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2023 (11) TMI 589 - ITAT KOLKATA Income Tax

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Assessee wins Section 68 bogus share capital case after providing complete documentation and transaction proof
ITAT Kolkata held in favor of the assessee regarding unexplained cash credit u/s 68 addition for bogus share capital. Revenue's sole contention was subscriber company director's non-appearance to summons u/s 131. The assessee furnished all required details and documents proving identity, creditworthiness, and genuineness of transactions. AO failed to identify discrepancies or conduct independent inquiry after assessee discharged initial burden. CIT(A) mechanically upheld AO's order without examining evidence or providing reasons, making it a non-speaking order. Addition was deleted following Supreme Court precedent requiring proper verification.

Unexplained cash credit under Section 68 - burden of proof on assessee and duty of AO to make independent enquiries - genuineness of shareholder subscription and creditworthiness of subscriber - nonspeaking order of appellate authorityUnexplained cash credit under Section 68 - burden of proof on assessee and duty of AO to make independent enquiries - genuineness of shareholder subscription and creditworthiness of subscriber - Deletion of addition treating share capital and share premium as unexplained cash credit where assessee had produced documents proving identity, source and creditworthiness of subscriber and AO failed to make independent enquiries - HELD THAT: - The Tribunal found that the assessee produced documentary evidence establishing identity of the share subscriber, transactions through banking channel, source of funds and tax assessment records of the subscriber. Having discharged the primary onus under Section 68 by furnishing documents showing identity, genuineness and creditworthiness, the legal duty shifted to the Assessing Officer to conduct independent enquiries and point out specific discrepancies before invoking Section 68. The AO did not examine the documents, did not point to any defect or insufficiency and made a mechanical, non-speaking addition. The Tribunal applied the principles in the cited Supreme Court precedents to conclude that, in the absence of any adverse finding or further enquiry by the AO, the addition was not sustainable and was liable to be deleted. [Paras 3, 4, 5, 7]Addition under Section 68 deleted as assessee discharged primary onus and AO failed to conduct required independent enquiries.Nonspeaking order of appellate authority - co-terminus powers of CIT(A) and duty to examine evidence - Appellate order of CIT(A) set aside for being non-speaking where CIT(A) upheld AO's mechanical addition without discussing material facts or pointing out defects in evidence - HELD THAT: - The Tribunal observed that the CIT(A) possesses plenary/co-terminus powers and an independent duty to examine evidence and call for information. In the present case the CIT(A) reproduced submissions but did not consider material documents, did not identify any infirmity in the evidence and merely affirmed the Assessing Officer's non-speaking order. Such confirmation without reasoned examination renders the order unsustainable. Accordingly, the appellate order could not stand. [Paras 6, 7]Order of CIT(A) held to be non-speaking and unsuitable for upholding the addition.Final Conclusion: The Tribunal allowed the appeal, deleted the addition treated as unexplained cash credit under Section 68, and set aside the non-speaking appellate order of the CIT(A) for want of reasoned examination.

2023 (11) TMI 588 - ITAT DELHI Income Tax

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Issues Involved:
1. Transfer pricing adjustment on account of mark-up on third-party costs.
2. Treatment of foreign exchange loss as operational or non-operational in nature.

Summary:

1. Transfer Pricing Adjustment on Account of Mark-Up on Third-Party Costs:

The Revenue contested the deletion of Rs. 1,09,56,542/- made on account of transfer pricing adjustment. The core argument was whether the assessee, BBC World (India) Private Limited, should include certain expenses incurred on behalf of its associated enterprises (AEs) in its cost base and apply a mark-up. The assessee argued these expenses were reimbursed at cost and did not involve additional services. The Transfer Pricing Officer (TPO) opined that all activities were covered under the service agreement and should be marked up. The CIT (A) agreed with the TPO but allowed certain expenses like advertisement and publicity, business promotion, and participation in trade events to be treated as pass-through costs due to their direct relation to third parties and minimal effort required by the assessee. The Tribunal upheld the CIT (A)'s decision, agreeing that these specific expenses should be excluded from the cost base and not marked up.

2. Treatment of Foreign Exchange Loss as Operational or Non-Operational in Nature:

The TPO included foreign exchange loss and interest expenses in the Profit Level Indicator (PLI) calculation, considering them operational costs. The assessee argued that these should be excluded as they are financial charges, typically excluded in comparable company analyses. The CIT (A) agreed with the assessee, referencing a previous year's decision that foreign exchange loss is non-operational, akin to interest costs. The Tribunal upheld this view, agreeing that these items should be excluded from the PLI calculation.

Conclusion:

The Tribunal dismissed the Revenue's appeal and the assessee's cross objection, upholding the CIT (A)'s decisions on both issues. The order was pronounced on November 10, 2023.

TPO's mark-up on third party costs partially rejected for advertisement and trade expenses treated as pass-through costs
ITAT DELHI upheld CIT(A)'s order regarding transfer pricing adjustments. The TPO's action to charge mark-up on third party costs was partially rejected. Advertisement, publicity, and trade event expenses were treated as pass-through costs without mark-up since they were undertaken at overseas entity's request with budget controlled by associated enterprise and risks borne by them. However, other expenses remained part of cost base requiring mark-up. Regarding foreign exchange losses, ITAT held these should be excluded from profit level indicator computation as they are operational/financial charges in nature, consistent with treatment of comparable companies in benchmarking analysis.

Transfer pricing adjustment - pass-through cost - arm's length price - mark-up on reimbursed third party costs - operational versus non operational expenditure - foreign exchange loss as financial/interest cost - profit level indicator (PLI) benchmarkingPass-through cost - mark-up on reimbursed third party costs - arm's length price - Whether the TPO was justified in treating reimbursements of third party costs as part of the assessee's cost base subject to mark up for transfer pricing purposes. - HELD THAT: - The Tribunal agreed with the ld. CIT(A)'s examination of the service agreement and factual matrix showing that certain expenditures (advertisement and publicity, business promotion, participation in trade events) were incurred at the request of the overseas AE, with the budget controlled by the AE and the risk and outcome attributable to the AE. Those items involved high cost but minimal effort by the assessee (buying advertisement space) and therefore constituted true pass through costs which ought to be excluded from the cost base for determining the arm's length price. Other expenses, being integrally related to the assessee's core activities and not demonstrably incurred as pass through third party costs, must form part of the assessee's cost base and be eligible for mark up. The Tribunal found the TPO's broad conclusion that all such reimbursements should be marked up to be unsupported on the facts and upheld the ld. CIT(A)'s narrower exclusion of only the three identified categories as pass through costs. [Paras 11, 12]Pass through treatment upheld only for advertisement and publicity, business promotion and participation in trade events; other reimbursed costs to be included in cost base and marked up.Foreign exchange loss as financial/interest cost - operational versus non operational expenditure - profit level indicator (PLI) benchmarking - Whether foreign exchange loss and interest expenses are operational items to be included in the PLI computation for benchmarking under transfer pricing. - HELD THAT: - The Tribunal concurred with the ld. CIT(A)'s view that financial charges, including foreign exchange fluctuation loss, partake the nature of interest/financial cost and are non operating in nature. Benchmarked comparables typically exclude such financial items when computing operating margins; consequently, for parity in benchmarking, these items must be excluded from the assessee's PLI computation. The Tribunal also relied on precedent reasoning treating items like foreign exchange fluctuations as non operational for the purpose of determining operating income and PLI. [Paras 13, 14, 15, 16, 17]Foreign exchange loss and interest expenses are non operating and are to be excluded while computing the PLI.Final Conclusion: The Tribunal, on rehearing, dismissed the Revenue's appeal and the assessee's cross objection by upholding the ld. CIT(A)'s determination that only advertisement and publicity, business promotion and participation in trade events qualify as pass through costs (excluded from the cost base), and that foreign exchange loss and interest are non operating financial charges to be excluded from PLI computation.

2023 (11) TMI 587 - ITAT AMRITSAR Income Tax

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DVO valuation report barred by limitation under section 142A(6) leads to deletion of unrecorded income additions
ITAT Amritsar allowed the assessee's appeal and deleted additions made for unrecorded income based on hotel building valuation differences. The tribunal held that the DVO's valuation report dated 28.10.2016 was barred by limitation as it exceeded the prescribed six-month period ending 30.09.2016 under section 142A(6). Additionally, the DVO incorrectly applied CPWD rates instead of local PWD rates for property valuation, creating approximately 25% rate difference. The tribunal ruled that additions cannot be sustained on an invalid, time-barred valuation report, making the CIT(A)'s order confirming the addition legally infirm and perverse.

Validity of Valuation Officer (DVO) report under section 142A(6) - time barred valuation report cannot be relied upon for making additions - applicability of local PWD rates (not CPWD rates) for valuation of cost of construction - addition based solely on an invalid or legally infirm DVO report is unsustainable Validity of Valuation Officer (DVO) report under section 142A(6) - time barred valuation report cannot be relied upon for making additions - Whether the addition sustained by the CIT(A) based on the DVO valuation report is sustainable where the DVO report was furnished beyond the six month period prescribed by section 142A(6). - HELD THAT: - The Tribunal found that section 142A(6) requires the Valuation Officer to send the valuation report within six months from the end of the month in which the reference is made. In the present case the valuation report was dated after the prescribed period and therefore was barred by limitation. Reliance on settled Apex Court authority and connected decisions established that a belated DVO report cannot constitute admissible material to base additions upon, particularly where the DVO report formed the sole basis of the impugned addition. Given the invalidity of the DVO report for being time barred, the foundational material for the addition failed and no addition could be sustained on that basis. [Paras 10, 12] The DVO report being time barred under section 142A(6) cannot be relied upon and the addition founded solely on that report is deleted. Applicability of local PWD rates (not CPWD rates) for valuation of cost of construction - addition based solely on an invalid or legally infirm DVO report is unsustainable - Whether the valuation adopted by the DVO (which used CPWD rates) and the CIT(A)'s reliance thereon is permissible without allowing adjustment to local PWD rates as required by law. - HELD THAT: - The Tribunal observed that the DVO had applied CPWD rates whereas the settled legal position requires application of local PWD or market correlative rates for determining cost of construction; CPWD rates normally yield a substantially higher estimate. The assessee's contention that the DVO report failed to apply local PWD rates and thereby denied the assessee a legitimate benefit was accepted. On combined consideration - both the time bar infirmity of the DVO report and the use of CPWD rather than local PWD rates - the Tribunal held that the valuation relied upon was legally infirm and could not support the addition. [Paras 11, 12] The DVO's use of CPWD rates instead of local PWD rates rendered the valuation legally infirm; the addition based on such valuation is unsustainable and is deleted. Final Conclusion: Both appeals are allowed: the Tribunal deleted the additions sustained by the CIT(A) because the DVO valuation relied upon was time barred under section 142A(6) and legally infirm for having applied CPWD rates instead of local PWD rates; the same reasoning applies mutatis mutandis to the second appeal.

2023 (11) TMI 586 - ITAT RAJKOT Income Tax

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Issues Involved:
1. Whether the assessee was required to deduct Tax at Source (TDS) under Section 194C of the Income Tax Act, 1961, on payments made for packing materials.
2. Whether the various discounts offered by the assessee should be treated as commission, thereby attracting TDS under Section 194H of the Act.
3. Whether the interest charged under Section 201(1A) of the Act for the alleged TDS defaults is justified.

Summary:

Issue 1: TDS under Section 194C for Packing Materials
The Revenue contended that the assessee's transactions with six parties for the purchase of packing materials constituted "works contract" under Section 194C, requiring TDS deduction. The Assessing Officer treated the assessee in default for non-TDS on Rs. 46,68,151/-. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, referencing the Jurisdictional High Court judgment in CIT vs. Girnar Food, which held that a contract for supply of materials with specific designs is a sale, not a works contract, and thus not subject to Section 194C. The Tribunal upheld the CIT(A)'s decision, stating that the transactions were outright purchases, not works contracts, as the suppliers independently produced the packing materials and paid excise duty and VAT. Therefore, Section 194C was not applicable.

Issue 2: TDS under Section 194H for Discounts
The Assessing Officer treated various discounts offered by the assessee as commission, asserting that TDS under Section 194H was required. The CIT(A) deleted this addition, citing the Jurisdictional High Court judgment in M/s. Gujarat Narmada Valley Fertilizer and Chemicals Ltd., which clarified that discounts given in a principal-to-principal transaction do not constitute commission. The Tribunal agreed, noting that the discounts were allowed to the assessee's buyers and not agents, and no services were rendered by the buyers to the assessee. Thus, Section 194H was not applicable.

Issue 3: Interest under Section 201(1A)
The Assessing Officer levied interest under Section 201(1A) for the alleged TDS defaults. Since the Tribunal upheld the CIT(A)'s deletion of the TDS defaults under Sections 194C and 194H, the interest charged under Section 201(1A) was also dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the assessee was not liable for TDS under Sections 194C and 194H, and consequently, the interest charged under Section 201(1A) was also not justified. The appeal was pronounced dismissed on 10-11-2023.

Assessee wins TDS dispute as purchases from suppliers deemed outright transactions not works contracts under Section 194C
The ITAT Rajkot ruled in favor of the assessee on TDS matters. The tribunal held that purchase of printed packing materials from six suppliers constituted outright purchase transactions, not works contracts, making Section 194C inapplicable since no job work was involved and suppliers used their own materials while paying excise duty and VAT. Additionally, discounts given to buyers were not subject to Section 194H as recipients were customers, not agents providing services. The tribunal distinguished these transactions from commission payments, noting buyers purchased goods for their own account rather than acting on behalf of the assessee. Revenue's appeal was dismissed entirely.

TDS under section 194C for works contracts vis-a -vis sale of goods - distinction between sale of goods and works contract - TDS under section 194H for commission or brokerage arising from discounts/incentives - treatment of credit notes/trade discounts as reduction of sale price and not commission - interest under section 201(1A) consequential to TDS default - precedential effect of jurisdictional High Court decisionsTDS under section 194C for works contracts vis-a -vis sale of goods - distinction between sale of goods and works contract - precedential effect of jurisdictional High Court decisions - Payments to six suppliers for printed packing material are not subject to TDS as works contracts under section 194C but constitute purchases of goods (sale). - HELD THAT: - The Tribunal found that the assessee purchased ready-made printed flexible packaging from the six suppliers; there was no case of the assessee supplying its own material for processing, no job-work agreement, and title in the finished goods was transferred by the suppliers to the assessee. The suppliers had independently produced the packaging and discharged excise and VAT, and the invoices described sale of goods rather than separate labour charges. The Tribunal followed the jurisdictional High Court decision in Girnar Food which holds that a contract for supply of materials with printing as per buyer's specifications, when the supplier supplies finished goods, is a sale and not a works contract attracting section 194C. Applying that principle to the facts, the Tribunal dismissed Ground No. 1 and held that section 194C did not apply. [Paras 6]Ground No. 1 rejected; payments are purchases of goods and not liable to TDS under section 194C.TDS under section 194H for commission or brokerage arising from discounts/incentives - treatment of credit notes/trade discounts as reduction of sale price and not commission - precedential effect of jurisdictional High Court decisions - Discounts and credit notes given to buyers/dealers are not commission attracting TDS under section 194H but reductions in sale consideration. - HELD THAT: - The Tribunal noted that section 194H applies where payments are made as commission or brokerage for services rendered or for acting on behalf of another. On the facts, the twelve parties were purchasers/customers who bought goods and sold them in their own right; they were not agents nor did they render services to the assessee. The credit notes related to returned goods, shortages, reimbursement of octroi, and incentives/discounts to boost sales, and operated to reduce the original sale consideration. The Tribunal followed the jurisdictional High Court decision in Gujarat Narmada Valley Fertilizer and Chemicals Ltd. which held that similar trade discounts do not amount to commission under section 194H. Applying that reasoning, Ground No. 2 was dismissed. [Paras 7]Ground No. 2 rejected; discounts/credit notes reduce sale consideration and are not subject to TDS under section 194H.Interest under section 201(1A) consequential to TDS default - consequences of deletion of TDS defaults on interest liability - Interest under section 201(1A) charged on TDS defaults is not payable where the underlying TDS defaults have been deleted. - HELD THAT: - The Tribunal observed that the interest levied under section 201(1A) was consequential to the TDS defaults which it had set aside by holding that neither section 194C nor section 194H applied. Having rejected the primary disallowances and defaults, the consequential interest charge could not survive. Accordingly, the Tribunal dismissed Ground No. 3. [Paras 8]Ground No. 3 rejected; interest under section 201(1A) deleted as consequential to deletion of TDS defaults.Final Conclusion: The appeal by the Revenue is dismissed: payments for printed packing materials were held to be purchases (not works contracts) and not subject to TDS under section 194C; discounts/credit notes to buyers were held to be reductions of sale consideration and not commission under section 194H; consequential interest under section 201(1A) was also deleted.

2023 (11) TMI 585 - ITAT RAJKOT Income Tax

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Section 263 revision not justified where Assessing Officer made enquiry and adopted a sustainable profit-rate view on cash sales.
Revision under section 263 of the Income-tax Act was held unsustainable because the Assessing Officer had examined the cash transactions, conducted enquiry under section 133(6), verified material from the angadia concern, and then treated the receipts as unaccounted sales while taxing only the estimated profit element by applying the gross profit rate. Since the assessment reflected application of mind and adopted one of the legally permissible views after enquiry, it was neither erroneous nor prejudicial to the interests of the Revenue. The Commissioner could not invoke section 263 merely to replace that view with a higher addition based on taxing the entire receipts.

Revision under section 263 - scope of jurisdiction of Commissioner under section 263 - appreciation of evidence and adoption of a legally plausible view by Assessing Officer - distinction between receipts and taxable income - treatment of cash receipts through angadia / cash agentRevision under section 263 - appreciation of evidence and adoption of a legally plausible view by Assessing Officer - distinction between receipts and taxable income - treatment of cash receipts through angadia / cash agent - Validity of PCIT's exercise of power under section 263 in setting aside the original assessment where the Assessing Officer applied GP rate of 19.40% to cash receipts routed through M/s National Shroff (Angadia) instead of treating the entire amount as unexplained cash income - HELD THAT: - The Tribunal found that the Assessing Officer had made detailed inquiries during original assessment proceedings, including issuing notice under section 133(6) to M/s National Shroff and examining vouchers and disclosures made by its partner. On the evidence the Assessing Officer concluded that the amounts represented out-of-book cash sales and applied the declared gross profit rate of 19.40% to compute taxable income thereon. The PCIT in revision proceeded on the view that the entire receipts should have been treated as unexplained cash and brought to tax, but the Tribunal held that where the Assessing Officer has examined material and adopted one of the permissible legal views, the Commissioner cannot invoke section 263 merely to substitute his own view. The Tribunal relied on the principle that only real income is taxable and not gross receipts, and that an assessment is erroneous and prejudicial to revenue under section 263 only if the view taken by the Assessing Officer is unsustainable in law. The Tribunal noted the settled principle from the decision relied upon in the order of the lower authority, Malabar Industrial Co. Ltd. v. CIT , that differing permissible views do not render an assessment order erroneous and prejudicial simply because the Commissioner prefers an alternative approach. Applying these principles to the facts, the Tribunal held the Assessing Officer's approach was a legally plausible view based on material on record and therefore the exercise of revision power was not justified. [Paras 8, 9]PCIT's order under section 263 setting aside the assessment is not sustainable; the Assessing Officer's order is restored.Final Conclusion: Appeal allowed; the order passed under section 263 is set aside and the assessment framed by the Assessing Officer for A.Y. 2012-13 is restored as the Assessing Officer had examined the material and adopted a legally plausible view.

2023 (11) TMI 584 - ITAT RAJKOT Income Tax

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Disallowance under Section 14A not justified when interest-free funds exceed investments yielding exempt income
ITAT Rajkot ruled in favor of the assessee regarding disallowance under section 14A. The assessee had paid substantial interest on unsecured loans while earning exempt income. The AO made additions claiming mixed funds usage, but CIT(A) restricted disallowance to exempt income amount. ITAT followed Gujarat HC precedents in Hitachi Home and Gujarat Fluoro Chemicals cases, holding that when interest-free funds exceed investments yielding exempt income, no section 14A disallowance is justified, as interest-bearing funds were not used for such investments.

2023 (11) TMI 583 - ITAT SURAT Income Tax

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Interest on enhanced land acquisition compensation was treated as part of compensation, not taxable as other sources income.
Interest under section 28 of the Land Acquisition Act, 1894, received with enhanced compensation and solatium for compulsory acquisition of rural agricultural land, was treated as part of the compensation itself and not as income from other sources. As no interest was awarded under section 34 of that Act, the receipt did not fall within section 56 of the Income-tax Act, 1961. The restriction of relief to 50% had no legal basis on the facts stated, and the assessee succeeded on the taxability issue.

Interest under Section 28 of the Land Acquisition Act forms part of compensation - distinction between interest under Section 28 and interest under Section 34 of the Land Acquisition Act - taxability of compensation and solatium on compulsory acquisition - income from other sources under section 56 of the Income tax ActInterest under Section 28 of the Land Acquisition Act forms part of compensation - income from other sources under section 56 of the Income tax Act - application of precedent treating Section 28 interest as part of compensation - Whether the interest awarded by the civil court under Section 28 of the Land Acquisition Act on enhanced compensation is taxable as income from other sources under section 56 of the Income tax Act - HELD THAT: - The Tribunal found that the Principal Senior Civil Judge enhanced the compensation and specifically awarded interest on the excess amount under Section 28 of the Land Acquisition Act. Relying on the distinction between Section 28 and Section 34 interest as recognised by the Apex Court, the Tribunal held that interest under Section 28 is part of the compensation awarded on enhancement and therefore assimilates to capital receipt on acquisition. Consequently, such interest does not constitute taxable 'income from other sources' under section 56. The Tribunal noted that no interest under Section 34 was awarded, and that the CIT(A)'s allowance of only 50% relief lacked basis in the facts and law. [Paras 7, 8]Interest awarded under Section 28 on enhanced compensation is not taxable under section 56 and the addition is deleted.Taxability of compensation and solatium on compulsory acquisition - exemption of compensation components on compulsory acquisition - Whether the enhanced compensation and solatium received on compulsory acquisition are taxable or exempt - HELD THAT: - The Tribunal recorded that the award comprised enhanced compensation, solatium and interest, and observed that enhanced compensation and solatium fall within the exempt ambit applicable to compensation for compulsory acquisition. Having found that the interest component likewise forms part of compensation when awarded under Section 28, the Tribunal concluded that the entire components awarded by the court (enhanced compensation and solatium, and Section 28 interest) are not taxable. The Tribunal also relied on coordinate authority following the Apex Court view to support exemption of Section 28 interest. [Paras 6, 7, 8]Enhanced compensation and solatium are exempt; the tribunal allowed the assessee's ground and deleted the impugned addition.Final Conclusion: The appeal is allowed: the civil court awarded enhanced compensation, solatium and interest under Section 28 are treated as components of compensation and are not taxable as income from other sources; the addition made by the Assessing Officer is deleted and the CIT(A)'s partial relief is set aside.

2023 (11) TMI 567 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH, NEW DELHI - LB Insolvency and Bankruptcy

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Issues: (i) Whether a successful auction purchaser, pursuant to an approved acquisition plan, can be substituted in place of the resolution professional to pursue the pending avoidance application; (ii) Whether the impugned order allowing substitution was liable to be set aside for want of detailed reasons.

Issue (i): Whether a successful auction purchaser, pursuant to an approved acquisition plan, can be substituted in place of the resolution professional to pursue the pending avoidance application.

Analysis: The pending avoidance application had been instituted by the resolution professional under the avoidance provisions of the Code, and the proceeds of such proceedings form part of the liquidation estate. The approved acquisition plan had already attained finality and specifically contemplated that the successful auction purchaser would pursue the avoidance proceedings. The objection that only the resolution professional or liquidator could prosecute such proceedings was rejected in light of the statutory scheme, the liquidation framework, and the earlier approved plan. The challenge was also weakened by the appellant's lack of legal basis to reopen matters already concluded in earlier proceedings.

Conclusion: The successful auction purchaser was entitled to be substituted and to pursue the avoidance application. The objection was rejected.

Issue (ii): Whether the impugned order allowing substitution was liable to be set aside for want of detailed reasons.

Analysis: Although the impugned order was brief, it was passed on a consequential application and expressly referred to the averments made therein. The earlier approved acquisition plan and the surrounding proceedings supplied the context for the decision. The absence of a lengthy standalone discussion did not, in the facts of the case, warrant interference.

Conclusion: The order was not vitiated for want of reasons.

Final Conclusion: No ground was made out to interfere with the substitution order, and the appeal failed.

Ratio Decidendi: Where an approved acquisition plan expressly contemplates pursuit of pending avoidance proceedings, and the relevant avoidance application was originally filed by the resolution professional, substitution of the successful auction purchaser to prosecute those proceedings is permissible; a brief consequential order will not be interfered with merely because it lacks elaborate reasons when the basis of the decision is ascertainable from the record.

Approved acquisition plan can permit substitution of the auction purchaser to pursue pending avoidance proceedings.
An approved acquisition plan may expressly provide for the successful auction purchaser to pursue pending avoidance proceedings originally filed by the resolution professional, and substitution is permissible where that framework has attained finality. The objection that only the resolution professional or liquidator can prosecute such proceedings was rejected because the avoidance application forms part of the liquidation estate and the concluded plan governed the continuation of the claim. A brief consequential order allowing substitution was also not invalid merely for want of elaborate reasons where the basis of the decision was ascertainable from the record. No interference was warranted, and the appeal failed.

Prosecution of avoidance applications by successful auction purchaser - liquidation estate and distribution of proceeds recovered from avoidance proceedings - persona designata of the resolution professional and delegation of powers - treatment of avoidance proceedings post-closure under regulation 44A - recommendations of the Insolvency Law Committee on who may file avoidance applications - requirement of reasoned or speaking orders - finality of approval of acquisition planProsecution of avoidance applications by successful auction purchaser - finality of approval of acquisition plan - persona designata of the resolution professional and delegation of powers - Successful Auction Purchaser permitted to be substituted in place of Resolution Professional to prosecute the avoidance application where the approved acquisition plan provides for such prosecution. - HELD THAT: - The Tribunal held that where the acquisition (or resolution/acquisition) plan explicitly provides that the Successful Auction Purchaser will pursue pending avoidance proceedings, and that acquisition plan has been approved by the Adjudicating Authority and its approval has become final, substitution of the Successful Auction Purchaser for the Resolution Professional to prosecute the avoidance application is permissible. The Court treated the present application as consequential to the approved acquisition plan and relied on the finality of that approval; it also followed the reasoning in earlier decisions where a Successful Resolution Applicant was permitted to pursue avoidance applications when the plan provided for it. The Tribunal observed that the avoidance application in this case had been filed by the Resolution Professional and the substitution was sought pursuant to the acquisition plan already approved; consequently the substitution order could not be faulted in appeal. [Paras 15, 24]Substitution allowing the Successful Auction Purchaser to prosecute the avoidance application was held permissible and not open to interference.Liquidation estate and distribution of proceeds recovered from avoidance proceedings - treatment of avoidance proceedings post-closure under regulation 44A - Proceeds recovered from avoidance proceedings constitute part of the liquidation estate; Regulation 44A contemplates treatment of such proceedings and does not prohibit prosecution by a Successful Auction Purchaser in the facts of this case. - HELD THAT: - The Tribunal noted that the Code expressly makes proceeds recovered through avoidance proceedings part of the liquidation estate and that Regulation 44A (inserted in 2022) contemplates how avoidance proceedings and distribution of proceeds are to be treated even after closure of liquidation. Regulation 44A therefore does not support a categorical prohibition on a Successful Auction Purchaser pursuing avoidance proceedings where the acquisition plan and approvals permit such pursuit. The Insolvency Law Committee report was considered: while it recommends that successful resolution applicants generally should not be permitted to file avoidance actions, that recommendation is inapposite here because the avoidance applications were already filed by the Resolution Professional and the acquisition plan provided for the purchaser to pursue them post-approval. [Paras 13, 14, 16, 20]Proceedings under Sections 43-66 and the statutory scheme treating recoveries as liquidation estate were held consistent with permitting prosecution in the present circumstances; Regulation 44A and the Committee's recommendations do not prohibit the substitution sought.Requirement of reasoned or speaking orders - The impugned order, though brief, contained sufficient basis (by reference to the applicant's averments and the context of the approved acquisition plan) and therefore did not warrant interference solely for lack of elaboration. - HELD THAT: - Acknowledging the settled principle that adjudicatory orders should ordinarily be reasoned, the Tribunal examined the impugned order which disposed of the substitution application by referring to the averments and treating the application as consequential to the acquisition plan already approved. Given the record-namely the acquisition plan's provision for prosecution and prior proceedings approving that plan-the Tribunal found the short order not amenable to being set aside on the ground of being non-speaking in the present appeal. [Paras 25, 26]Absence of detailed reasons in the Adjudicating Authority's order did not, on the facts, justify interference.Finality of approval of acquisition plan - Pendency of a separate Civil Appeal before the Supreme Court (relating to a different fact-matrix and resolution plan) did not require deferral of determination of the substitution application in this proceeding. - HELD THAT: - The Tribunal observed that the issue pending before the Supreme Court in the cited Civil Appeals concerned different proceedings and did not raise the precise question whether a Successful Auction Purchaser in liquidation (post-approval of an acquisition plan) could be substituted to pursue avoidance applications. Consequently, pendency of that Civil Appeal was not a bar to deciding the present appeal. The Tribunal also noted that the Supreme Court in related proceedings had permitted continuation of proceedings under Sections 43 to 66, indicating that continuation of avoidance proceedings was not stayed. [Paras 22, 28]The pendency of the other Civil Appeal was not a ground to defer or set aside the substitution order in this case.Final Conclusion: The Appeal was dismissed. The Tribunal upheld the order permitting substitution of the Successful Auction Purchaser to prosecute the avoidance application, held that proceeds of avoidance proceedings form part of the liquidation estate and that Regulation 44A/the Committee report did not preclude substitution in the facts, found the brief impugned order not vitiated for want of reasons on these facts, and declined to defer determination because of pendency of unrelated Civil Appeals.

2023 (11) TMI 566 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI Insolvency and Bankruptcy

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Issues: (i) whether the appellant could claim exclusion of time under section 14(2) of the Limitation Act, 1963 on the basis of winding up proceedings initiated by a third party and related SARFAESI steps; (ii) whether the one time settlement request dated 08.07.2021 could have bearing on limitation under section 25(3) of the Contract Act, 1872.

Issue (i): whether the appellant could claim exclusion of time under section 14(2) of the Limitation Act, 1963 on the basis of winding up proceedings initiated by a third party and related SARFAESI steps.

Analysis: Section 14(2) applies where the applicant has been prosecuting another civil proceeding with due diligence and in good faith against the same party for the same relief, and the earlier forum is unable to entertain it because of defect of jurisdiction or a like cause. The winding up petition was filed by a third party, not by the appellant, and the appellant had not obtained leave to proceed with its own recovery steps after the winding up order. The earlier proceedings therefore did not satisfy the statutory requirements for exclusion of time.

Conclusion: The appellant was not entitled to the benefit of section 14(2) of the Limitation Act, 1963 on the basis of the winding up proceedings or the SARFAESI proceedings.

Issue (ii): whether the one time settlement request dated 08.07.2021 could have bearing on limitation under section 25(3) of the Contract Act, 1872.

Analysis: A promise to pay a time-barred debt is enforceable only if it is a distinct promise in writing and signed by the debtor or authorised agent. The settlement request was part of the record only in appeal, and the corporate debtor had not been given an opportunity to respond to its effect. The question whether the document constituted a valid written promise meeting the statutory requirements required fresh examination by the adjudicating authority.

Conclusion: The issue arising from the one time settlement request had to be considered afresh by the adjudicating authority.

Final Conclusion: The dismissal of the section 7 application was set aside only to the limited extent connected with the one time settlement issue, and the matter was remitted for fresh consideration on that aspect alone while the rejection of limitation benefit under section 14(2) was left undisturbed.

Ratio Decidendi: Exclusion of time under section 14(2) of the Limitation Act requires the applicant to have prosecuted an earlier proceeding with due diligence and in good faith against the same party for the same relief; a third-party proceeding does not satisfy that test. A written promise to pay a barred debt may affect limitation only if it meets the strict requirements of section 25(3) of the Contract Act.

Limitation exclusion under section 14(2) failed on third-party winding up proceedings, while a settlement request needed fresh scrutiny.
Exclusion of time under section 14(2) of the Limitation Act was unavailable because the earlier winding up proceedings were initiated by a third party, not by the appellant, and did not involve prosecution of the same relief with due diligence and good faith against the same party. A one-time settlement request was treated as potentially relevant to limitation under section 25(3) of the Contract Act only if it amounted to a distinct written promise signed by the debtor or authorised agent, so that issue required fresh examination by the adjudicating authority. The limitation finding under section 14(2) was left undisturbed, but the matter was remitted on the settlement request issue.

Application of Section 14(2) of the Limitation Act, 1963 - Effect of a third party winding up on exclusion of limitation - Distinguishing and applicability of Sesh Nath Singh precedent - One Time Settlement and Section 25(3) of the Indian Contract Act, 1872 - Proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016Application of Section 14(2) of the Limitation Act, 1963 - Effect of a third party winding up on exclusion of limitation - Benefit of Section 14(2) of the Limitation Act cannot be invoked by the Appellant on account of the winding up petition filed by a third party in the Bombay High Court. - HELD THAT: - Section 14(2) excludes from computation of limitation the time during which the applicant has been prosecuting with due diligence another civil proceeding against the same party for the same relief in a forum which, by defect of jurisdiction or like cause, is unable to entertain it. The winding up petition before the Bombay High Court was filed by a third party (M/s Oswal Minerals Ltd.) and not prosecuted by the Appellant. The Official Liquidator's communication shows the Appellant was notified and requested to obtain leave to prosecute proceedings under Section 446(1) of the Companies Act, 1956, but the Appellant did not seek such leave. The conditions for exclusion under Section 14(2) - that the earlier proceeding be prosecuted by the applicant, in good faith, with due diligence, and in a forum unable to entertain it by reason of defect of jurisdiction or the like - are not satisfied. Consequently the Adjudicating Authority correctly held that the period during which the third party winding up petition remained pending cannot be excluded from limitation in favour of the Appellant. [Paras 8, 9, 10, 11]Appellant is not entitled to the benefit of Section 14(2) on account of the third party winding up petition; the Adjudicating Authority's conclusion in this regard is affirmed.Distinguishing and applicability of Sesh Nath Singh precedent - The Supreme Court decision in Sesh Nath Singh is distinguishable and is not applicable to the facts of the present case. - HELD THAT: - In Sesh Nath Singh the earlier SARFAESI proceedings were stayed by the High Court on the ground of want of jurisdiction, and the conditions for exclusion under Section 14(2) were prima facie satisfied because the proceedings were shown to be without jurisdiction. In the present case there is no such finding that proceedings initiated by the Bank were without jurisdiction; moreover the winding up petition was filed by a third party and not prosecuted by the Appellant. The Tribunal correctly contrasted the factual and legal basis of Sesh Nath Singh and held that its ratio does not extend to the present facts. [Paras 11, 12]Sesh Nath Singh does not afford relief to the Appellant; the Adjudicating Authority rightly distinguished that precedent.One Time Settlement and Section 25(3) of the Indian Contract Act, 1872 - Proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 - Whether the One Time Settlement (OTS) letter dated 08.07.2021 affects the question of limitation under Section 25(3) of the Contract Act is not finally decided and is remitted to the Adjudicating Authority for fresh consideration limited to that issue. - HELD THAT: - An OTS letter dated 08.07.2021 from a director of the Corporate Debtor was produced for the first time in this appeal; it was not before the Adjudicating Authority and the Corporate Debtor has had no opportunity to reply to it. Principles governing Section 25(3) require that (i) the promise must refer to a debt which but for limitation could have been enforced, (ii) there be a distinct promise to pay in whole or in part, and (iii) the promise be in writing and signed by the debtor or his agent. Because the OTS communication was not considered below and the Corporate Debtor was not afforded a chance to respond, the Tribunal directed revival of the Section 7 application limited to adjudication of the effect, if any, of the OTS on limitation, and granted the Corporate Debtor one month to file a reply. All other grounds relating to Section 14 and SARFAESI/winding up are to remain finally decided against the Appellant and are not to be reopened. [Paras 13, 15, 16]Section 7 application is revived only to permit the Adjudicating Authority to consider afresh the consequence of the OTS dated 08.07.2021 in relation to limitation; the Corporate Debtor is granted one month to file a reply and the Adjudicating Authority shall decide the Section 7 application in accordance with law limited to this issue.Final Conclusion: The appeal is partly allowed: the Adjudicating Authority's dismissal of the Section 7 petition as time barred is set aside only to the extent that the effect of the One Time Settlement letter dated 08.07.2021 on limitation (under Section 25(3) of the Contract Act) is to be considered afresh; all other pleas, including reliance on Section 14(2) of the Limitation Act and the applicability of Sesh Nath Singh in relation to the third party winding up and SARFAESI proceedings, are finally negatived and shall not be reopened.

2023 (11) TMI 565 - CESTAT BANGALORE Service Tax

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Appeal Abated Due to Successor's Inaction Post Liquidator Appointment; Consistent with Tribunal's Precedent.
The appeal abated under Rule 22 of the CESTAT (Procedure) Rules, 1982, as the successor-in-interest failed to continue the proceedings after the appointment of an official liquidator. Despite multiple notices, no response was received from the successor, resulting in the appeal's abatement. The Tribunal, referencing the precedent set in Alok Industries Ltd vs. CCE, Belapur/Mumbai Central, consistently applies this principle, leading to the same outcome in this case.

2023 (11) TMI 564 - CESTAT BANGALORE Service Tax

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Liquidation and appeal abatement under Rule 22 operate automatically when no continuance application is filed by the liquidator.
Where a company is in liquidation, Rule 22 of the CESTAT Procedure Rules, 1982 requires the liquidator, successor-in-interest or other authorised legal representative to apply for continuance of the appeal within the prescribed time. In the absence of any such application by the liquidator, the appeal abates automatically by operation of the rule. The Tribunal therefore treated the proceedings as terminated and did not adjudicate the tax demand on merits.

Cenvat credit on outward freight beyond place of removal - place of removal - interpretation of Rule 2(l) of Cenvat Credit Rules - Board Circular No. 999/6/2015-CX dated 28/02/2015 - continuance of proceedings after adjudication as an insolvent - Rule 22 of CESTAT Procedure Rules, 1982 - application for continuance by liquidator - abatement of appeal on appointment of liquidatorCenvat credit on outward freight beyond place of removal - place of removal - interpretation of Rule 2(l) of Cenvat Credit Rules - Board Circular No. 999/6/2015-CX dated 28/02/2015 - Availment of cenvat credit of service tax paid on outward freight for transportation of final product beyond the place of removal - HELD THAT: - The Tribunal recorded that the appellant availed cenvat credit on service tax paid on GTA for transportation of goods beyond the factory gate. Having considered the submissions and relied upon the decision of the Hon'ble Supreme Court in Commissioner of Central Excise & Service Tax, Bangalore-II v. Ultra Tech Cement Ltd. and Board Circular No. 999/6/2015-CX, the Tribunal found that after the amendment to the rules the credit is admissible only up to the place of removal and not for post-removal transportation. On that basis the credit taken for outward freight beyond the place of removal was held ineligible.Credit availed on outward freight beyond the place of removal is not admissible and the demand confirmed below was supported by the legal position as stated.Continuance of proceedings after adjudication as an insolvent - Rule 22 of CESTAT Procedure Rules, 1982 - application for continuance by liquidator - abatement of appeal on appointment of liquidator - Effect of insolvency and non-application by the liquidator on continuance of the appeal before the Tribunal - HELD THAT: - During pendency of the appeal the appellant company was placed in liquidation and a liquidator was appointed by the NCLT. Rule 22 of the CESTAT Procedure Rules, 1982 requires an application for continuance of proceedings by or against the successor-in-interest (including a liquidator) within sixty days, unless sufficient cause is shown for delay. No application for continuance was filed by the liquidator nor was any communication received seeking adjournment. Applying Rule 22 and precedents considered by the Tribunal, the appeal cannot be continued in absence of such an application by the liquidator.The appeal abates for want of continuance application by the liquidator; proceedings before the Tribunal stand abated.Final Conclusion: The Tribunal noted that the cenvat credit on outward freight beyond the place of removal is not admissible but, on account of the appellant's liquidation and failure of the liquidator to apply for continuance under Rule 22, the appeal is ordered to abate.

2023 (11) TMI 563 - CESTAT AHMEDABAD Service Tax

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Pipeline laying services for government water board not taxable as commercial construction service under service tax
The CESTAT Ahmedabad dismissed the Revenue's appeal regarding a refund claim for pipeline laying services provided to Gujarat Water Supply Sewerage Board. The tribunal held that laying pipelines for GWSSB does not constitute Industrial or Commercial Construction Service, as the board operates on subsidized rates and government grants rather than commercial purposes. Following Gujarat HC precedent in Commissioner of CGST vs BMS Projects, the tribunal concluded that such services are not taxable under the relevant service tax category. The appellant was entitled to refund of service tax already paid, and the Commissioner (Appeal)'s order was upheld.

Commercial or Industrial Construction Service - used primarily for commerce or industry - non-commercial public welfare activity - refund of service tax - binding effect of coordinate and High Court precedentsCommercial or Industrial Construction Service - used primarily for commerce or industry - non-commercial public welfare activity - refund of service tax - Laying of pipeline for Gujarat Water Supply & Sewerage Board (GWSSB) is not taxable as Commercial or Industrial Construction Service and the service tax paid is refundable. - HELD THAT: - The Tribunal examined whether pipelines laid for GWSSB fall within the definition of Commercial or Industrial Construction Service, which requires the constructed pipeline or conduit to be used primarily for commerce or industry. Applying the reasoning of coordinate Tribunal benches and the Gujarat High Court in BMS Projects Pvt. Ltd., and relying on decisions in Dinesh Chandra Agarwal Infracon P. Ltd. and Larsen & Toubro Ltd., the Tribunal found that GWSSB was constituted under statute to provide and regulate water supply and sewerage as a public welfare function. The Board's activities, tariff structure and financing demonstrated that sale of water is incidental and subsidised, not a primary commercial or industrial activity. Consequently, the pipelines were not constructed primarily for commerce or industry. The Tribunal further noted that the cited precedents have not been stayed or reversed and thus have binding effect for the present controversy. Following these determinations, the Tribunal held that the respondent was not liable to service tax on the laying of pipelines for GWSSB and was therefore entitled to refund of the service tax paid. [Paras 4, 5]Order of Commissioner(Appeal) allowing refund is upheld and the Revenue's appeal is dismissed.Final Conclusion: Appeal dismissed. The laying of pipelines for GWSSB does not constitute Commercial or Industrial Construction Service as the works are not primarily for commerce or industry; accordingly the service tax paid is refundable and the Commissioner(Appeal)'s order is upheld.

2023 (11) TMI 529 - DELHI HIGH COURT Companies Law

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Issues Involved:
1. Refusal of registration of shares under Section 111A of the Companies Act, 1956.
2. Interpretation of "sufficient cause" for refusal of share transfer.

Summary:

Issue 1: Refusal of registration of shares under Section 111A of the Companies Act, 1956

The appeal was filed under Section 10F of the Companies Act, 1956 against the order of the Company Law Board (CLB) dated 17th December 2014. The CLB had directed the Appellant, M/s Basti Sugar Mills (now 'Phenil Sugars Ltd.'), to register the shares of the Respondents. The Respondents, Mrs. Laxmi Gupta, Mr. Chandra Prakash Pahwa, Mr. Kapil Kumar, Mr. Madhav Sharan Gupta, and Ms. Astha Gupta, had sought registration of their shareholding, which was refused by the company. The CLB found that the reasons provided by the Appellant did not fall within the ambit of Section 111A of the Act.

The Appellant argued that Respondent No. 4, Mr. Madhav Sharan Gupta, was the Auditor of the company and had acted detrimentally to the company's interests. The Appellant claimed that the Respondents, acting in concert, sought to purchase shares to cause hurdles in corporate decisions. The CLB, however, held that the request would be covered under Section 111(A)(3) and not under Section 111(A)(2) of the Act.

Issue 2: Interpretation of "sufficient cause" for refusal of share transfer

The Appellant relied on the Supreme Court judgment in Mackintosh Burn v. Sarkar and Chaudhary Enterprise Pvt. Ltd. (2018) 5 SCC 575, which clarified that refusal to register shares could be based on any ground constituting sufficient cause, including conflict of interest. The Appellant argued that the Respondents' actions constituted sufficient cause for refusal under Section 111A(2) of the Act.

The CLB had concluded that the term "sufficient cause" should not be limited to violations of law under Section 111A(3) but should include any reasonable apprehension that the transfer is not in the company's best interest. The CLB directed the Appellant to register the shares, but this decision was challenged.

The High Court noted that "sufficient cause" should be interpreted pragmatically and reasonably, considering the purpose of the legislation. The Court found that the Appellant's apprehensions about the Respondents' intentions were reasonable and supported by material on record, constituting sufficient cause for refusal.

In conclusion, the High Court set aside the CLB's order and upheld the Appellant's refusal to register the shares, finding it justified under the circumstances.

The appeal was allowed, and all pending applications were disposed of.

Delhi HC upholds company's refusal to register shares citing mala fide transfers under Section 111A
Delhi HC allowed appeal against NCLAT order directing registration of shares. Court held that "sufficient cause" under Section 111A Companies Act includes not only legal violations but also mala fide transfers intended to obstruct company functioning. Respondents, comprising former associate's family members and relatives of ex-statutory director, filed multiple complaints against appellant company. Their failure to appear and rebut allegations of seeking to hinder bona fide corporate decisions constituted sufficient cause for refusing share registration. Company's refusal was justified.

Scope of the expression 'sufficient cause' in proviso to sub section (2) of Section 111A - free transferability of shares in a public company - distinction between pre registration objections and post registration remedies - conflict of interest and mala fide transfer as sufficient cause to refuse registration - application of judicial interpretation of Section 58(4) (Companies Act, 2013) to Section 111A (Companies Act, 1956)Scope of the expression 'sufficient cause' in proviso to sub section (2) of Section 111A - free transferability of shares in a public company - distinction between pre registration objections and post registration remedies - Whether the proviso to sub section (2) of Section 111A can be read to permit refusal of registration only where there is statutory contravention as in sub section (3), or whether 'sufficient cause' has a broader ambit. - HELD THAT: - The Court examined the text and legislative purpose of Section 111A and the interaction between the free transferability provision and the proviso permitting refusal for 'sufficient cause'. It relied on the principle that the proviso must be read as a limited exception to the free transferability guaranteed by sub section (2) and noted the legislative choice to use the wider phrase 'sufficient cause' in the proviso as distinct from the narrower 'contravention of any law' in sub section (3). The Court endorsed the Supreme Court's analysis in construing the analogous provision in the Companies Act, 2013, holding that 'sufficient cause' cannot be reduced solely to statutory violations; it may include other legitimate grounds such as mala fide transfers or conflict of interest. At the same time, the proviso is not to be read in a manner that obliterates the free transferability principle; where the company can identify statutory violations before registration, it may invoke sub section (3) considerations as sufficient cause, but the proviso is not confined to those violations alone. The expression 'sufficient cause' is to be given a pragmatic, reasonable and liberal construction consonant with legislative intent and judicial precedent on the phrase. [Paras 27, 28]The proviso to sub section (2) of Section 111A must be given a pragmatic construction; 'sufficient cause' is not limited to statutory contraventions listed in sub section (3) and can include other grounds such as mala fide transfers or conflict of interest, subject to preserving the core principle of free transferability.Conflict of interest and mala fide transfer as sufficient cause to refuse registration - application of judicial interpretation of Section 58(4) (Companies Act, 2013) to Section 111A (Companies Act, 1956) - Whether, on the facts of this case, the Appellant had 'sufficient cause' to refuse registration of the transfer of shares to the Respondents. - HELD THAT: - The Court considered the material on record concerning Respondent No. 4's prior role with the company, the familial and associative relationship between the Respondents, multiple complaints lodged by them with regulatory authorities, and allegations that they formed a cartel and intended to obstruct bona fide corporate decision making. The Respondents did not appear to rebut these allegations before the Court. Applying the legal test that 'sufficient cause' permits refusal where there is a reasonable apprehension, supported by material, that the transfer is not in the best interests of the company and its stakeholders, the Court found the Appellant's apprehension to be reasonable and supported by evidence on record. Consequently, the Court concluded that the facts constituted 'sufficient cause' under the proviso to sub section (2) of Section 111A. [Paras 29, 30, 31]On the facts, the Appellant had sufficient cause to refuse registration; the CLB's order directing registration was unsustainable and is set aside.Final Conclusion: The High Court interpreted 'sufficient cause' in the proviso to sub section (2) of Section 111A as broader than only statutory contraventions and, applying that test to the facts, held that the company had sufficient cause to refuse registration; the Company Law Board's order directing registration was set aside and the appeal is allowed.

2023 (11) TMI 528 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB Insolvency and Bankruptcy

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Settlement after full payment led to closure of insolvency proceedings and setting aside of the section 9 admission order.
Settlement and full payment of the operational creditor's dues rendered continuation of the corporate insolvency resolution process unnecessary. The parties recorded that the settlement amount had been finalised and paid, and the operational creditor confirmed receipt of the entire payment. On that basis, the NCLAT set aside the order admitting the section 9 application and closed the corporate insolvency resolution process. The order also directed that the amount of Rs. 2 lakh payable to the interim resolution professional towards fee and expenses be made by the operational creditor within the stipulated time.

Admittance of Section 9 application - Settlement between parties - Closure of Corporate Insolvency Resolution Process - Payment to Interim Resolution ProfessionalAdmittance of Section 9 application - Settlement between parties - Closure of Corporate Insolvency Resolution Process - Impugned order admitting the Section 9 application set aside and CIRP closed pursuant to settlement and payment made by the corporate debtor. - HELD THAT: - The Appeal challenged the Adjudicating Authority's order admitting the Section 9 application. The parties reached a settlement and the Operational Creditor confirmed receipt of the agreed payment transmitted by the Appellant. In these circumstances the Tribunal found no reason to continue the Corporate Insolvency Resolution Process and therefore set aside the impugned admission order and ordered closure of the CIRP. The Tribunal's decision rests on the definitive settlement between the Corporate Debtor and the Operational Creditor and the receipt of the agreed amount by the Operational Creditor.Impugned order dated 12.10.2023 set aside and the Corporate Insolvency Resolution Process closed.Payment to Interim Resolution Professional - Direction for payment to the Interim Resolution Professional in respect of fee and expenses. - HELD THAT: - The Interim Resolution Professional informed the Tribunal that the Adjudicating Authority had directed a deposit of a specified amount which remained unpaid. The Tribunal directed the Operational Creditor to make the required payment by bank draft to the IRP within three weeks to cover fee and expenses, thereby ensuring outstanding IRP dues are discharged despite closure of the CIRP.Operational Creditor directed to pay the specified amount to the Interim Resolution Professional by bank draft within three weeks to cover fee and expenses.Final Conclusion: The appeal was disposed of by setting aside the admission order under Section 9 and closing the CIRP on account of settlement and payment; the Operational Creditor was directed to make the specified payment to the IRP within three weeks to cover fees and expenses.

2023 (11) TMI 527 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI Insolvency and Bankruptcy

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Section 7 application rejected as no concluded contract or financial debt established between parties
NCLAT upheld NCLT's rejection of Section 7 application for CIRP initiation. Tribunal found no concluded contract between parties and no financial debt existed. Appellant failed to establish Rs.2.6 crore was advanced pursuant to private placement offer under Section 42 of Companies Act. No material evidence showed company issued private placement offer or that amount qualified as financial debt under IBC Section 5(8). While NCLAT criticized NCLT's finding in paragraph 27 regarding debt liquidation as unsustainable and based on conjecture, it ultimately upheld the rejection order. Appeal was disposed of with NCLT's decision maintained.

Financial debt within the meaning of Section 5(8) of the IBC - share application money / private placement under Section 42 of the Companies Act, 2013 - requirement of private placement offer and statutory compliances for applicability of Section 42 - treatment as deposit under Rule 2(vii) of the Companies (Acceptance of Deposit) Rules, 2014 - adjudicatory finding based on surmise and conjectureShare application money / private placement under Section 42 of the Companies Act, 2013 - requirement of private placement offer and statutory compliances for applicability of Section 42 - treatment as deposit under Rule 2(vii) of the Companies (Acceptance of Deposit) Rules, 2014 - Whether the amount of Rs.2.6 Crores advanced by the appellant constituted share application money arising from a private placement (thus attracting Section 42(6) and Rule 2(vii)) - HELD THAT: - The Tribunal examined the correspondences and held that no material was placed on record to show that the company had issued a private placement offer or that the appellant's payments were pursuant to any such offer. Section 42 is an enabling provision that requires issuance of a private placement offer and prescribed compliances (including board/special resolution and filing) before application money can be treated under Section 42(6). Rule 2(vii) of the Companies (Acceptance of Deposit) Rules, 2014 applies only to amounts received pursuant to an offer made in accordance with the Companies Act; absent proof of any such offer or compliance, Rule 2(vii) and its explanation do not apply. For these reasons the Tribunal held that the payments could not be treated as share application money or as deposits under the cited rules and that the appellant failed to prove the applicability of Section 42(6) or Rule 2(vii). [Paras 14]Section 42(6) and Rule 2(vii) are not attracted as there is no evidence of any private placement offer or statutory compliance; the amount cannot be treated as share application money or deposit under those provisions.Financial debt within the meaning of Section 5(8) of the IBC - adjudicatory finding based on surmise and conjecture - Whether the Adjudicating Authority rightly held that no financial debt was due and whether that specific finding (paragraph 27) was sustainable - HELD THAT: - The Tribunal observed that the payment of Rs.2.6 Crores by the appellant to the corporate debtor was not in dispute, but the nature of that payment (whether it created a recoverable financial debt) was not established as being pursuant to a private placement. The Adjudicating Authority's paragraph 27, which recorded a presumption that no financial debt existed (in part on the basis that the amount could be adjusted from sale of summit units), was held to rest on surmise and conjecture and therefore unsustainable. The Tribunal clarified that an e mail proposing adjustment by sale of units did not establish repayment or liquidation of the debt. However, the Tribunal expressly refrained from expressing any final view on whether the amount had in fact been repaid, leaving that question open for appropriate proceedings. [Paras 18, 20]Paragraph 27 of the Adjudicating Authority's order is deleted because the finding that no financial debt existed was based on conjecture; the question of actual repayment is left open for determination in appropriate proceedings.Financial debt within the meaning of Section 5(8) of the IBC - Whether the Section 7 petition was rightly rejected by the Adjudicating Authority - HELD THAT: - Although the Tribunal found that paragraph 27 of the Adjudicating Authority's order was based on unsustainable surmise and deleted that paragraph, on the substantive record the appellant had failed to establish that the payments constituted a financial debt recoverable under Section 5(8) (in particular by proving they were share application money under Section 42). In the absence of proof that the payments fell within the statutory definitions relied upon by the appellant, the Adjudicating Authority's ultimate conclusion rejecting the Section 7 application was upheld. [Paras 22]The Adjudicating Authority's order dismissing the Section 7 application is upheld.Final Conclusion: The Tribunal deleted paragraph 27 of the Adjudicating Authority's order because it was founded on surmise, held that the appellant failed to prove the payments were share application money or deposits under the Companies Act/Rules (so Section 42(6) and Rule 2(vii) do not apply), and upheld the rejection of the Section 7 petition while leaving open any separate determination of actual repayment for appropriate proceedings.

2023 (11) TMI 526 - CESTAT HYDERABAD Service Tax

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Issues involved: The appeal deals with whether the Appellant is liable to pay service tax under the head of 'Survey and Exploration of Mineral' for payments made to GX Technologies Corporation, USA (GXT) and GGS Spectrum Limited, UK (GGS) for data usage, and whether service tax is applicable on the income tax deposited under the TDS Scheme for services received from Dynamic Global Advisors Ltd., located outside India.

Issue 1: Liability for Service Tax on Data Usage Payments

The Appellant, engaged in mining of mineral oil or gas, bid for exploration blocks under NELP VII. The data related to geological and seismic quality of the blocks was to be purchased from DGH, who appointed GXT and GGS to analyze the data. The Appellant entered into a contract to license the data from GXT and GGS. The Appellant argued that the payment made was for the licensed rights to use the data, not for carrying out the survey, and thus, service tax should not apply. The Tribunal noted that the seismic data was owned by GXT and GGS and was available off-the-shelf for licensing. The Appellant did not engage GXT and GGS for specific survey activities but procured the data for analysis by DGAL. As GXT and GGS were located outside India and the data was made available from outside India, service tax was deemed not applicable under Rule 3(ii) of the Service Import Rules.

Issue 2: Applicability of Service Tax on TDS

Regarding the service tax on TDS deposited for services received from DGAL, the Appellant contended that the TDS was paid on their own account to the government and service tax should not apply on this amount. The Tribunal, in line with previous judgments, held that service tax cannot be levied on the TDS portion paid to the government by the Appellant. The Tribunal differentiated this case from Sheladia Rites where TDS was deducted from the gross amount payable to the service provider. As the TDS was paid separately by the Appellant, service tax was not applicable on this amount. The appeal was allowed, and the impugned order was set aside.

Judgment: The Appellate Tribunal, CESTAT Hyderabad, ruled in favor of the Appellant, holding that service tax was not applicable on the payments made for data usage and on the TDS amount deposited on their own account. The Tribunal emphasized that the activities of GXT and GGS were not for specific survey purposes for the Appellant, and the data licensing was done from outside India. The Appellant's payment of TDS on their own account exempted them from service tax on that amount. The appeal was allowed with consequential relief.

Foreign seismic data licensing payments exempt from service tax as services provided outside India
CESTAT Hyderabad held that service tax was not applicable on payments made to foreign entities for licensing seismic data under survey and exploration of mineral services. The appellant obtained off-the-shelf data from US and UK companies through licensing agreements, not engaging them for specific survey activities. Since the data licensing occurred from outside India, service tax was not leviable under Service Import Rules. Additionally, service tax could not be levied on TDS amounts paid by appellant from their own account to government, as TDS was not deducted from gross payment to service providers. Appeal allowed on both issues.

Survey and exploration of mineral - survey and exploration - service import rules - services provided from outside India - licence to use seismic data - intellectual property right / online information access or database retrieval - service tax on tax deducted at sourceSurvey and exploration of mineral - licence to use seismic data - service import rules - services provided from outside India - intellectual property right / online information access or database retrieval - Whether payments made to GX Technologies Corporation, USA and GGS Spectrum Ltd., UK for licence to use pre-existing seismic data attract service tax under the category 'survey and exploration of mineral'. - HELD THAT: - The Tribunal examined the statutory definition of 'survey and exploration of mineral' and the CBEC circular clarifying that taxable activities include seismic survey, collection, processing and interpretation of data. In the present case the seismic data was owned by GXT and GGS, acquired by them under contract with DGH and made available 'off-the-shelf' on a licence-to-use basis; the appellant did not engage GXT/GGS to perform a specific survey, collection, processing or interpretation for it. The licensing of already-acquired data was therefore comparable to obtaining licensed access to intellectual property or database content rather than commissioning survey services. Further, GXT and GGS carried out the licensing from outside India and, applying Rule 3(ii) of the Service Import Rules, the activities in question were held to be performed from outside India and not liable to service tax in India. The Tribunal therefore treated the consideration as falling outside the 'survey and exploration of mineral' service and, at best, akin to IPR/online information access, and excluded it from service tax liability under that category. [Paras 15, 16, 17]Payments to GXT and GGS for licence to use pre-existing seismic data do not attract service tax under 'survey and exploration of mineral' and are not taxable in India under the Service Import Rules.Service tax on tax deducted at source - gross amount charged under Section 67 - Whether service tax is payable on the amount of income tax deposited under the TDS scheme by the appellant in respect of payments to Dynamic Global Advisers Ltd. - HELD THAT: - The Tribunal followed its precedents holding that service tax is leviable only on the gross amount charged by the service provider and not on the portion representing TDS paid by the recipient out of pocket to the Government where the service provider was paid the full invoice amount. In the present facts DGAL invoiced the full amount and the appellant paid the invoice in full and remitted TDS to the revenue on its own account; hence the portion representing TDS paid to the Government is not a taxable addition to the gross consideration for the purposes of service tax. The Tribunal distinguished cases where TDS was deducted from the amount payable to the service provider. [Paras 18, 19]Service tax is not payable on the TDS amount remitted by the appellant to the Government where the appellant paid the full invoice amount to the non resident service provider.Final Conclusion: The appeal is allowed on the merits: the demand of service tax under 'survey and exploration of mineral' in respect of licence fees paid to GXT and GGS is set aside, and no service tax is leviable on the TDS remitted by the appellant in respect of payments to DGAL. The question of limitation is left open.

2023 (11) TMI 525 - CESTAT HYDERABAD Service Tax

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Air cargo terminal operations including unloading, screening, and build-up services classified as Cargo Handling Services under Section 65A
CESTAT Hyderabad held that air cargo terminal operations including unloading, checking, weighing, customs facilitation, screening, and build-up services constitute Cargo Handling Services (CHS) rather than Storage and Warehousing Services (SWS). The tribunal determined that activities performed within the customs area by authorized cargo service providers for export cargo processing are cargo handling activities, not warehousing. Terminal storage charges collected during mandatory processing periods do not transform the operator into a warehouse keeper. Screening and pallet build-up services, though potentially classifiable under Airport Services when provided to airlines, fall under CHS per Section 65A classification hierarchy. Appeal allowed.

Cargo Handling Service - Storage and Warehousing services - Airport Services - classification of taxable services under Section 65A(2)Cargo Handling Service - Storage and Warehousing services - Whether activities set out at S.No.1-7 (unloading/acceptance, checking labels, weighing, facilitating Customs examination, receiving Let Export Order, document checks, loading into trolleys) constitute Cargo Handling Service or Storage and Warehousing services - HELD THAT: - The Tribunal examined the nature and context of activities 1-7 performed by the appellant within the cargo terminal for export-bound cargo and noted that these activities are performed as part of processing cargo for shipment, include short-term holding incidental to processing, customs facilitation and handling, and are carried out within the customs/cargo terminal for onward export. The mere labelling of charges as "terminal storage-processing charges" does not alter the character of the service. The cargo terminal is not operated as a principal storage/warehouse and there is no allegation that the appellant operates a statutory warehouse. Many activities (short term storage, customs examination, documentation) are incidental to the main activity of handling cargo prior to export and therefore fall within the scope of Cargo Handling Service rather than Storage and Warehousing services. [Paras 19, 20, 21]Activities S.No.1-7 are classifiable as Cargo Handling Service; classification as Storage and Warehousing services is inappropriateCargo Handling Service - Airport Services - classification of taxable services under Section 65A(2) - Whether activities S.No.8-9 (screening through X ray and build-up/unitization of cargo in pallets for aircraft loading) are classifiable as Airport Services or as Cargo Handling Service - HELD THAT: - The Tribunal accepted that S.No.8-9 can prima facie fall within the definitions of both Airport Services and Cargo Handling Service. Applying the statutory guidance in Section 65A(2) for classification of services prima facie classifiable under more than one sub clause, the sub clause providing the more specific description is to be preferred. Since Sec 65(23) (Cargo Handling Service) occurs earlier than the sub clause for Airport Services in clause (105) and the screening/unitization activities are integrally connected with handling of cargo at a freight/cargo terminal, these activities are to be classified as Cargo Handling Service. [Paras 22, 23, 24]Activities S.No.8-9 are classifiable as Cargo Handling Service by application of Section 65A(2); they are not to be classified as Airport Services for the period in questionCargo Handling Service - Validity of the demand and penalties confirmed by the adjudicating authority where classification was changed to Airport Services and Storage and Warehousing services - HELD THAT: - Having held that the activities in dispute (S.No.1-9) are classifiable as Cargo Handling Service, the Tribunal found merit in the appellant's challenge to the adjudicating authority's reclassification and consequent demand. The Tribunal concluded that the classification adopted by the original authority was not correct and, on merits, allowed the appeal. Consequentially, penalties and the demand based on the impugned classification were set aside. The Tribunal left the question of limitation open since the appeal was allowed on merits. [Paras 24, 25]Impugned demand and penalties based on classification as Airport Services and Storage and Warehousing services set aside; appeal allowedFinal Conclusion: Appeal allowed on merits: activities performed by the appellant for export cargo during March 2008 to June 2010 (including processing, short term holding, customs facilitation, screening and unitization) are classifiable as Cargo Handling Service; reclassification to Airport Services and Storage and Warehousing services and the consequential demand and penalties are set aside.

2023 (11) TMI 522 - CESTAT CHENNAI Central Excise

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Issues Involved:
1. Eligibility of CENVAT Credit on input services availed prior to commencement of commercial production.
2. Interpretation of "input service" definition post-01.04.2011.
3. Disallowance of specific services under the amended definition.

Summary:

1. Eligibility of CENVAT Credit on Input Services:
The appellant, M/s. Saint Gobain Glass India Ltd., availed CENVAT Credit on various input services before the commencement of commercial production. The Department argued that these services fall under "services used in relation to setting up of factory," which is ineligible for credit post-01.04.2011 as per the amended definition of "input service."

2. Interpretation of "Input Service" Definition Post-01.04.2011:
The Tribunal examined the definition of "input service" before and after 01.04.2011. Prior to this date, the definition included services used in relation to setting up a factory. Post-amendment, these words were omitted. However, the main part of the definition still includes services used directly or indirectly in or in relation to the manufacture of final products. The Tribunal noted that services used for the commencement of manufacture are in relation to the manufacture of final products.

3. Disallowance of Specific Services:
The Tribunal referenced previous decisions, including M/s. Pepsico India Holdings (Pvt.) Ltd. and M/s. Mangalam Cement Ltd., which held that services used for setting up a factory are covered under "input services" as they are directly or indirectly related to manufacture. The Tribunal found that the appellant did not avail credit on the setting up of buildings or roofs but on services like Erection, Commissioning, and Installation of machinery, which are eligible for credit.

Conclusion:
The Tribunal concluded that the disallowance of credit on the impugned services, except for Emergency Medical Services and services rendered by M/s. Lease Plan India Pvt. Ltd., cannot be sustained. The appeal was partly allowed, with disallowance upheld for Emergency Medical Services (Rs.31,518/-) and services by M/s. Lease Plan India Pvt. Ltd. (Rs.7664.99/-). The demand, interest, and penalties for other services were set aside.

CENVAT credit allowed for pre-production input services following PEPSICO precedent under Rule 2(l)(ii)
CESTAT Chennai ruled on CENVAT credit eligibility for input services availed before commercial production commenced. Following precedent from PEPSICO INDIA HOLDINGS case, the tribunal held that services used for factory setup qualify as input services under Rule 2(l)(ii) of CENVAT Credit Rules 2004, as they relate directly to manufacturing activities. However, credit for Emergency Medical Services (Rs.31,518) was disallowed as appellant failed to prove these weren't for personal consumption. Credit disallowance for services by Lease Plan India (Rs.7,664.99) was upheld as uncontested. Appeal allowed partially; remaining service credits were permitted.

Input service - CENVAT credit - services used directly or indirectly in or in relation to the manufacture - commencement of commercial production - omission of 'setting up' from the inclusive part of the definition - exclusion for services used in construction of building or civil structureInput service - services used directly or indirectly in or in relation to the manufacture - omission of 'setting up' from the inclusive part of the definition - commencement of commercial production - Whether CENVAT credit of Service Tax on services availed prior to commencement of commercial production (post 01.04.2011) is eligible when such services were used for setting up, erection, commissioning or other services leading to commencement of manufacture. - HELD THAT: - The Tribunal examined the amended definition of "input service" post 01.04.2011 and held that the main part of the definition - permitting credit for services "used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal" - remained unchanged. The omission of the specific words "setting up" from the inclusive part did not exclude services used in setting up a factory from the ambit of input services where such services are used in relation to manufacture. Reliance was placed on earlier Tribunal decisions (including M/s. Pepsico India Holdings (Pvt.) Ltd. and M/s. Mangalam Cement Ltd.) which concluded that activities necessary for establishing the manufacturing unit (including erection, commissioning and installation of plant and machinery) are activities in relation to manufacture and, unless specifically excluded by the exclusion clauses, qualify for CENVAT credit. The Tribunal rejected Departmental decisions and authorities cited as inapplicable to the distinct issue of input services used in relation to manufacture, and observed that services used for commencement of manufacture fall within the wide scope of the main clause of Rule 2(l)(ii). [Paras 11, 12, 13, 17, 18]Disallowance of credit in respect of services (other than those specifically addressed separately) availed prior to commencement of commercial production is set aside; CENVAT credit held eligible.CENVAT credit - input service - Whether credit availed on Emergency Medical Services provided to the factory qualifies as eligible input service. - HELD THAT: - The appellant explained that on-site emergency medical services were arranged as a factory facility for accidents. The Tribunal examined the evidence and found that the service was not established as used other than for personal use/consumption and therefore did not fall within the ambit of eligible input services under the Rules. The tribunal applied the exclusionary principle to disallow credit where the requisite nexus to manufacture (or non-personal use) was not proved. [Paras 15]Disallowance of credit in respect of Emergency Medical Services is upheld.CENVAT credit - Whether the reversal/credit in respect of services rendered by M/s. Lease Plan India Pvt. Ltd. for September 2013 (which the appellant has not contested) can be disallowed. - HELD THAT: - The appellant conceded lack of clarity regarding the service and reversed the credit for September 2013 and did not contest the Departmental disallowance. The Tribunal therefore treated the matter as not contested and upheld the disallowance in respect of that specific transaction. [Paras 16]Disallowance of the credit claimed for September 2013 in respect of services by M/s. Lease Plan India Pvt. Ltd. is upheld.Final Conclusion: The appeal is partly allowed: CENVAT credit availed on services used for erection, commissioning, installation and related activities prior to commencement of commercial production (post 01.04.2011) is held eligible and the demand, interest and penalties in respect thereof are set aside; however, credit in respect of Emergency Medical Services and the uncontested September 2013 Lease Plan entry are disallowed and upheld as per the order.

2023 (11) TMI 518 - BOMBAY HIGH COURT Indian Laws

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Cheque dishonour case fails as accused issued cheque for another's debt, not own liability under Section 138
The Bombay HC dismissed an appeal in a cheque dishonour case under section 138 of the NI Act. The court held that for prosecution under section 138, the cheque must be issued by someone who owes a legally enforceable debt. The accused was acquitted because the cheque was not issued to discharge the accused's own debt but allegedly for another person's liability. Without proper assignment of liability or nexus between the cheque issuance and accused's obligation to repay, the complainant failed to establish the required legal debt. The presumption under section 139 was successfully rebutted by the accused's plausible defence.

Offence under Section 138 of the Negotiable Instruments Act - Presumption under Section 139 of the Negotiable Instruments Act - Assignment/transfer of liability for debt - Rebuttal of statutory presumption by plausible defenceAssignment/transfer of liability for debt - Offence under Section 138 of the Negotiable Instruments Act - Whether the accused had taken over the liability of the purchaser such that issuance of the cheque by the accused could sustain prosecution under Section 138 NI Act - HELD THAT: - The Court found that the contractual transaction for sale of jewellery was exclusively between the complainant and Mr Dhaval Bhatt and that there was no documentary evidence or oral testimony establishing that the accused had assumed that debt. PW 1 admitted that the accused had no role until blank signed cheques were handed over by Mr Dhaval Bhatt and that the cheque contents were filled at the instance of the complainant. There was no written instrument effecting assignment or any direct communication from the accused to the complainant undertaking liability. Reliance on precedents of this Court (Hiten Sagar; Nandkishore Mehra) supports the principle that mere assertion that one person issued a cheque to discharge another's liability is insufficient; the creditor must be made aware of or be party to the assignment. On the evidence, the trial court rightly concluded the accused did not take over the purchaser's liability and therefore the issuance of the cheque could not sustain criminal liability under Section 138 vis a vis the accused. [Paras 11, 12, 13, 14, 18]The accused did not assume the liability of Mr Dhaval Bhatt and therefore could not be convicted under Section 138 for repayment of that debt.Presumption under Section 139 of the Negotiable Instruments Act - Rebuttal of statutory presumption by plausible defence - Whether the presumption under Section 139 could be invoked by the complainant in the absence of assignment and whether that presumption stood rebutted - HELD THAT: - The Court noted that Section 139 creates a rebuttable presumption that a holder received a cheque for discharge of any debt. However, that presumption operates only where there is a nexus between the drawer and the obligation sought to be discharged. Here, the primary liability lay on Mr Dhaval Bhatt and there was no assignment of that liability to the accused; moreover, evidence showed the cheque leaf was filled at the complainant's instance and the accused's banker produced records of telephonic instructions to stop payment. Following Rangappa, the presumption can be displaced by a plausible defence drawn from the complainant's own materials without the accused having to lead independent evidence. Given absence of nexus and the plausible defence of non assignment and stop payment instructions, the presumption under Section 139 did not avail the complainant. [Paras 15, 16, 17, 18]The presumption under Section 139 was rebutted on the material; in the absence of assignment and given the plausible defence, Section 139 did not assist the complainant.Final Conclusion: On the facts and materials, the High Court upheld the trial Court's acquittal: the accused had not assumed the purchaser's liability and the statutory presumption under Section 139 was displaced by a plausible defence, hence conviction under Section 138 could not be sustained; the appeal is dismissed.

2023 (11) TMI 460 - DELHI HIGH COURT Indian Laws

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Issues: (i) Whether the Magistrate was required to conduct the mandatory inquiry under Section 202 of the Code of Criminal Procedure, 1973 before issuing summons in complaints under Section 138 of the Negotiable Instruments Act, 1881 against an accused residing beyond territorial jurisdiction; (ii) Whether, at the summoning stage, the Magistrate was required to examine the underlying share sale and purchase agreement to determine the existence of a legally enforceable debt before issuing process.

Issue (i): Whether the Magistrate was required to conduct the mandatory inquiry under Section 202 of the Code of Criminal Procedure, 1973 before issuing summons in complaints under Section 138 of the Negotiable Instruments Act, 1881 against an accused residing beyond territorial jurisdiction.

Analysis: The statutory inquiry under Section 202 is mandatory where the accused resides outside the territorial jurisdiction of the Magistrate. In complaints under Section 138 of the Negotiable Instruments Act, 1881, the inquiry may be conducted on the basis of the complainant's affidavit and supporting documents, read with Section 145 of that Act. The inquiry need not necessarily involve examination of witnesses on oath, and the Magistrate may confine the exercise to satisfaction that sufficient grounds exist for proceeding. The summoning orders reflected consideration of the complaint, pre-summoning evidence and documents, and therefore showed compliance with the statutory requirement even though Section 202 was not specifically mentioned in express terms.

Conclusion: The mandatory inquiry under Section 202 of the Code of Criminal Procedure, 1973 was duly conducted and the summoning orders were not vitiated on that ground.

Issue (ii): Whether, at the summoning stage, the Magistrate was required to examine the underlying share sale and purchase agreement to determine the existence of a legally enforceable debt before issuing process.

Analysis: The existence or non-existence of a legally enforceable debt based on the conditions in the agreement is a matter of defence and proof at trial. By virtue of the presumption under Section 139 of the Negotiable Instruments Act, 1881, a cheque is presumed to have been issued in discharge of a debt or liability, subject to rebuttal by evidence. At the stage of issuance of summons, the Magistrate is only required to ascertain whether the basic ingredients of the offence under Section 138 are prima facie made out on the basis of the complaint and pre-summoning evidence. Requiring a detailed examination of the agreement at that stage would amount to conducting a full trial before summons, which is impermissible.

Conclusion: The Magistrate was not required to adjudicate the existence of a legally enforceable debt by construing the agreement at the summoning stage.

Final Conclusion: The summoning order challenged in one petition was upheld and the revisional order setting it aside was reversed, while the connected challenge to the other summoning order was rejected, with both complaints proceeding in accordance with law.

Ratio Decidendi: In complaints under Section 138 of the Negotiable Instruments Act, 1881, the Section 202 inquiry for an accused residing outside jurisdiction may be satisfied by consideration of the complainant's affidavit and documents, and the Magistrate need only determine prima facie compliance with the ingredients of the offence without entering into the merits of the defence or the detailed question of legally enforceable debt.

Section 202 inquiry in cheque dishonour complaints can rest on affidavit and documents; enforceable debt is for trial, not summoning.
In complaints under Section 138 of the Negotiable Instruments Act, 1881, where the accused resides beyond the Magistrate's territorial jurisdiction, the mandatory Section 202 CrPC inquiry can be satisfied on the basis of the complainant's affidavit and supporting documents, read with Section 145 of the NI Act, and need not require oral examination of witnesses if the Magistrate is otherwise satisfied that sufficient grounds exist to proceed. At the summoning stage, the Magistrate is not required to construe the underlying share sale and purchase agreement or finally determine whether a legally enforceable debt exists, because that issue falls within the defence and trial. The decision confirms that only prima facie ingredients of the offence need be assessed before issuing process.

Mandatory inquiry under Section 202 CrPC - evidence on affidavit under Section 145 of the Negotiable Instruments Act - presumption under Section 139 of the Negotiable Instruments Act - prima facie satisfaction for issuance of summons in proceedings under Section 138 NI Act - magistrate may examine documents and pre-summoning evidence for satisfaction under Section 202Mandatory inquiry under Section 202 CrPC - prima facie satisfaction for issuance of summons in proceedings under Section 138 NI Act - Whether the Magistrate had conducted the mandatory inquiry under Section 202 CrPC before issuing summons in the complaints under Section 138 NI Act. - HELD THAT: - The Court held that in complaints under Section 138 NI Act the inquiry envisaged by Section 202 CrPC can be conducted by considering pre summoning evidence and documents and need not always involve taking evidence on oath. Applying the guidance in Re: Expeditious Trial of Cases under Section 138 of the NI Act and the Practice Directions, the Magistrate may examine affidavits and documents to be satisfied whether basic ingredients of Section 138 are prima facie made out. On the record before the learned MM, pre summoning evidence established issuance and dishonour of the cheque, service of statutory notice and non payment within fifteen days, and the learned MM recorded prima facie satisfaction. Accordingly, the learned MM had conducted the requisite inquiry under Section 202 CrPC and lawfully issued summons. [Paras 13, 20, 21, 24, 25]The learned MM conducted the inquiry required by Section 202 CrPC and the summoning orders meet the requirement of prima facie satisfaction under Section 138 NI Act.Evidence on affidavit under Section 145 of the Negotiable Instruments Act - magistrate may examine documents and pre-summoning evidence for satisfaction under Section 202 - Whether the Magistrate was required to examine witnesses on oath or to conduct a full trial like appreciation of documents (including the Share Sale Agreement) before issuing summons. - HELD THAT: - Relying on the Supreme Court's interpretation, Section 145 permits the complainant's evidence to be given by affidavit and, read with Section 202, the Magistrate need not insist on oral evidence on oath; documents and affidavits may suffice. The Court rejected the contention that the MM was obliged to engage in full trial level appreciation of the Share Sale and Purchase Agreement to determine accrual of legally enforceable debt at the summons stage. Determination whether contractual conditions were fulfilled is a matter for trial where the accused may seek to rebut the statutory presumption under Section 139. Requiring a detailed adjudication on the Agreement at the Section 202 stage would frustrate the expeditious procedure contemplated by the law. [Paras 18, 19, 20, 26, 27]The learned MM was not required to conduct a trial like examination of the Agreement or to record oral evidence of witnesses on oath; affidavit evidence and document appreciation sufficed at the Section 202 stage.Presumption under Section 139 of the Negotiable Instruments Act - rebuttal of presumption at trial - Whether the existence of a legally enforceable debt had to be negatived by the Magistrate at the stage of issuing summons. - HELD THAT: - The Court reiterated that Section 139 creates a rebuttable presumption that a cheque was issued in discharge of a legally enforceable debt. That presumption cannot be finally displaced at the stage of taking cognizance and issuing summons; the accused may rebut it by leading evidence at trial. Consequently, the MM need only be satisfied prima facie that the ingredients of Section 138 are made out on the complainant's pre summoning material; detailed resolution of conflicting contentions on enforceability of debt is for trial. [Paras 19, 20, 22, 23]It was not incumbent on the Magistrate to negativate the existence of a legally enforceable debt at the summons stage; such matters are to be tested at trial where the presumption under Section 139 can be rebutted.Final Conclusion: The High Court set aside the ASJ's remand order and upheld the summoning order dated 9.1.2020 in CC No. 380/2020; the petition challenging the summoning order dated 27.1.2020 in CC No. 886/2020 was dismissed. Both learned Magistrates were held to have lawfully conducted the inquiry under Section 202 CrPC by relying on pre summoning evidence and affidavits, and the matters as to enforceability of the debt are left open for trial.

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