compounding operates as acquittalCompoundable offence under the Negotiable Instruments Act - compounding of offence under Section 138 by settlement between parties - effect of compounding operates as acquittal - Whether the offence punishable under Section 138 of the Negotiable Instruments Act can be compounded after conviction and pending revision where the parties have effected a settlement, and whether compounding warrants acquittal of the accused. - HELD THAT: - The Court accepted the parties' compromise and held that an offence under Section 138 is compoundable in view of Section 147 of the Negotiable Instruments Act read with Section 320 Cr.P.C. The Court relied upon earlier decisions including Ramesh Chander to state that compounding may be permitted during trial and by the High Court or Court of Session exercising revisionary jurisdiction under Section 401 Cr.P.C. and that the composition under Section 320(8) Cr.P.C. produces the effect of acquittal of the accused with whom the offence has been compounded. Applying these principles, and having regard to the compromise deed and the parties' settlement, the Court concluded that the matter is fit for compounding and that the conviction and sentence must be set aside and the accused acquitted. [Paras 5, 8, 9, 10, 11]The parties' settlement is permitted to operate as compounding of the offence under Section 138 N.I. Act; the conviction and sentence are set aside and the petitioner is acquitted, with release ordered if not wanted in any other case.Final Conclusion: Revision allowed; impugned conviction and sentence set aside on account of compounding under Section 147 of the Negotiable Instruments Act read with Section 320 Cr.P.C., and the petitioner acquitted and ordered to be released if not required elsewhere.

2023 (12) TMI 425 - SC Order GST

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Interim stay on impugned observations granted while notice was issued, preserving the position pending final disposal.
Notice was issued to the respondents, and the observations in paragraphs 77 and 78 of the impugned order were stayed pending disposal of the matter. The interim relief preserved the position on those observations until the Court finally determined the dispute.

2023 (12) TMI 365 - BOMBAY HIGH COURT VAT and Sales Tax

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Issues: (i) Whether the petitioners could claim refund or exemption from entertainment duty on the ground of Article 14 discrimination and negative equality because allegedly similar operators were not being proceeded against. (ii) Whether the levy of entertainment duty on the petitioners' water sports activities could be avoided on the basis of legislative debate or the contention that only amusement-park water activities were intended to be taxed.

Issue (i): Whether the petitioners could claim refund or exemption from entertainment duty on the ground of Article 14 discrimination and negative equality because allegedly similar operators were not being proceeded against.

Analysis: The petitioners admitted that their activities were covered by the charging scheme and that they had earlier claimed the benefit of the statutory exemption and concessional regime. The Court found that they failed to establish that the Gateway of India operators or any other identified operators were similarly situated, and no such operators were impleaded. It reiterated that equality under Article 14 is a positive concept and cannot be invoked to compel the State to extend an illegality or irregularity to others. A claim for negative equality cannot sustain a writ for refund or non-recovery merely because another person may not have been assessed or recovered from.

Conclusion: The plea of discrimination and negative equality failed, and no refund could be granted on that basis.

Issue (ii): Whether the levy of entertainment duty on the petitioners' water sports activities could be avoided on the basis of legislative debate or the contention that only amusement-park water activities were intended to be taxed.

Analysis: The statutory scheme separately defined entertainment, place of entertainment, amusement park, and water sports activity, and the charging provision expressly subjected water sports activity, whether within or outside an amusement park, to duty. The Court held that the levy was on the activity and not on the entity conducting it. It further held that resort to legislative debates was unwarranted because the statutory text was clear. Since the petitioners' own case acknowledged liability under the Act and they had availed the statutory concession for the initial years, they could not later contend that their activities were outside the charging provision. The plea of unjust enrichment also failed because the duty was primarily payable by the petitioners under the statute and their licence conditions.

Conclusion: The statutory levy on the petitioners' water sports activities was upheld, and the challenge based on legislative intent failed.

Final Conclusion: The petitioners were not entitled to refund or other relief, and the writ petition failed in its entirety.

Ratio Decidendi: Article 14 cannot be used to claim parity with persons who may have benefited from an alleged illegality or non-enforcement, and where the charging provision clearly levies duty on a specified activity, legislative debate cannot override the plain statutory text.

Entertainment duty on water sports remains payable where clear statutory language overrides legislative debate and negative equality claims.
Entertainment duty on water sports activities applies where the charging provision expressly covers such activities within or outside an amusement park. Clear statutory text prevails over legislative debates, and the levy attaches to the activity rather than the operator. Operators who accepted statutory liability and availed concessional treatment cannot subsequently contend that their activities fall outside the charging provision. Article 14 does not support a refund or exemption based on alleged non-enforcement against others: equality is a positive concept and cannot compel extension of an illegality or irregularity. The plea of unjust enrichment also fails where the statute and licence conditions primarily place duty liability on the operator.

Negative equality - Article 14 - equality before law - entertainment duty on water sports activity - statutory interpretation - use of legislative debates as external aid - estoppel by conduct - acceptance of statutory benefit - unjust enrichmentNegative equality - Article 14 - equality before law - Claim for refund based on alleged discriminatory non recovery of entertainment duty from other operators invoking Article 14 - HELD THAT: - The petitioners sought refund on the ground that similarly placed operators (notably at Gateway of India) were not charged entertainment duty and that this discriminatory treatment violated Article 14. The Court held that the petitioners failed to establish parity with those operators and did not implead or demonstrate that such persons were similarly placed. The plea amounts to a claim of negative equality which the law does not endorse; a petitioner cannot seek to perpetuate or replicate an alleged illegality in favour of others by invoking equality. Prior Supreme Court authorities were applied to hold that where an alleged preferential treatment in favour of others is impugned, the remedy is to challenge the legality of that favour, not to obtain the same benefit by way of writ. Consequently, the contention that non recovery from others entitles the petitioners to refund is untenable. [Paras 11, 13, 16, 17, 18]Claim under Article 14 based on non recovery from other operators is rejected; negative equality cannot be the basis for refund.Entertainment duty on water sports activity - statutory interpretation - charging provision - Whether the Bombay Entertainment Duty Act levies duty only on water activities conducted within amusement/water parks or on water sports activities generally - HELD THAT: - The Court examined the text and scheme of the Act, noting separate definitions for "amusement park" and "water sports activity" and distinct provisos in Section 3(1). The third proviso expressly makes water sports activity liable whether situated within or outside an amusement park. The levy is on the activity and not the entity carrying it on. Accordingly, the plain language of the charging provisions covers the petitioners' water sports activities such as water skiing, wind surfing, sailing, kayaking and jet boating. The petitioners had themselves applied for benefit under Section 3(5A), accepting coverage under the Act; having availed the statutory concession earlier, they cannot now repudiate coverage once the exemption period expired. [Paras 12, 28, 29]The Act levies entertainment duty on water sports activities whether inside or outside amusement parks; the petitioners' activities are covered and liable to duty.Statutory interpretation - use of legislative debates as external aid - Whether legislative assembly debates support a narrower construction limiting duty to water activities within amusement parks - HELD THAT: - The Court reiterated the primacy of the statutory text and held that legislative debates are not conclusive and cannot override clear statutory language. Relying on established authorities, the Court observed that statements in legislative debates are not binding and may be unreliable as indicators of legislative intent when the statute's language is clear. Given the Act's explicit provisions distinguishing amusement parks and water sports activities and making the latter taxable whether inside or outside amusement parks, the petitioners' reliance on selected assembly speeches failed to alter the statute's plain meaning. [Paras 26, 27, 30]Legislative debates do not justify a construction limiting the levy to water activities within amusement parks; the statute's text governs.Unjust enrichment - estoppel by conduct - acceptance of statutory benefit - Whether the petitioners' uncontested payment under protest, and their not having collected the duty from customers, entitles them to refund on the ground of unjust enrichment - HELD THAT: - The Court found no basis for unjust enrichment: the petitioners were primarily liable under the licence terms and law to deposit the duty and there is no material showing the State levied or appropriated duty without authority. The petitioners had accepted statutory treatment earlier by applying for the Section 3(5A) concession and by depositing amounts; their contention that payments were 'under protest' was inconsistent with the record and irrelevant to the Article 14 plea. Merely not having passed the duty on to customers does not establish unjust enrichment against the State when liability rests on the proprietor. [Paras 24, 25, 29]Unjust enrichment and 'payment under protest' contentions are rejected; no entitlement to refund on these grounds.Final Conclusion: The petition is dismissed. The Court finds the petitioners' claims of discriminatory treatment, reliance on legislative debates, unjust enrichment and payment under protest insufficient to entitle them to a refund; the water sports activities are chargeable under the Act and the challenged reliefs are refused. No order as to costs.

2023 (12) TMI 360 - ALLAHABAD HIGH COURT GST

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Mining Companies Win Temporary Relief: GST Royalty Payments Halted Pending Comprehensive Legal Review of Tax Classification
HC granted stay on GST payment for mining lease/royalty, finding merit in petitioner's argument that royalty constitutes a tax rather than service consideration. Relying on precedent in India Cement Ltd. case, the court suspended GST liability pending further judicial review, directing parties to file counter affidavits and awaiting final determination of the substantive legal issue.

2023 (12) TMI 359 - MADHYA PRADESH HIGH COURT GST

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Issues involved:
The judgment deals with the challenge against a show cause notice issued by Respondent No. 2 alleging GST liability on manufacturing and selling beer under specific brand names.

Details of the judgment:

1. Challenge against show cause notice:
The petitioner challenged the show cause notice dated 30.06.2022, contending that the activities of manufacturing and selling beer under specific brand names are not liable to GST. The petitioner argued that the amounts earned and retained by the Contractual Bottling Unit are not subject to GST, and it is UBL that should be responsible for GST as it provides services by granting representation rights. The petitioner sought to set aside the show cause notice on the grounds of arbitrariness and unreasonableness.

2. Legal position on writ petitions against show cause notices:
The petitioner cited legal precedents to support the maintainability of the writ petition against the show cause notice, emphasizing that when a notice is issued with premeditation, a writ petition can be entertained. However, the respondent opposed the petition, stating that there is an efficacious remedy available to contest the show cause notice before the adjudicating authority.

3. Court's decision and legal precedents:
The Court considered various grounds raised by the petitioner but ultimately dismissed the petition on the basis of the availability of an alternative statutory remedy. Referring to legal precedents, the Court highlighted that when a statutory appeal is provided, it should be availed by the litigating parties. The Court emphasized that entertaining a writ petition against a mere show cause notice is not appropriate when there is a statutory remedy in place.

4. Final decision and liberty to avail alternative remedy:
The Court allowed the application for dismissal of the petition and dismissed the petition on the grounds of an alternative statutory remedy being available. The petitioner was granted liberty to avail the alternative remedy in accordance with the law if advised to do so. No costs were awarded in the matter.

This judgment underscores the importance of exhausting statutory remedies before seeking judicial intervention against show cause notices, in line with established legal principles and precedents.

GST Show Cause Notice Challenge Rejected: Statutory Alternative Remedy Directs Petitioner to Prescribed Legal Procedures
HC dismissed petitioner's writ challenging GST show cause notice. Court held that statutory alternative remedy exists for contesting the notice, and direct judicial intervention through writ petition is inappropriate. Petitioner was granted liberty to pursue alternative legal remedy as per prescribed procedures, emphasizing procedural requirements in tax dispute resolution.

2023 (12) TMI 338 - ITAT DELHI Income Tax

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ISSUES PRESENTED AND CONSIDERED

1. Whether initiation of penalty proceedings under section 271E for a particular assessment year is legally maintainable when no assessment or other proceedings for that assessment year are pending before the assessing officer at the time of initiation.

2. Whether a penalty under section 271E can be validly initiated while the assessing officer is exercising jurisdiction in respect of a different assessment year (i.e., on the basis of information discovered in proceedings for another year).

3. Whether penalty proceedings under sections 271D/271E are independent of assessment proceedings such that they may be initiated at any time irrespective of pending proceedings for the relevant assessment year.

4. Whether an appellate order is vitiated by deciding the appeal on a ground (absence of reasonable cause) that was not raised by the appellant before the first appellate authority.

5. Whether passing an appellate order in the name of a deceased person (when legal heirs are on record) is a fatal procedural defect.

ISSUE-WISE DETAILED ANALYSIS - Issue 1: Maintainability of penalty initiation when no proceedings for the relevant A.Y. are pending

Legal framework: Section 271E imposes penalty for contraventions of section 269T (receipt/repayment by bearer cheque). Penalty proceedings are tied to the default occurring in a specified assessment year and, as a matter of proper locus to initiate penalty, require the assessing officer to be in seisin of proceedings for that relevant year.

Precedent Treatment: The Tribunal relied on the reasoning of a High Court decision (referred to in the record) holding that where a return has merely been processed under section 143(1)(a) and no scrutiny or assessment under section 143(3) is pending or undertaken for that year, the assessing officer is not in seisin of proceedings for that year and therefore cannot validly initiate penalty proceedings for it.

Interpretation and reasoning: The Court examined the facts showing that the return for the relevant year was processed under section 143(1) and no assessment proceedings were pending for that year when the penalty notice under section 271E was issued. The information constituting the basis for the penalty (repayment by bearer cheque) came to the AO while completing assessment for a later year. The Tribunal held that initiation of penalty proceedings for the earlier year while the AO was dealing with a different year is not legally tenable; the AO must be in seisin of proceedings qua the relevant year to initiate such penalty.

Ratio vs. Obiter: Ratio - Penalty under section 271E cannot be validly initiated where no proceedings are pending before the AO for the relevant assessment year; initiation during proceedings of a different year is impermissible. This follows the High Court reasoning adopted by the Tribunal. Obiter - observations about the AO's powers to reopen under section 147 remain contextual.

Conclusion: Initiation of penalty proceedings under section 271E for the assessment year in question was invalid where no proceedings for that year were pending; such initiation is bad in law.

ISSUE-WISE DETAILED ANALYSIS - Issue 2: Validity of initiating section 271E penalty based on information from assessment of a different year

Legal framework: Penal proceedings under sections 271D/271E are concerned with defaults occurring in a particular year; jurisdiction to initiate penalty is linked to the AO's control/seisin of proceedings for that year.

Precedent Treatment: The Tribunal referenced authorities recognizing limits on initiation of penalty when the return was merely processed and there was no scrutiny for the relevant year; the AO could have initiated scrutiny or reopened the earlier year under section 147 if appropriate.

Interpretation and reasoning: The Tribunal found that information collected in the assessment of a later year cannot be used to bootstrap jurisdiction to initiate penalty for the earlier year when there are no proceedings pending for the earlier year. If the AO considers the information merits action for the earlier year, proper steps would be to bring the earlier year to scrutiny or to undertake appropriate proceedings (including section 147 where permissible) rather than initiating penalty from a different-year proceeding.

Ratio vs. Obiter: Ratio - Use of information arising in one year's assessment does not permit initiation of penalty for a different year absent pending proceedings in that different year. Obiter - Practical options available to AO (scrutiny/reopening) noted but not exhaustively adjudicated.

Conclusion: Initiation of the penalty on the basis of information discovered in the assessment of another year was not a legally sustainable course; penalty so initiated was invalid.

ISSUE-WISE DETAILED ANALYSIS - Issue 3: Independence of penalty proceedings under sections 271D/271E from assessment proceedings

Legal framework: Sections 271D/271E create specific penal liability for non-compliance with payment/receipt modes; the question is whether these penalty proceedings can be instituted at any time irrespective of assessment proceedings for the relevant year.

Precedent Treatment: The Revenue argued that sections 271D/271E are separate proceedings independent of assessment. The Tribunal rejected this contention on the facts, applying precedent that requires the AO to be seised of proceedings in respect of the relevant year before initiating penalty.

Interpretation and reasoning: The Tribunal held that the mere separability of the substantive penalty provision does not vest the AO with unfettered temporal jurisdiction to initiate penalty for a year in which no proceedings are pending; statutory and jurisprudential safeguards require initiation to be linked to the AO's jurisdiction in respect of that year.

Ratio vs. Obiter: Ratio - Sections 271D/271E cannot be invoked dehors any connection to pending proceedings for the relevant assessment year; the AO must be in seisin of that year's proceedings. Obiter - The independence of penalty provisions in abstract does not override jurisdictional prerequisites.

Conclusion: The Revenue's submission that sections 271D/271E may be invoked at any time irrespective of pending proceedings for the relevant year was rejected as devoid of merit on the facts; penalty initiation must respect jurisdictional limits.

ISSUE-WISE DETAILED ANALYSIS - Issue 4: Appellate authority deciding on a ground not raised by the appellant (reasonable cause)

Legal framework: Appellate orders should decide issues raised by the parties; deciding appeal on a new ground not agitated by the appellant may be procedurally improper and prejudicial.

Precedent Treatment: The Tribunal noted that the CIT(A) decided the appeal on the question of absence of reasonable cause (section 273B touchstone) although that ground had not been advanced before him by the appellant.

Interpretation and reasoning: The Tribunal accepted the appellant's contention that the CIT(A) purportedly disposed of the appeal on a ground not pressed before him, which is a procedural irregularity and undermines fairness of adjudication. This procedural error reinforced the Tribunal's conclusion to set aside the penalty on other substantive jurisdictional grounds.

Ratio vs. Obiter: Ratio - An appellate authority should not decide an appeal on a ground not raised by the appellant; such decision-making is procedurally improper. Obiter - The substantive merits of 'reasonable cause' were not adjudicated by the Tribunal given the primary jurisdictional defect.

Conclusion: The CIT(A)'s reliance on the unpleaded ground of 'reasonable cause' was improper; this procedural lapse weighed against the sustainment of the penalty.

ISSUE-WISE DETAILED ANALYSIS - Issue 5: Order passed in the name of deceased person when legal heirs were on record

Legal framework: Correct party description and representation are necessary for valid adjudicatory orders; passing an order in the name of a deceased person when legal heirs are on record may constitute a fatal defect.

Precedent Treatment: The appellant raised that the CIT(A)'s order was in the name of a deceased person and legal heirs were placed on record; the Tribunal recognized this as a flaw.

Interpretation and reasoning: The Tribunal noted the procedural infirmity and treated it as one of the factors undermining the validity of the appellate order, though the principal ground for setting aside the penalty was the jurisdictional defect in initiation of the penalty itself.

Ratio vs. Obiter: Ratio - Appellate orders issued in the name of a deceased person despite legal heirs being on record are procedurally defective. Obiter - The defect's remedial consequences depend on whether it caused prejudice; here it reinforced the decision to delete the penalty.

Conclusion: The appellate order's incorrect naming was a fatal procedural defect reinforcing the Tribunal's conclusion to delete the impugned penalty.

FINAL CONCLUSION (integrated)

Penalty proceedings under section 271E initiated for the assessment year in question while no proceedings for that year were pending before the assessing officer were invalid. Initiation of penalty on the basis of information arising in assessment of another year without the AO being seised of proceedings for the relevant year is not legally tenable. The appellate authority's decision on an unpleaded ground and the passing of an order in the name of a deceased person were additional procedural infirmities. On these grounds the impugned penalty was deleted.

Section 271E penalty initiation during different assessment year proceedings renders penalty proceedings legally untenable and unsustainable
ITAT Delhi held that penalty under section 271E for loan repayment by bearer cheque instead of crossed cheque was improperly initiated. The penalty proceedings for A.Y. 2014-15 were commenced while completing assessment for A.Y. 2015-16, which is legally untenable. Penalty proceedings must be initiated while the AO is conducting assessment proceedings for the relevant year in which default occurred, not afterwards. Since no proceedings were pending for A.Y. 2014-15, the penalty initiation was bad in law and unsustainable. Appeal allowed.

Penalty under section 271E - Requirement of pending proceedings for the relevant assessment year for initiation of penalty - Initiation of penalty proceedings during assessment of a different year - Reasonable cause defence under section 273B (consideration in penalty proceedings) - Validity of appellate order deciding on grounds not raised before itPenalty under section 271E - Requirement of pending proceedings for the relevant assessment year for initiation of penalty - Initiation of penalty proceedings during assessment of a different year - Initiation and imposition of penalty under section 271E for A.Y. 2014-15 which was initiated while completing assessment proceedings for A.Y. 2015-16 - HELD THAT: - The Tribunal found as an established fact that no proceedings were pending before the assessing officer in respect of A.Y. 2014-15 when the penalty under section 271E was initiated; the information about the repayment relevant to A.Y. 2014-15 came to the AO during scrutiny of A.Y. 2015-16. Relying on the principle that penalty proceedings under section 271E must be initiated while the AO is seised of the assessment proceedings of the relevant year in which the default occurred, the Tribunal held that initiating penalty for A.Y. 2014-15 during completion of assessment for A.Y. 2015-16 is not legally tenable. The Tribunal noted that, in such circumstances, the proper course would have been for the AO to bring A.Y. 2014-15 to scrutiny and make a regular assessment or to initiate appropriate proceedings under section 147, neither of which was done. The Revenue's contention that section 271D/271E proceedings can be initiated dehors pending proceedings for the relevant year was rejected as devoid of merit. On these conclusions the Tribunal held the penalty and its confirmation unsustainable. [Paras 11, 12]Initiation and imposition of the penalty under section 271E for A.Y. 2014-15 is invalid and unsustainable; the penalty is deleted.Reasonable cause defence under section 273B (consideration in penalty proceedings) - Validity of appellate order deciding on grounds not raised before it - Whether the CIT(A) erred in deciding the appeal on the ground of absence of reasonable cause (which was not raised by the assessee) and in passing the order in the name of a deceased person - HELD THAT: - The Tribunal agreed with the assessee that the CIT(A) addressed the question of 'reasonable cause' - a ground not taken by the assessee before the appellate authority - and thus decided the appeal on an issue that was not raised. The Tribunal also recorded the assessee's contention that the CIT(A)'s order was passed in the name of the deceased assessee and found that this was a material defect. Although the primary dispositional ground was the illegality of initiating penalty for the wrong assessment year, the Tribunal accepted that the CIT(A)'s reliance on and decision upon the unraised question of reasonable cause and the procedural defect of passing the order in the deceased's name were both improvident. [Paras 13]CIT(A) erred by deciding on a ground not raised by the assessee and by passing the order in the name of the deceased; this defect supports the conclusion that the appellate confirmation was flawed.Final Conclusion: The impugned penalty under section 271E (A.Y. 2014-15) was set aside: initiation of the penalty during assessment of A.Y. 2015-16 when no proceedings were pending for A.Y. 2014-15 was held legally untenable; the penalty is deleted and the assessee's appeal is allowed.

2023 (12) TMI 337 - ITAT DELHI Income Tax

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Assessee wins case on unexplained cash deposits under Section 68 after explaining sources as savings and income
ITAT Delhi ruled in favor of assessee regarding unexplained cash deposits under section 68. The assessee explained cash deposits in IDBI Bank account as old savings, current year income, and withdrawals from banks/partnership firm. Revenue failed to provide evidence dismantling this explanation. No incriminating material was found during search of assessee's bank locker. AO incorrectly made additions based on material found in another person's case without following mandatory section 153C procedures. ITAT deleted all additions sustained by CIT(A), following precedents from Delhi HC and SC decisions.

Requirement of incriminating material in search to sustain additions under section 153A - Applicability of section 153C for reliance on material found during search of other persons - Burden on Revenue to rebut explanations for unexplained cash deposits and credited funds - Deletion of additions not supported by record or cogent reasonsRequirement of incriminating material in search to sustain additions under section 153A - Applicability of section 153C for reliance on material found during search of other persons - Assessment framed under section 153A r.w.s. 143(3) cannot sustain additions based on incriminating material alleged to be found in search of other persons unless the mandatory procedure under section 153C is followed; where no incriminating material was found in the assessee's locker, additions are unsustainable. - HELD THAT: - The Tribunal recorded that the search led to discovery of a key to a locker in the assessee's name and the locker was searched, but no incriminating material was found on the locker (recorded findings). The Assessing Officer made additions relying on material purportedly from other persons; however, if additions are sought to be made on the basis of material found in the case of another person, the statutory procedure under section 153C must be followed. The Tribunal noted the absence of incriminating material in the assessee's own search and that the AO did not invoke the section 153C procedure before relying on third party material; accordingly the additions could not be sustained. The Tribunal relied on the consistent line of authority of the Delhi High Court and subsequent affirmation by the Supreme Court to support this legal principle and applied it to delete the contested additions. [Paras 16, 17, 18, 19, 20]Grounds attacking the assessment as unsupported by incriminating material and for failure to follow section 153C were allowed and the impugned additions based on such material were deleted.Burden on Revenue to rebut explanations for unexplained cash deposits - Deletion of additions not supported by record or cogent reasons - Addition of Rs. 93,000 as unexplained cash deposit under section 68 was unsustainable as the assessee furnished explanations which were not successfully rebutted by the Revenue. - HELD THAT: - The assessee provided an explanation attributing the cash deposits to old savings, income earned during the year, withdrawals from banks and partnership firm and produced records. The Tribunal found that the AO/CIT(A) did not bring evidence to dismantle this explanation and that the IDBI bank account was declared by the assessee. In absence of solid factual or legal basis to reject the explanation, the addition had no sustainable foundation and was deleted. [Paras 15, 20]Addition of Rs. 93,000 under section 68 was deleted in favour of the assessee.Burden on Revenue to rebut explanations for credited funds - Applicability of section 153C for reliance on material found during search of other persons - Deletion of additions not supported by record or cogent reasons - Addition of Rs. 40,00,000 as unexplained credit under section 68 was deleted where the assessee furnished documentary evidence that the credit arose from sale of shares and there was no incriminating material in the assessee's search; AO's reliance on alleged accommodation entries from other persons was factually incorrect and procedurally improper without invoking section 153C. - HELD THAT: - The assessee produced paperwork and Rule 46A evidence showing the credited amount related to sale of shares to RNB Leasing and Financial Services and supplied PAN/ITR of the buyer. The AO alleged accommodation entries from a third party concern but the Tribunal found that the AO and CIT(A) proceeded on an incorrect factual premise that incriminating material was found in the assessee's premises; in reality no incriminating material was found in the locker. Further, reliance on material of other persons without following section 153C procedure was held impermissible. Applying these conclusions and relevant authorities the Tribunal deleted the addition. [Paras 16, 17, 20]Addition of Rs. 40,00,000 under section 68 was deleted in favour of the assessee.Deletion of additions not supported by record or cogent reasons - Part disallowance sustained by the CIT(A) in respect of agricultural income was unwarranted and relieved the assessee where prior years had accepted agricultural income and details of landholding were on record. - HELD THAT: - The Tribunal observed that the assessee had declared agricultural income in earlier assessment years which was accepted and that details of land holding were filed in the assessment proceedings before the AO. Given these facts, the partial disallowance upheld by the CIT(A) lacked justification. Accordingly, the Tribunal reduced/deleted the addition relating to agricultural income as recorded by the Tribunal. [Paras 14, 20]Addition on account of agricultural income was deleted (assessed relief given to the assessee).Final Conclusion: For AY 2014-15 the Tribunal allowed the appeal in part: it deleted the additions sustained by the CIT(A) relating to unexplained agricultural income, the unexplained cash deposits and the unexplained credited funds, holding that additions were not supported by incriminating material, the Revenue failed to rebut the explanations, and material from other persons cannot be relied upon without invoking section 153C.

2023 (12) TMI 336 - ITAT RAJKOT Income Tax

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Trust cannot claim section 10(23C)(vi) exemption for new institute added after original approval granted
ITAT Rajkot dismissed the assessee's appeal against CIT's revision order u/s 263. The trust claimed exemption u/s 10(23C)(vi) for a School of Science added to the trust in 2014, despite the approval being granted in 2012 for specific institutes. ITAT held that approval granted to existing institutes cannot automatically extend to new institutes added subsequently. The trust needed to apply afresh for approval for the new institute. The assessment order was correctly found erroneous and prejudicial to revenue.

Revisional jurisdiction under Section 263 - Approval under Section 10(23C)(vi) - Exemption under Section 11 - Registration under Section 12A - Prejudice to the revenue - One time approval/CBDT Circular No.7/2010 - Alternative claim of exemptionRevisional jurisdiction under Section 263 - Approval under Section 10(23C)(vi) - One time approval/CBDT Circular No.7/2010 - Whether the assessment order was erroneous in granting exemption under Section 10(23C)(vi) to an institute not covered by the approval - HELD THAT: - The Tribunal upheld the CIT(Exemptions)'s conclusion that the Assessing Officer erred in allowing exemption under Section 10(23C)(vi) to the School of Science because the approval certificate dated 17.04.2012 specifically listed only certain institutes and did not include the School of Science. The Tribunal agreed with the CIT(Exemptions) that the one time approval dispensation (as explained in CBDT Circular No.7/2010) did not operate to automatically extend the original approval to institutions subsequently added to the trust; new institutions added after grant of approval required separate consideration and the assessee ought to have applied for approval in respect of that institute. The Tribunal found no infirmity in the CIT(Exemptions)'s finding that the AO's allowance was therefore an incorrect application of fact and law, rendering the assessment order erroneous for the purpose of Section 263. [Paras 11, 12, 13, 14, 18]Assessment order was erroneous in granting exemption under Section 10(23C)(vi) to an institute not covered by the approval; the CIT(Exemptions)'s order under Section 263 upholding the error is confirmed.Prejudice to the revenue - Exemption under Section 11 - Registration under Section 12A - Alternative claim of exemption - Whether prejudice to the revenue was shown because the assessee could have alternatively claimed exemption under Section 11 by virtue of registration under Section 12A - HELD THAT: - The Tribunal agreed with the CIT(Exemptions) that prejudice to the revenue existed because the assessee had not claimed exemption under Section 11 in the return or during assessment and that such a claim would require scrutiny and verification; registration under Section 12A does not render Section 11 exemption automatic. The Tribunal also rejected the Revenue's contention that CBDT Circular No.1/2015 forbids an alternative claim under Section 11 where Section 10(23C)(vi) is claimed; the Tribunal interpreted the circular as only preventing claiming exemption under other provisions of Section 10 once exempt under Section 10(23C)(vi) or Section 11, and not as barring an assessee from seeking exemption under Section 11 after or instead of Section 10(23C)(vi) subject to fulfillment of conditions and verification. [Paras 15, 16, 17, 18]Prejudice to the revenue was established because the assessee had not claimed or substantiated exemption under Section 11 and the claim required verification; CBDT Circular No.1/2015 does not bar an alternative claim under Section 11 in the manner contended by the Revenue.Final Conclusion: The Tribunal dismissed the assessee's appeal, upholding the CIT(Exemptions)'s order under Section 263 - the allowance of exemption under Section 10(23C)(vi) to the School of Science (which was not covered by the approval) rendered the assessment order erroneous and prejudicial to the revenue; the matter stands restored to the AO for fresh examination as directed by the CIT(Exemptions).

2023 (12) TMI 318 - SECURITIES APPELLATE TRIBUNAL MUMBAI SEBI

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Issues Involved:
1. Alleged violation of Section 12A(a), (b), and (c) of the SEBI Act, 1992 read with Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
2. The role and knowledge of the appellant regarding the transactions involving Nashik Property and Kanjurmarg Property.
3. The jurisdiction and scope of SEBI's inquiry into the conduct of Chartered Accountants.
4. The professional standards and responsibilities of statutory auditors versus forensic auditors.

Summary:

1. Alleged Violation of SEBI Act and PFUTP Regulations:
The appellant, a leading firm of Chartered Accountants, was penalized by SEBI for allegedly violating Section 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations. The AO concluded that the appellant facilitated the cleaning up of the books of the Company despite being aware of irregularities and misstatements in the financial statements.

2. Role and Knowledge of the Appellant:
The AO found that the transactions involving Nashik Property and Kanjurmarg Property, which included significant sums of money, were not reflected in the financial statements. Despite the AO's findings, the Tribunal noted that there was no documented evidence of these transactions and that the appellant was not aware of them. The Tribunal emphasized that the appellant was a statutory auditor, not a forensic auditor, and relied on the documents provided by the Company, which did not indicate any irregularities.

3. Jurisdiction and Scope of SEBI's Inquiry:
The Tribunal highlighted the limited scope of SEBI's inquiry, which should be confined to the charge of conspiracy and involvement in fraud. The Tribunal referenced the Bombay High Court's decision in Price Waterhouse & Co. vs. SEBI, which stated that SEBI cannot encroach upon the powers vested with the Institute under the CA Act. SEBI can only take action if there is evidence of connivance or conspiracy with the Company's officers.

4. Professional Standards and Responsibilities:
The Tribunal noted the distinction between statutory auditors and forensic auditors, emphasizing that statutory audits are conducted on a test-check basis and are subject to inherent limitations. The appellant had followed the accounting standards prescribed by the ICAI, and there was no evidence of their involvement in fabricating or falsifying accounts. The Tribunal concluded that any issues of professional negligence should be referred to the ICAI, not SEBI.

Conclusion:
The Tribunal found that the AO's findings were based on presumptions and conjectures. There was no evidence of the appellant's direct involvement in the fraudulent transactions or any collusion with the Company's directors or promoters. Consequently, the impugned order was quashed, and the appeal was allowed.

CA firm wins appeal against SEBI adjudication proceedings under Section 12A for alleged book cleaning facilitation
Securities Appellate Tribunal Mumbai allowed appeal by CA firm against SEBI adjudication proceedings. SEBI had alleged the firm facilitated cleaning up company books despite knowing irregularities. SAT held that without proof of inducement, fraud, collusion or connivance, SEBI cannot proceed under Section 12A of SEBI Act. The inquiry scope was limited to conspiracy charges, not professional negligence. Since no direct involvement in fudging accounts was established, matter should be referred to ICAI for disciplinary action if accounting standards were violated. SEBI's role confined to conspiracy charges only.

Liability of a statutory auditor under the SEBI Act for conspiracy or connivance in fraud - scope of SEBI's jurisdiction to investigate and adjudicate conduct of Chartered Accountants - distinction between professional negligence and fraudulent connivance under the PFUTP Regulations - application of auditing standard SA 315 and inherent limitations of a statutory audit - remedial competence of ICAI for professional misconduct of auditorsLiability of a statutory auditor under the SEBI Act for conspiracy or connivance in fraud - distinction between professional negligence and fraudulent connivance under the PFUTP Regulations - Whether the appellant (statutory auditor) could be penalised under Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations for having facilitated the cleaning up of the Company's books of account. - HELD THAT: - The Tribunal held that SEBI's inquiry is confined to ascertaining conspiracy, connivance or involvement of the auditor in a fraud affecting the securities market and is not a forum to adjudicate allegations of professional negligence in auditing. Applying the legal principles in the decisions of the Bombay High Court and this Tribunal, the Court reiterated that absent evidence of inducement, collusion or mens rea on the part of the auditor, provisions under Section 12A and the PFUTP Regulations cannot be invoked. The Tribunal found no finding of direct involvement, collusion or connivance by the appellant in fudging or cleaning up the books; the material did not establish fraudulent intent or dishonest facilitation. Consequently the appellant could not be penalised under the SEBI Act and PFUTP Regulations on the basis of the record before the AO. [Paras 18, 19, 28, 29, 36]No penal liability under Section 12A and Regulations 3 and 4 of the PFUTP Regulations could be sustained against the appellant in the absence of evidence of connivance or fraudulent intent.Scope of SEBI's jurisdiction to investigate and adjudicate conduct of Chartered Accountants - remedial competence of ICAI for professional misconduct of auditors - Extent of SEBI's jurisdiction to proceed against a Chartered Accountant or CA firm for conduct in the course of statutory audit and the appropriate forum for professional negligence. - HELD THAT: - Relying on precedent, the Tribunal explained that SEBI has power to investigate and take remedial or preventive measures where evidence shows a CA was instrumental in preparing false or fabricated accounts in connivance with company officers, because such conduct affects investor interests and the securities market. However, if the inquiry discloses at best omissions or professional lapses without mens rea or collusion, those matters fall within the disciplinary domain of the Institute of Chartered Accountants and SEBI cannot substitute that process. The Tribunal emphasised that SEBI's statutory role is limited to conspiracy/fraud affecting the securities market, and professional negligence should be referred to ICAI for disciplinary action. [Paras 21, 22, 23, 26, 35]SEBI may act only where evidence shows fraudulent connivance; allegations of professional negligence should be dealt with by ICAI.Application of auditing standard SA 315 and inherent limitations of a statutory audit - liability of a statutory auditor under the SEBI Act for conspiracy or connivance in fraud - Whether the AO's findings that the appellant was aware of the large property-related transactions and therefore facilitated improper entries were supported by evidence or were based on surmise and conjecture. - HELD THAT: - The Tribunal found the AO's conclusions rested on presumptions and conjectures. The appellant had audited books reflected through documents and was not a forensic auditor; there was no written agreement evidencing the large transactions and the appellant had sought and relied on explanations, an agreement relating to a smaller consultancy payment, and balance confirmations which corresponded with the books. The Court observed that zero-balance ledger items were not identified as risks in the appellant's exercise under SA 315 and that statutory audits have inherent limitations and are conducted on a test-check basis. In that factual matrix, the finding that the appellant must have known of and facilitated the transactions was unsustainable. [Paras 16, 31, 32, 33, 34]AO's findings of awareness and facilitation were based on surmise and conjecture and could not be sustained in view of the documentary record and the inherent scope of a statutory audit.Final Conclusion: The impugned adjudication order is quashed; the appeal is allowed. The Tribunal concluded that SEBI's action could not be sustained in absence of evidence of connivance or fraudulent intent by the appellant and noted that allegations of professional negligence, if any, are within the disciplinary competence of the ICAI. Parties shall bear their own costs.

2023 (12) TMI 285 - BOMBAY HIGH COURT Income Tax

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Company wins tax case as disputed sublease rent cannot be taxed under Section 56 without established right to receive income
The Bombay HC ruled in favor of the appellant company regarding taxation of sublease rent from IDBI. The court held that income under Section 56 cannot be taxed as "accrued" when the right to receive such income is disputed and pending adjudication. Since the sublease agreement was terminated in 1981 and cross-suits between parties remain pending before Small Causes Court, no definite right to receive rent existed. The appellant had not accepted rent post-termination, and the court determined that income cannot be taxed on presumption that future court orders may favor the appellant. The revenue's attempt to tax the disputed amount as accrued income for assessment year 1986-87 was unjustified.

Accrual of income - Income from Other Sources - mercantile system of accounting - qualitative and quantitative factors for accrual - debitum in praesenti solvendum in futuro - pendency of civil proceedings postpones accrual - garnishee proceedings do not create subsisting right Accrual of income - qualitative and quantitative factors for accrual - mercantile system of accounting - pendency of civil proceedings postpones accrual - garnishee proceedings do not create subsisting right - Whether the lease rent of Rs. 3,42,720/- accrued to the assessee in the assessment year 1986-87 (and similarly for the other listed years) and was taxable despite pending civil disputes between the assessee and IDBI. - HELD THAT: - The Court applied the two-fold test for accrual - a qualitative element (existence of a legal right to receive) and a quantitative element (ascertainment of the sum) - and held that both must converge for income to accrue. While an assessee following the mercantile system may show entries, mere earning or entry in books does not suffice unless a right to receive has ripened into a debt (debitum in praesenti solvendum in futuro). The cross-suits between the parties, including the assessee's claim of lawful termination and IDBI's claim restraining termination, placed the right to receive the rent in jeopardy and sub judice. The Small Causes Court's order permitting IDBI to deposit rent in court was made "without prejudice" and did not vest a subsisting right in the assessee. Payment to the tax authorities pursuant to garnishee proceedings likewise did not amount to creation of a legal right in favour of the assessee. Applying binding authorities that postpone accrual until civil adjudication where rights are disputed, the Court concluded that the requisite convergence of legal right and ascertainment was absent for the year under consideration; to tax the sum in 1986-87 would pre-empt the civil court's determination. The Tribunal and lower authorities erred by construing the assessee's claims as a waiver of right or by treating the garnishee deposit as proof of a subsisting right. [Paras 32, 33, 37, 38, 39] The lease rent did not accrue to the assessee for assessment year 1986-87 (and for the other specified assessment years) and therefore could not be taxed in those years. Final Conclusion: The appeals are allowed on the question of accrual: the Revenue was not justified in taxing the disputed lease rent for AY 1986-87 and for the other specified assessment years, the issue of accrual being postponed until final adjudication of the civil disputes; no observation herein prejudges the merits of those civil suits.

2023 (12) TMI 284 - DELHI HIGH COURT Income Tax

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Company wins quash of reassessment proceedings under Section 147 for land sale transaction deemed stock-in-trade
Delhi HC quashed reassessment proceedings under Section 147 against a company for land sale transaction. The court held that the AO erroneously applied Section 50C when land was stock-in-trade, not capital asset. The reassessment was initiated after four years without alleging non-disclosure of material facts, constituting mere change of opinion. The PCIT's approval was mechanical without proper application of mind. The transaction was not sham as documents were genuine and previously scrutinized during original assessment. The court emphasized that reopening concluded assessments requires careful examination by senior officers, which was lacking here.

Reopening of assessment under Section 147 of the Income tax Act - application of Section 50C of the Income tax Act - change of opinion - reasons recorded for reopening - approval for reopening under Section 151 of the Income tax Act - deemed escapement under Explanation 2 to Section 147 - sham transaction - stock in trade versus capital assetReopening of assessment under Section 147 of the Income tax Act - application of Section 50C of the Income tax Act - stock in trade versus capital asset - change of opinion - reasons recorded for reopening - Validity of reopening assessment of SIPL for AY 2011-12 on the basis that income had escaped assessment - HELD THAT: - The Court found that the AO had examined the subject sale transaction during the original scrutiny assessment under Section 143(3) and had recorded that the assessee was engaged in real estate and land development and had treated the land as stock in trade. The reasons recorded for reopening proceeded on the premise that the transaction was on capital account and invoked Section 50C by valuing the land at circle rate to compute escaped income. Section 50C, however, applies only to transfer of a capital asset; given the finding in the assessment record that the land was stock in trade, reliance on Section 50C was erroneous. Reopening after the four year period required a specific case of failure to disclose fully and truly all material facts; no such failure was alleged or made out as the transaction and the MoU with the group company were before the AO in the original assessment. On these grounds the Court concluded that the reassessment amounted to a change of opinion and was not justified. [Paras 34, 36, 39, 58, 59]Reopening under Section 147 was invalid; reassessment could not be sustained because it rested on the misapplication of Section 50C and constituted impermissible change of opinion.Approval for reopening under Section 151 of the Income tax Act - deemed escapement under Explanation 2 to Section 147 - reasons recorded for reopening - Whether the Principal Commissioner of Income Tax (PCIT) applied independent mind in granting approval for reopening - HELD THAT: - The form used to obtain approval did not contain mandatory particulars required when an assessment had already been made (notably particulars concerning the originally assessed income and whether there was under assessment). The ACIT and PCIT endorsed the proposal without addressing these required entries and without demonstrating application of mind to whether the matter fell within Explanation 2(c) (deemed escapement). The Court emphasised the layered procedure for reopening and that senior officers must apply their minds; here the endorsements indicate a rubber stamp approval rather than considered satisfaction. [Paras 47, 49, 50, 53, 58]Approval under Section 151 was given without proper application of mind and thus did not validate the reopening.Sham transaction - reopening of assessment under Section 147 of the Income tax Act - Whether the sale and remittance arrangement between SIPL and STPL constituted a sham transaction justifying reopening - HELD THAT: - The Court observed that no finding was placed on record that the MOU/agreement was a counterfeit or non existent instrument; SIPL had produced the agreement and the transaction was recorded and reflected in assessment records. The facts relied upon by the AO differ from authorities where reopening was sustained on fresh material exposing falsity. The AO's case proceeded on a view that the transaction was on capital account (invoking Section 50C) rather than on demonstrable proof of sham dealings; therefore the Phool Chand Bajranglal line of authority was inapplicable. [Paras 54, 56, 57]The transaction was not held to be a sham and that premise did not justify reopening.Final Conclusion: The Court quashed the impugned order dated 13.11.2018 and held that reassessment proceedings against Shourya Infrastructure Pvt. Ltd. for AY 2011-12 were not justified: the AO misapplied Section 50C to stock in trade, the reopening amounted to a change of opinion with no failure to disclose, and the supervisory approvals under Section 151 were given without proper application of mind.

2023 (12) TMI 260 - SECURITIES APPELLATE TRIBUNAL MUMBAI SEBI

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SEBI's Rs. 447 crore disgorgement order overturned due to lack of vicarious liability and procedural violations
Securities Appellate Tribunal Mumbai allowed appeals against SEBI's order imposing Rs. 447.27 crores disgorgement and one-year derivatives trading ban on a company and entities. The Tribunal held that Section 27 of SEBI Act, prior to 2019 amendment, applied only to criminal proceedings, not civil liability. Managing Director could not be held vicariously liable without proof of direct involvement or knowledge in manipulative trades. The Tribunal found SEBI failed to establish complicity beyond surmises and conjectures. Additionally, inordinate 10-year delay in proceedings and non-supply of investigation documents violated natural justice principles. Appeals were allowed on grounds of lack of vicarious liability, procedural violations, and insufficient evidence of manipulation.

Vicarious liability under Section 27 of the SEBI Act - distinction between "offence" and "contravention" - prospective effect of statutory amendment - scope of civil adjudication under Chapter VI-A of the SEBI Act - reasonableness and limitation in initiation of regulatory proceedings - principles of natural justice and disclosure of investigation report - requirement of clear evidence of active role for imposing personal liabilityVicarious liability under Section 27 of the SEBI Act - distinction between "offence" and "contravention" - Section 27 as it stood prior to amendment w.e.f. March 08, 2019 did not extend vicarious liability to civil adjudication and applied only in respect of offences triable under Chapter VII. - HELD THAT: - A purposive and contextual reading of the SEBI Act shows Chapter IV (directions), Chapter VI-A (monetary penalties) and Chapter VII (offences and prosecution) form distinct remedial regimes. The pre-amendment text of Section 27 employed the term "offence" and must be read in the context of Sections 24 and 26 which envisage criminal prosecution before designated courts. Parliamentary material (Notes on Clauses to the Finance Bill, 2018) and subsequent amendment replacing "offence" with "contravention" demonstrate a legislative intention to enlarge the scope prospectively to cover enforcement (civil) proceedings. Accordingly, the pre-2019 Section 27 did not permit imposition of vicarious liability for civil contraventions adjudicated under Chapter VI-A.Section 27 prior to March 08, 2019 did not apply to civil liability; it was confined to offences.Prospective effect of statutory amendment - scope of civil adjudication under Chapter VI-A of the SEBI Act - The 2018 amendment to Section 27 (effective March 08, 2019) replaced "offence" with "contravention" to expand vicarious liability to civil enforcement proceedings; the amendment is substantive and prospective, not clarificatory or retrospective. - HELD THAT: - The Notes on Clauses explicitly state that the amendment was intended to "enlarge the scope" to cover enforcement proceedings. Given the substantive change in the statutory wording and the surrounding scheme of the Act, the amendment cannot be given retrospective effect. Treating the amendment as merely clarificatory is inconsistent with legislative history and SEBI's prior consistent position that pre-amendment Section 27 did not impose vicarious liability for civil contraventions.As amended w.e.f. March 08, 2019, Section 27 covers vicarious liability for contraventions (civil enforcement); the amendment is substantive and prospective.Requirement of clear evidence of active role for imposing personal liability - vicarious liability under Section 27 of the SEBI Act - On the facts, the Managing Director (noticee no. 2) could not be held vicariously liable: (a) pre-amendment Section 27 did not apply to civil adjudication in any event; and (b) even assuming applicability, SEBI failed to prove active involvement or knowledge-board minutes authorized two senior executives to "explore, identify and implement" the funding avenue and no direct evidence established the Managing Director's complicity. - HELD THAT: - The Board minutes of 29.03.2007 and 19.11.2007 unambiguously authorised the CFO and Controller Accounts to explore and implement funding, and the two authorised officers reported to the Board. Those minutes, not disputed, discharged the proviso under Section 27 by showing due delegation and absence of proof of the Managing Director's knowledge or complicity. The AO's contrary conclusion was based on inference and surmise rather than evidentiary proof of an active role; statutory and jurisprudential principles require clear, concrete evidence of active participation (and, where criminal intent is relevant, mens rea) before imposing vicarious liability on a person by virtue of designation alone.The Managing Director (noticee no. 2) is not liable under Section 27 on the facts presented; the finding of complicity is quashed.Reasonableness and limitation in initiation of regulatory proceedings - principles of natural justice and disclosure of investigation report - Proceedings (and penalty orders) against noticee nos. 3 and 4 were quashed due to inordinate delay in initiation of adjudication and breach of principles of natural justice by non-disclosure of relied documents (including the investigation report); on merits the AO's finding of aiding and abetting was unsustainable. - HELD THAT: - Trades occurred in November 2007; SEBI sought and received information from noticee nos. 3 and 4 in 2009-2010 yet issued the show cause notice only in November 2017-an inordinate delay which cannot be justified by an internal decision to await Section 11B proceedings. Where no statutory limitation is prescribed, proceedings must be initiated within a reasonable time; prolonged delay here caused prejudice and loss of evidence. Further, repeated requests for documents identified in the SCN, including the investigation report, were not complied with, violating natural justice (T. Takano principle). Independently, factual connections the AO drew between facility agreements and the alleged manipulative scheme were speculative: the facility agreements pre-dated the RIL decision to sell and could not reasonably be read as proof that noticee nos. 3 and 4 financed the specific manipulative trades.Adjudication against noticee nos. 3 and 4 quashed for inordinate delay, nondisclosure and lack of sustaining evidence; penalties against them set aside (refund directed if deposited).Consistency of regulatory adjudication - application of prior tribunal decision - The impugned order in respect of the Company (Reliance Industries Limited) is not interfered with as the matter was squarely covered by this Tribunal's earlier decision in Appeal No. 120 of 2017 and is presently the subject of a pending Supreme Court appeal. - HELD THAT: - The Tribunal found no reason to disturb the AO's findings as regards the Company because the issue had been considered and decided by this Tribunal in the earlier appeal; counsel for the Company conceded coverage by that decision. Consequently, the appeal by the Company is dismissed.Penalty order against the Company stands; appeal by the Company dismissed.Final Conclusion: The Tribunal holds that Section 27 prior to March 08, 2019 did not extend vicarious liability to civil adjudication; the 2018 amendment expanded the provision prospectively to cover contraventions. On the facts, the Managing Director cannot be held vicariously liable and the findings against him are quashed. Proceedings and penalty orders against Navi Mumbai SEZ Pvt. Ltd. and Mumbai SEZ Ltd. are quashed for inordinate delay, nondisclosure and absence of sustainable evidence; any penalty amounts deposited by them are to be refunded. The order as it relates to Reliance Industries Limited is upheld and the Company's appeal is dismissed. Parties to bear their own costs.

2023 (12) TMI 252 - CESTAT AHMEDABAD Service Tax

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Appellant wins appeal after depositing service tax liability before show cause notice under Section 73(3)
CESTAT Ahmedabad allowed the appeal where appellant raised finance through External Commercial Borrowings and Foreign Currency Convertible Bonds, receiving services from overseas banks under reverse charge mechanism. Appellant deposited entire service tax liability with interest before show cause notice issuance. Tribunal held revenue neutrality applied as service tax paid would be available as Cenvat credit for excise duty discharge. Since compliance was made before SCN under Section 73(3) of Finance Act 1994, penalties were set aside as no deliberate evasion was established.

Revenue neutrality - Reverse charge mechanism - Cenvat credit - Section 73(3) of the Finance Act, 1994 - bar on issuance of show cause notice where tax is paid before notice - Penalty under Section 78 of the Finance Act, 1994 - Requirement of fraud, collusion, wilful mis-statement or suppression for imposition of penaltyRevenue neutrality - Reverse charge mechanism - Cenvat credit - Penalty under Section 78 of the Finance Act, 1994 - Whether penalties imposed under Section 78 can be sustained where service tax under reverse charge was paid and was available as Cenvat credit, creating a revenue neutral situation. - HELD THAT: - The Tribunal found as an admitted fact that the appellant had discharged the Service Tax liability along with interest before issuance of the show cause notice and that the liability arose under reverse charge as recipient of overseas banking and financial services. Because the Service Tax so paid was available to the appellant as Cenvat credit usable against excise liability, the factual matrix created a revenue neutral position. In such circumstances, there was no reason to infer intent to evade payment of Service Tax or to impute suppression, mis-statement or fraud-the essential ingredients for sustaining penalty under Section 78. The Tribunal relied on earlier decisions holding that when the tax paid would be available as credit to the manufacturer, penalty cannot be sustained for lack of intent to evade duty, and applied that principle to set aside the penalty imposed on the facts of this case. [Paras 4]Penalty under Section 78 set aside because the availability of Cenvat credit on tax paid under reverse charge produced a revenue neutral situation and there was no evidence of intent to evade tax.Section 73(3) of the Finance Act, 1994 - bar on issuance of show cause notice where tax is paid before notice - Requirement of fraud, collusion, wilful mis-statement or suppression for imposition of penalty - Whether the show cause notice and consequential imposition of penalty were permissible where the assessee had paid the tax and interest before issue of the notice and the position was revenue neutral. - HELD THAT: - The Tribunal observed that the appellant had deposited the service tax with interest on 24.11.2007, prior to the SCN dated 28.01.2010, and that the tax so paid was available as Cenvat credit to the manufacturer. Under Section 73(3) the central excise officers shall not serve notice on a person who has paid the tax on his own ascertainment before service of a show cause notice; applying this provision, and having regard to the absence of any material in the SCN demonstrating deliberate short payment or intent to evade, the Tribunal held it was improper to issue the SCN for imposing penalty. The Tribunal concluded that denying the benefit of Section 73(3) merely because the payment followed a departmental query would render the provision redundant; accordingly, the appellant was entitled to the bar in Section 73(3) and the penalties could not be sustained. [Paras 4]The benefit of Section 73(3) applies; the show cause notice and penalties should not have been issued where tax and interest were deposited before the notice and no deliberate evasion was shown.Final Conclusion: The appeal is allowed; penalties imposed under the Finance Act, 1994 are set aside in view of revenue neutrality and applicability of Section 73(3) where tax and interest were paid prior to issuance of the show cause notice; consequential benefits, if any, to follow.

2023 (12) TMI 245 - CESTAT AHMEDABAD Central Excise

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Cutting, boring, beveling, threading operations on seamless pipes constitute manufacturing under Section 2(f), making products liable to excise duty.
CESTAT Ahmedabad held that cutting, boring, beveling, and threading operations on seamless pipes/tubes to manufacture drill pipes/rods constituted manufacturing under Section 2(f) of Central Excise Act, 1944, making products liable to excise duty. The tribunal confirmed duty demand but remanded spindle subs/connectors demand to adjudicating authority for verification of duty payment claims. Confiscation was denied as goods were already removed. Personal penalty of Rs. 5 lacs on director was upheld for knowingly evading duty obligations. Appeal disposed.

Manufacture under Section 2(f) of the Central Excise Act, 1944 - excisability of drill rods/drill pipes - invocation of extended period of limitation under proviso to Section 11A(1) - confiscation of goods released on bond - remand for factual verification of duty payments - personal penalty under Rule 26 of the Central Excise RulesManufacture under Section 2(f) of the Central Excise Act, 1944 - excisability of drill rods/drill pipes - Processes undertaken by the appellant in producing drill rods/drill pipes amounted to manufacture and the resultant products are excisable. - HELD THAT: - The Tribunal examined the sequence of operations from raw materials (round bars and seamless pipes) through cutting, boring, beveling, threading, fitting and welding of connectors and painting, and accepted the adjudicating authority's finding that the finished article (drill rod/ drill pipe) has a distinct name, character and use. The components (connectors and pipes) were found to have no independent market use and the processes were held to be incidental and ancillary to completion of a manufactured product. The Tribunal rejected reliance on earlier pre-1985 authority applying the old tariff nomenclature and concluded that, under the post-1985 tariff regime and the factual findings of the investigation, the work undertaken by the appellant satisfies the test of "manufacture" under Section 2(f) and the products fall within the First Schedule and are liable to excise duty. [Paras 4]Processes amount to manufacture and the resultant drill rods/drill pipes are excisable goods liable to central excise duty.Remand for factual verification of duty payments - Whether the demand of Rs. 9,89,159/- for alleged clandestine clearances of Spindle Subs/Bit Subs/Connectors is sustainable. - HELD THAT: - The Tribunal noted competing documentary claims: Revenue alleged over-invoicing beyond ER-1 returns indicating unpaid duty, while the appellant produced records asserting duty payment and ER-1 entries. The materials on record did not permit a conclusive finding at the appellate stage. Consequently the Tribunal directed a remand to the adjudicating authority for verification of evidence submitted by the appellant and for a fresh decision on that specific demand. [Paras 4]Demand of Rs. 9,89,159/- is remanded for verification and fresh adjudication by the authority.Confiscation of goods released on bond - Whether the seized goods could be confiscated where they had been removed and were not available for confiscation. - HELD THAT: - The Tribunal agreed with the adjudicating authority that confiscation cannot be ordered when the goods have already been removed and are not physically available for confiscation. The finding reflects the factual position that goods had been released and thus could not be confiscated in the circumstances of this case. [Paras 4]Confiscation cannot be ordered where the goods have been removed and are not available for confiscation.Invocation of extended period of limitation under proviso to Section 11A(1) - Whether invocation of the extended period of limitation was justified in view of suppression, misstatement or fraud by the appellant. - HELD THAT: - The Tribunal reviewed documentary evidence, ER-1 returns, applications for rebate and investigation statements and concluded that the appellant had mis-declared and failed to disclose the true manufacturing activity. The Tribunal found that the adjudicating authority had erred in not examining certain documents fully but, on balance, accepted the Revenue's case that the appellant suppressed facts, did not maintain required daily stock accounts, and had not taken registration or returns in respect of the disputed goods. Relying on authority and analogous reasoning, the Tribunal held that the proviso to Section 11A(1) is invokable and that the extended period for demand is correctly applied for the five-year period under challenge. [Paras 4]Extended period of limitation under the proviso to Section 11A(1) is invokable; the demand for the extended period is upheld.Personal penalty under Rule 26 of the Central Excise Rules - Whether personal penalty imposed on Shri Sanjay Jayantilal Gandhi under Rule 26 is sustainable and in what quantum. - HELD THAT: - The Tribunal examined the adjudicating authority's finding that Shri Sanjay Jayantilal Gandhi was a key decision-maker who knew or had reason to believe that the goods were excisable and that he was involved in removal and dealing with such goods. The earlier higher penalty imposed in another order was noted, but the impugned order reduced the penalty to Rs. 5 lakhs. The Tribunal found the imposition and quantum in the impugned order to be proper and proportionate to the acts and omissions, and accordingly upheld the penalty as fixed by the Commissioner. [Paras 4]Personal penalty of Rs. 5 lakhs on Shri Sanjay Jayantilal Gandhi under Rule 26 is upheld.Final Conclusion: The Tribunal held that the appellant's processes amount to manufacture and the drill rods/drill pipes are excisable; the extended period of limitation was rightly invoked on findings of suppression and mis-statement; confiscation could not be ordered as the goods were not available; the specific demand of Rs. 9,89,159/- is remanded for verification; and the personal penalty on the director under Rule 26 is sustained at the reduced amount.

2023 (12) TMI 227 - BOMBAY HIGH COURT Income Tax

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Tax treatment of government business subsidies as "income" u/s2(24)(xviii) challenged as arbitrary; upheld, petition dismissed
The dominant issue was the constitutional validity of s. 2(24)(xviii) of the Income-tax Act, inserted to treat specified Government subsidies/incentives as "income", challenged as arbitrary and discriminatory under Art. 14 and as impairing business profitability. The HC held Parliament's legislative competence was unquestioned and the provision carried a presumption of constitutionality; in fiscal statutes the legislature may enact targeted inclusionary measures to plug tax leakages, and diminished profits do not establish violation of Part III rights. The HC also noted the petitioner sought the incentive after the amendment, implying knowledge and acceptance of the prevailing tax regime, and that striking it down would create uncertainty and disrupt settled tax compliance. The writ petition was dismissed.

Constitutional validity of a taxation provision - inclusive definition of "income" - purpose test for characterisation of subsidy - legislative competence under Entry 82 to define taxable "income" - presumption of constitutionality and judicial restraint in fiscal legislation - non-arbitrariness and Article 14 scrutiny of taxing statutesConstitutional validity of a taxation provision - inclusive definition of "income" - purpose test for characterisation of subsidy - presumption of constitutionality and judicial restraint in fiscal legislation - Validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961, which treats government assistance (subsidy, grant, incentive, waiver, concession, reimbursement etc.) as "income", subject to the limited exclusion in Explanation 10 to Section 43. - HELD THAT: - The Court examined the challenge to Section 2(24)(xviii) on the anvil of legislative competence and Part III rights, applying settled principles of judicial restraint in fiscal matters. Noting that the word "income" is of elastic import and that Parliament has power under Entry 82 to define and tax income, the Court emphasised the strong presumption of constitutionality applicable to taxing statutes and the limited scope for judicial interference unless a provision is manifestly arbitrary or discriminatory. Pre-amendment case law applying the "purpose test" (distinguishing capital from revenue receipts) was analysed; the Court observed that Parliament may, within its competence, expand the statutory definition of income to meet evolving fiscal policy and to avoid litigation, and that legislative correction of judicially perceived lacunae is permissible. Applying the tests from precedents relied upon by both sides, the Court found no clear transgression of constitutional principles, no hostile discrimination, and no manifest arbitrariness in treating government assistance as income subject to the stated exclusion. The petitioner's contention of retrospective or impermissible intrusion into State revenues was rejected on the basis of parliamentary competence and the absence of a constitutional infirmity. The Court therefore upheld the impugned sub-clause as constitutionally valid and dismissed the writ petition. [Paras 29, 31, 36, 43, 44]Sub-clause (xviii) to Section 2(24) is constitutionally valid; petition dismissed.Final Conclusion: The High Court upheld the constitutional validity of Section 2(24)(xviii) of the Income Tax Act, 1961 (Finance Act, 2015 amendment), rejecting the petitioner's challenge that the provision unlawfully converts capital subsidies and similar State incentives into taxable income; the petition is dismissed.

2023 (12) TMI 185 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB Insolvency and Bankruptcy

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ISSUES PRESENTED AND CONSIDERED

1. Whether a Request for Resolution Plan (RFRP) that requires submission of a bank guarantee along with the resolution plan (in absolute terms: Rs. 50 lakhs) contravenes Regulation 36-B(4) of the CIRP Regulations, 2016 which prohibits any non-refundable deposit for submission of or along with resolution plans.

2. Whether an RFRP that specifies a performance security to be provided by the successful resolution applicant in terms of Regulation 36-B(4A) (including Explanation I and II) can also require, as a pre-condition for consideration, submission of an upfront bank guarantee by prospective resolution applicants.

3. Whether the Committee of Creditors (CoC) acted illegally or beyond its powers by refusing to consider a resolution plan where the prospective resolution applicant failed to submit a bank guarantee mandated by the RFRP and by refusing to waive that requirement.

4. Whether an appeal challenging non-consideration of a plan on grounds of non-compliance with an RFRP condition is maintainable when the RFRP condition was never challenged before the CoC or earlier authorities and the approved resolution plan has been implemented and distributions made.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Compatibility of an upfront bank guarantee requirement in the RFRP with Regulation 36-B(4)

Legal framework: Regulation 36-B(4) states that the request for resolution plans shall not require any non-refundable deposit for submission of or along with a resolution plan. Regulation 36-B(4A) permits a requirement that the resolution applicant, if its plan is approved, provide a performance security within the time specified and permits specification of the nature, value and duration of such performance security in the RFRP (Explanation I & II).

Precedent Treatment: The judgment does not cite or rely upon external precedents; the Court's analysis is confined to statutory text and the terms of the RFRP.

Interpretation and reasoning: The Court distinguishes a prohibition on non-refundable deposits (Reg.36-B(4)) from the separate, post-approval performance security regime (Reg.36-B(4A)). The RFRP's requirement of an upfront bank guarantee of Rs. 50 lakhs was examined to determine whether it constituted a prohibited non-refundable deposit. The RFRP did not characterize or treat the Rs. 50 lakhs as a non-refundable deposit; rather it required a bank guarantee to be submitted along with the plan as a condition of consideration. The Court finds that Reg.36-B(4) bars non-refundable deposits but does not per se forbid a requirement for a bank guarantee submitted with the plan, where the RFRP also complies with Reg.36-B(4A) by providing for performance security by the successful applicant.

Ratio vs. Obiter: Ratio - The prohibition in Reg.36-B(4) on non-refundable deposits does not automatically render an RFRP invalid where it requires an upfront bank guarantee, provided the RFRP does not require a non-refundable deposit and otherwise complies with Reg.36-B(4A) concerning performance security.

Conclusions: The upfront bank guarantee in the RFRP was not found to be in contravention of Regulation 36-B(4), because the RFRP did not require a non-refundable deposit and separately complied with the performance security requirement under Regulation 36-B(4A).

Issue 2 - Permissibility of requiring an upfront bank guarantee in addition to a post-approval performance security under Regulation 36-B(4A)

Legal framework: Regulation 36-B(4A) permits specification of a performance security (nature, value, duration, source) in the RFRP with the approval of the CoC, with Explanation I permitting specification "with the approval of the committee, having regard to the nature of resolution plan and business of the corporate debtor" and Explanation II allowing absolute specifications (e.g., guarantee for Rs. X for Y years) or variable specifications.

Precedent Treatment: No external precedent cited; the Court interprets the regulatory text and the RFRP language.

Interpretation and reasoning: The Court reads Reg.36-B(4A) and its explanations as authorizing the CoC to specify performance security in the RFRP, including in absolute terms. The RFRP in question specified both an upfront bank guarantee of Rs. 50 lakhs to be submitted with the resolution plan and a separate performance bank guarantee (10% of total amount) by the successful resolution applicant. The Court treats the upfront bank guarantee as a legitimate term of the RFRP aimed at testing seriousness and financial capability of prospective applicants, and as not inconsistent with the statutory scheme when the RFRP otherwise respects the limitations of Reg.36-B(4) and (4A).

Ratio vs. Obiter: Ratio - An RFRP may validly specify an upfront bank guarantee (in absolute terms) for submission with the plan where the RFRP also specifies the post-approval performance security authorized by Regulation 36-B(4A) and does not require a non-refundable deposit.

Conclusions: The RFRP's dual requirements (upfront bank guarantee plus post-approval performance bank guarantee) were permissible under Regulation 36-B(4A) and not barred by Regulation 36-B(4).

Issue 3 - Legality of the CoC's refusal to consider a plan where the applicant failed to submit the mandated bank guarantee and refused to waiver

Legal framework: Parties must comply with terms of an RFRP; the CoC has authority to set conditions in the RFRP (subject to regulatory limits) and to consider only those plans complying with RFRP conditions.

Precedent Treatment: None cited; analysis based on RFRP terms and minutes of the CoC meeting.

Interpretation and reasoning: The CoC minutes show that the prospective applicant failed to submit the Rs. 50 lakhs bank guarantee and requested a waiver to submit it post-approval; the CoC refused waiver because the requirement was an express term of the RFRP. The Court finds no illegality in the CoC's refusal to waive a condition of the RFRP or in declining to consider a non-compliant plan. The Appellant did not challenge the RFRP term earlier and accepted the RFRP process in communications to the bank, undermining contention of invalidity.

Ratio vs. Obiter: Ratio - The CoC is entitled to enforce RFRP conditions and to decline consideration of plans that do not comply with such conditions; refusal to waive an express RFRP requirement is not per se illegal.

Conclusions: The CoC's decision not to consider the plan for non-submission of the required bank guarantee and its refusal to waive the condition was lawful; no illegality was found in the CoC's action.

Issue 4 - Maintainability of appeal when RFRP condition was not challenged earlier and the approved plan has been implemented

Legal framework: The appellate review focuses on whether the decision under challenge is vitiated by illegality or non-compliance with law; remedies may be limited if the challenged order has been implemented and distributions completed.

Precedent Treatment: Not invoked; outcome inferred from facts and equitable considerations.

Interpretation and reasoning: The Court notes that the appellant never challenged the RFRP terms at any earlier stage, only sought to raise the objection after its plan was not considered. Further, the approved resolution plan has been implemented and distributions made, rendering the appeal virtually infructuous. These factual and procedural circumstances weigh against entertaining the appeal.

Ratio vs. Obiter: Ratio - An appeal challenging non-consideration of a non-compliant resolution plan may be dismissed where the appellant failed to challenge RFRP terms at the appropriate stage and where the approved plan has been implemented and distributions effected, making the appeal practically moot.

Conclusions: The appeal was dismissed as there was no reason to entertain it given (a) absence of earlier challenge to the RFRP condition, (b) the appellant's non-compliance with the RFRP, and (c) full implementation and distribution under the approved resolution plan.

Appeal Dismissed Over Missing Bank Guarantee; Tribunal Upholds Rejection of Resolution Plan as Per CIRP Regulations.
The Appellate Tribunal dismissed the appeal concerning the rejection of a resolution plan due to the Appellant's failure to submit a required bank guarantee of Rs. 50 lakhs as per the Request for Resolution Plan (RFRP). The Appellant argued that the bank guarantee requirement was contrary to CIRP Regulations, but the Tribunal found that the RFRP's condition complied with Regulation 36B (4A). The Appellant's non-compliance and failure to challenge the RFRP terms justified the CoC's decision to reject the plan. The appeal was deemed moot as the resolution plan was already approved and implemented.

Validity of pre-condition in Request for Resolution Plan - requirement of bank guarantee as a filter for seriousness of resolution applicants - compliance with Regulation 36B(4) and 36B(4A) of the CIRP Regulations, 2016 - committee of creditors' discretion to enforce terms of RFRP - maintainability of challenge to RFRP when not previously contestedCompliance with Regulation 36B(4) and 36B(4A) of the CIRP Regulations, 2016 - validity of pre-condition in Request for Resolution Plan - Validity of the requirement of a Rs. 50 Lakhs bank guarantee in the RFRP vis-a -vis Regulation 36B(4) and (4A). - HELD THAT: - The Tribunal examined Regulation 36B(4), which prohibits requiring any non-refundable deposit with submission of a resolution plan, and Regulation 36B(4A), which permits specification of a performance security in the RFRP to be provided by the successful resolution applicant. The RFRP did not stipulate any non-refundable deposit; instead it required a bank guarantee of Rs. 50 Lakhs to be submitted along with the resolution plan and separately provided for a performance bank guarantee by the successful resolution applicant. The requirement in the RFRP thus did not contravene the prohibition in sub-regulation (4), and fell within the scope of permissibility under sub-regulation (4A) and its Explanations which allow specification of performance security with the approval of the committee. The Tribunal therefore held that the RFRP's condition was in compliance with Regulation 36B(4A) and not illegal. [Paras 4, 9, 10, 11]Requirement of Rs. 50 Lakhs bank guarantee in the RFRP was lawful and in conformity with Regulation 36B(4A); it was not a prohibited non-refundable deposit under Regulation 36B(4).Committee of creditors' discretion to enforce terms of RFRP - maintainability of challenge to RFRP when not previously contested - Whether the CoC was justified in not considering the appellant's resolution plan which did not comply with the RFRP, and whether the appellant could raise that objection at this stage. - HELD THAT: - The record of the 9th CoC meeting shows the appellant's plan was not considered because he failed to submit the bank guarantee required by the RFRP and his request to waive that requirement was declined by the CoC. The appellant never challenged the RFRP condition during the process, and sought relief only after his plan was not considered. The Tribunal accepted the Resolution Professional's submission that the bank guarantee condition was intended as a seriousness filter and that the appellant's non-compliance justified the CoC's decision. Further, the Resolution Plan has been approved, implemented and distributions made, rendering the appeal practically infructuous. In these circumstances no illegality was found in the CoC's refusal to consider the non-compliant plan and the appellant cannot now be permitted to challenge the requirement which he did not contest earlier. [Paras 3, 5, 8, 12]CoC was justified in not considering the appellant's plan for non-compliance with the RFRP; the appellant's belated challenge to the RFRP condition is not maintainable and the appeal is dismissed as the approved plan has been implemented.Final Conclusion: The Tribunal found the RFRP condition requiring a Rs. 50 Lakhs bank guarantee to be lawful under Regulation 36B(4A), upheld the CoC's refusal to consider the appellant's non-compliant plan, noted the appellant's failure to challenge the RFRP earlier, and dismissed the appeal as the resolution plan has been approved and implemented.

2023 (12) TMI 183 - CESTAT AHMEDABAD Service Tax

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Sovereign police deployment charges are not security agency services and statutory fees for mandatory duties fall outside service tax.
Charges recovered by a State police department for deploying additional force for public security and maintenance of law and order were held to arise from sovereign statutory functions under the Rajasthan Police Act, 2007. Because the amount was fixed by statutory notifications, collected for mandatory police duties, and deposited in the Government treasury, the activity was not a commercial security agency service rendered in the course of business. The circular on sovereign/public authorities was applied to treat such statutory fees for compulsory functions as outside the service tax net, and the demand was held unsustainable.

Security Agency Service - sovereign/public authority - statutory function - definition of "person" excluding the State - cost recovery not amounting to business activity - C.B.E.&C. Circular No. 89/7/2006 on levy of service tax by sovereign/public authorities - user charges under Section 46 of the Police ActSecurity Agency Service - definition of "person" excluding the State - statutory function - cost recovery not amounting to business activity - C.B.E.&C. Circular No. 89/7/2006 on levy of service tax by sovereign/public authorities - user charges under Section 46 of the Police Act - Whether the State police department's provision of security services and recovery of charges therefor attract service tax as 'Security Agency Service'. - HELD THAT: - The Tribunal held that the State police, being an agency/arm of the State, is not a "person" liable to be treated as a security agency for levy of service tax. The charges recovered for deployment of additional police force were held to be statutory user charges notified under the Police Act and deposited into the Government treasury. Applying the test in C.B.E.&C. Circular No. 89/7/2006, the Tribunal found that (a) the deployment of police personnel is a statutory/mandatory duty performed by a sovereign/public authority; (b) the fees are levied in accordance with the statutory provision and notifications issued thereunder; and (c) the amounts are credited to the Government treasury. The Tribunal therefore concluded that the receipts are statutory in nature and not consideration for a taxable commercial supply of services. The characterisation of the amounts as cost recovery did not convert the activity into a business or commercial activity for service-tax purposes, and the lower authorities' view treating the activity as a taxable security agency service was rejected. The Tribunal also noted consistent earlier decisions on the identical issue and followed their ratio. [Paras 4, 5]Demand of service tax on security services provided by the State police and recovery of charges is unsustainable; impugned order set aside and appeal allowed.Final Conclusion: The Tribunal allowed the appeal: service tax demand on fees recovered by the State police for deployment of additional police force was held not leviable because such receipts are statutory user charges connected with a sovereign function, collected pursuant to the Police Act and deposited into the Government treasury.

2023 (12) TMI 182 - CESTAT AHMEDABAD Service Tax

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Issues Involved:
1. Whether the software supplied by the appellant constitutes "goods" and is thus exempt from service tax.
2. Whether the value of bought-out software should be included in the assessable value for service tax purposes.

Summary:

Issue 1: Whether the software supplied by the appellant constitutes "goods" and is thus exempt from service tax.
The appellant, Advanced Sys Tek Private Limited, is engaged in supplying "batch controller flow measuring instruments" and has developed Smart Terminal Software (STM) for terminal automation. They also occasionally supply bought-out standard software such as Oracle/MS Windows, which are installed on peripherals supplied as part of the system. The appellant argued that these software packages, supplied on appropriate media, constitute "goods" and do not attract service tax, relying on CBEC Circular No. 644/35/12 dated 12.07.2002 and various judicial decisions. The Tribunal agreed with the appellant's assertion that the software supplied preloaded on a medium like hardware amounts to a sale of goods and not a provision of service, referencing the Supreme Court's decision in Quickheal Technologies Ltd. and other relevant cases.

Issue 2: Whether the value of bought-out software should be included in the assessable value for service tax purposes.
The appellant contested the inclusion of the value of bought-out software in the assessable value for service tax. They had paid VAT on these software packages and argued that they should not be included in the service tax value. The Tribunal noted that there was no bifurcation of equipment and software in the purchase orders, and the bought-out software was supplied and installed in the machines sold by the appellant. The Tribunal found that the bought-out software, being standalone and off-the-shelf, should not be included in the assessable value for service tax. The Tribunal also referenced the decision in Intercontinental Consultants & Technocrats P. Ltd., which declared Rule 5 of the Service Tax (Determination of Value) Rules 2006 ultravires. Consequently, the Tribunal set aside the demand for service tax on the value of the bought-out software and allowed the appeal in these terms.

Conclusion:
The Tribunal concluded that the software supplied by the appellant constitutes "goods" and is exempt from service tax. Additionally, the value of bought-out software should not be included in the assessable value for service tax purposes. The appeal was allowed, and the demand for service tax on the value of bought-out software was set aside.

Software supplied with hardware constitutes sale of goods not service provision under service tax law
CESTAT Ahmedabad held that bought-out software supplied along with STM software constitutes sale of goods, not provision of service. Following SC precedent in Quick Heal Technologies case, the tribunal ruled that preloaded software supplied through hardware medium cannot be treated as service provision. The service tax demand on bought-out software value was unsustainable and set aside. Appeal allowed in favor of appellant.

Software supplied on a tangible medium constitutes sale of goods - deemed sale and transfer of right to use - service tax not leviable on supply of goods - includibility of bought out software in service tax valueSoftware supplied on a tangible medium constitutes sale of goods - service tax not leviable on supply of goods - includibility of bought out software in service tax value - Whether the value of bought out off the shelf software supplied pre loaded on a medium with terminal automation systems is includible in the assessable value for service tax. - HELD THAT: - The Tribunal found that the appellant supplied, besides its own STM software, bought out standard software (Oracle, MS Windows, TFMS, PLC, etc.) which were in many cases pre loaded on media (hard drives/CDs) and delivered as part of the machines. The appellant had discharged CST/VAT on such supplies. Relying on the principles in the decisions reproduced (including the analysis in Quickheal and earlier precedents discussed therein), the court applied the test whether the software, when supplied on a medium, is capable of being abstracted, transferred, delivered, stored and possessed and therefore falls within the concept of "goods" or a deemed sale. Where software is supplied in tangible form (pre loaded on media/hardware) and sale tax/VAT has been paid, the transaction is in substance a sale of goods and not a provision of service; it cannot be thereafter re characterised as a service for levy of service tax. Applying these principles to the material facts - uncontested assertions that the bought out software were off the shelf, pre loaded and supplied as goods and that VAT was paid - the Tribunal held that the demand of service tax on the value of the bought out software cannot be sustained and must be set aside. [Paras 5, 6, 8, 9]Value of the bought out software supplied pre loaded on media is to be treated as sale of goods and is not includible in the assessable value for service tax; demand set aside to that extent.Final Conclusion: The appeal is allowed to the extent that the demand of service tax on the value of bought out software supplied pre loaded with the terminal automation systems is set aside, the Tribunal treating such supplies as sale of goods not exigible to service tax.

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