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Issues: Whether a single composite assessment order covering more than one tax period was sustainable under the Goods and Services Tax law.
Analysis: The order was challenged on the ground that a single assessment order had been passed for multiple years. The Court relied on the view that a single show-cause notice or a single composite assessment order cannot be issued for more than one tax period, and that separate proceedings are required for each assessment year where the annual return due date has been reached.
Conclusion: The composite assessment order was not sustainable and was set aside, along with the appellate order, with liberty to initiate fresh proceedings separately for each assessment year.
Ratio Decidendi: A single show-cause notice or composite assessment order cannot validly cover multiple tax periods where separate assessment proceedings are required for each tax period or assessment year.
Validity of single assessment order - challenge on the ground that a single assessment order passed, for more than one financial year, would be violative of the provisions of Section 73 and Section 74 of the G.S.T. Act, 2017 - HELD THAT:- A Division Bench of this Court in S.J. CONSTRUCTIONS, SUMA INFRA, M/S. SKS TRADERS, BHAARAT SCRAP TRADERS VERSUS THE ASSISTANT COMMISSIONER AND OTHERS, THE DEPUTY ASSISTANT COMMISSIONER IIST AND OTHERS, THE ADDITIONAL COMMISSIONER ST AND OTHERS. [2025 (9) TMI 1215 - ANDHRA PRADESH HIGH COURT], after considering the said question, had held that, a single show-cause notice or a single composite assessment order, cannot be passed, in relation to more than one tax period of either a month if the assessment is taken up before the due date for filing of the annual return or for more than one year if the due date for filing of annual return has been reached.
The petitioner has raised various grounds of challenge. However, the petitioner is pressing the primary ground of the order being a composite order. In that view of the matter the present Writ Petition is being disposed of on this ground of challenge, leaving open the other grounds of challenge.
This Writ Petition is disposed of, setting aside the Order of assessment, dated 29.11.2022 as well as the Order of appeal, dated 23.01.2025, leaving it open to the respondents to initiate fresh proceedings, for each assessment year separately.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the amendment effective 01.02.2019 substituting the definition of "relevant date" for refund of unutilised input tax credit under inverted tax structure could be applied retrospectively so as to curtail the limitation period for refund claims relating to periods prior to the amendment.
(ii) Whether, after exclusion of the period 01.03.2020 to 28.02.2022 for computation of limitation for refund applications under Section 54, the refund application filed on 02.02.2021 was within limitation for the tax periods July 2017 to March 2019.
(iii) Whether rejection of the refund claim for January 2019 to March 2019 on the asserted ground of "no eligible inputs" could be sustained in the absence of a reasoned finding.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Retrospective application of amended "relevant date" and impact on vested right
Legal framework: The Court examined Section 54(1) and Section 54(3)(ii) governing refund of unutilised input tax credit in an inverted tax structure, and the definition of "relevant date" in Explanation (2)(e), which was substituted with effect from 01.02.2019 from "end of the financial year" to "due date for furnishing the return under Section 39 for the period in which such claim arises."
Interpretation and reasoning: The Court framed the determinative question as whether the amendment curtailing the period for filing refund claims could be applied to periods preceding 01.02.2019 so as to divest or curtail a right that had already accrued. The Court held that the right to claim refund for the pre-amendment period could not be curtailed by a subsequent amendment unless the amendment expressly provided for retrospective operation. The Court treated the curtailment of the limitation window, when applied to an accrued entitlement, as impermissible retrospective deprivation of a vested right, and applied the presumption that such substantive curtailment operates prospectively absent express retrospective intent.
Conclusion: The amended definition of "relevant date" effective 01.02.2019 could not be applied retrospectively to refund claims relating to periods prior to 01.02.2019 so as to shorten the time available; the unamended definition continued to govern those pre-amendment periods.
Issue (ii): Limitation for the refund application dated 02.02.2021 in light of exclusion of time from 01.03.2020 to 28.02.2022
Legal framework: The Court applied the notification excluding the period from 01.03.2020 to 28.02.2022 for computation of limitation for filing refund applications under Section 54, and noted that the exclusion was deemed effective from 01.03.2020.
Interpretation and reasoning: The Court accepted that, applying the exclusion period, refund claims for February 2018 to December 2018 were within limitation. For July 2017 to January 2018, the Court held that since the unamended "relevant date" applied, the limitation would have otherwise run up to March 2020; because the limitation endpoint fell within the excluded period commencing 01.03.2020, the exclusion protected the claim and the application dated 02.02.2021 could not be rejected as time-barred. The Court further held that the refund claim for January 2019 to March 2019 was also not barred by limitation under Section 54, and that the claim could not be rejected solely on "technical grounds of delay" in the circumstances considered.
Conclusion: The refund application dated 02.02.2021 was held not barred by limitation for the periods July 2017 to December 2018, and the Court also held that the claim for January 2019 to March 2019 was not barred by limitation.
Issue (iii): Validity of rejection for January 2019 to March 2019 on the ground of "no eligible inputs"
Interpretation and reasoning: The Court noted that the claim for January 2019 to March 2019 had been rejected on the basis that no eligible inputs were received, but found that no reasoned finding supporting that conclusion had been recorded. In the absence of a reasoned determination, the Court held that the rejection could not be sustained in its existing form and required reconsideration.
Conclusion: The rejection for January 2019 to March 2019 was not upheld; the matter required a fresh determination with a reasoned decision.
Final disposition tied to the decided issues: The Court set aside the impugned appellate order and remanded the matter for fresh determination in accordance with the Court's conclusions on (a) non-retrospective operation of the amended "relevant date," (b) applicability of the excluded period for limitation computation, and (c) necessity of a reasoned finding on the "eligible inputs" ground.
Refund of the accumulated input tax credit - Inverted Tax Structure - applicability of amendment effective from 01.02.2019, which curtailed the period prescribed for filing refund applications, to divest or curtail the vested right of the petitioner in relation to the period preceding the amendment - HELD THAT:- The right to claim refund with respect to period preceding the amendment cannot be curtailed by the amendment. The amended Section cannot operate retrospectively so as to take away a vested right. This amendment must be treated as prospective unless it is given retrospective effect. The vested right of the petitioner cannot be unilaterally revoked or curtailed by a subsequent amendment to the statute unless the amendment expressly provides for retrospective application. Thus, even though the amendment came into force on 01.02.2019, it cannot curtail the rights vested in the petitioner.
In Harshit Harish Jain & anr. vs. The State of Maharashtra & Ors. [2025 (1) TMI 1701 - SUPREME COURT], the Hon’ble Apex Court, in a matter regarding rejection of appellants claim for refund of Stamp Duty under the provisions of Maharashtra Stamp Act while considering the issue whether amended six months limitation introduced by 24.04.2015 amendment to Section 48(1) of the Act governs the appellants’ claim for stamp duty refund, when the Cancellation Deed was executed prior to the amendment and registered, i.e., the right to seek refund accrued on the date of execution, thus, invoking the un-amended two years window, has held 'Denying a legitimate refund solely on technical grounds of limitation, especially when the timing of registration fell close to the legislative amendment, fails to strike the equitable balance ordinarily expected in fiscal or quasi-judicial determinations. A measure of discretion or consideration for good faith conduct is not alien to statutory processes that safeguard citizens from unjust enrichment by the State.'
Thus, even though the amendment came into force on 01.02.2019, it cannot curtail the right which had already vested prior thereto. Therefore, the un-amended definition of „relevant date’ would continue to apply - It is well settled that every statute is presumed to operate prospectively unless the same is expressly made retrospective, substantive amendments which alter or curtail the scope of tax payer vested rights are presumed to be prospective unless the legislation unequivocally provides otherwise.
The petitioner’s claim for January 2019 to March 2019 was rejected only on the ground that no eligible inputs were received during the said period but no reasoned finding in this regard has been given. The refund claim for July 2017 to December 2018 are not barred by limitation as it falls within the extended limitation period afforded by the aforesaid Notification. The refund claim from January to March 2019 is also not barred by limitation under Section 54. The retrospective application of the amendment would deprive the petitioner to claim refund, as this right had been vested with the petitioner. The claim of the petitioner, therefore, cannot be thrown out solely on technical grounds of delay.
The impugned order dated 30.09.2022 is set aside. The matter is remanded back to respondent No. 2 for fresh determination in light of aforesaid observations and in accordance with law - Petition allowed by way of remand.
Issues: (i) Whether input tax credit (ITC) is admissible on inward supplies such as spare parts, repairs and refurbishment of second-hand motor vehicles when the supplier opts for the margin scheme under Notification No. 08/2018-Central Tax (Rate) and Rule 32(5) of the CGST Rules, 2017; (ii) Whether ITC is admissible on other common business expenses and capital goods (for example office/showroom rent, telephone, advertisement, professional fees, capital goods, demo vehicles) where the supplier applies the margin scheme under Notification No. 08/2018-Central Tax (Rate) and Rule 32(5).
Issue (i): Admissibility of ITC on direct expenditures for second-hand vehicles (spare parts, repairs, refurbishment) where margin scheme under Notification No. 08/2018 and Rule 32(5) is applied.
Analysis: Notification No. 08/2018 and Rule 32(5) restrict the benefit of paying tax on margin where ITC has been availed on "such goods", i.e., the used motor vehicles themselves. Rule 32(5) is a valuation provision prescribing taxable value as the margin when no ITC has been availed on the purchase of the used goods. Neither the notification nor the rule contains an express bar on claiming ITC for other inward supplies (repairs, spare parts, refurbishment) used in the course or furtherance of business. Section 16 (and related provisions and rules governing conditions and restrictions) continues to govern admissibility of ITC on inward supplies other than the purchase of the used vehicles.
Conclusion: Input tax credit on inward supplies such as spare parts, repairs, and refurbishment services is admissible, subject to compliance with the conditions in Sections 16 to 21 of the CGST Act and Rules 36 to 45 of the CGST Rules.
Issue (ii): Admissibility of ITC on other common business expenses and capital goods (office/showroom rent, telephone, advertisement, professional fees, capital goods, demo vehicles) when the margin scheme is applied.
Analysis: The margin scheme under Rule 32(5) and Notification No. 08/2018 is limited to valuation of second-hand goods and to denial of ITC only in respect of the purchase of such used motor vehicles. Capital goods and other inputs used in the course or furtherance of business are not expressly excluded by the notification or Rule 32(5). Section 17(5) contains specific exclusions (for certain motor vehicles used for passenger transport), but acquisition for further supply or as demo vehicles falls outside that exclusion and may qualify for ITC subject to statutory conditions. Nil or zero margin determined under the valuation mechanism does not convert the supply into an exempt supply; it remains a taxable supply with taxable value computed as zero and therefore does not itself trigger ITC reversal under Rules 42/43.
Conclusion: Input tax credit on other common business expenses and capital goods (including demo vehicles used for further supply) is admissible, subject to fulfillment of the conditions in Sections 16 to 21 of the CGST Act and Rules 36 to 45 of the CGST Rules.
Final Conclusion: The applicant may adopt the margin valuation under Rule 32(5) and Notification No. 08/2018 for second-hand motor vehicle sales provided no ITC is availed on the purchase of those vehicles; notwithstanding adoption of the margin scheme, ITC on other inward supplies (direct repair/refurbishment inputs, common business inputs, and eligible capital goods) is available subject to statutory conditions, and nil-margin transactions under the margin scheme are taxable supplies with taxable value zero and do not by themselves necessitate reversal of common ITC.
Ratio Decidendi: Where a supplier sells second-hand motor vehicles under the margin scheme, the statutory restriction on availment of input tax credit applies only to the inward supplies of the used vehicles themselves; other inward supplies and eligible capital goods used in the course or furtherance of business remain eligible for ITC under Sections 1621 and the corresponding rules, and a nil computed margin does not convert the supply into an exempt supply for ITC reversal purposes.
Margin Scheme under Rule 32(5) of the CGST Rules - Restriction on availment of Input Tax Credit limited to purchase of used motor vehicles - Entitlement to Input Tax Credit under Section 16 subject to Sections 16-21 and Rules 36-45 - Classification of nilmargin transactions as taxable supplies with taxable value zero - Reversal of common ITC under Rule 42/Rule 43 attracted only for exempt supplies - Notification No. 08/2018Central Tax (Rate) - concessional valuation for used motor vehicles
Restriction on availment of Input Tax Credit limited to purchase of used motor vehicles - Entitlement to Input Tax Credit under Section 16 subject to Sections 16-21 and Rules 36-45 - Admissibility of Input Tax Credit on direct expenditures (spare parts, repairs and refurbishment) incurred in relation to resale of secondhand motor vehicles. - HELD THAT: - The Authority held that Notification No. 08/2018CT (Rate) and Rule 32(5) restrict the availment of ITC only in respect of the inward supply of the used motor vehicles themselves. There is no provision in the notification or Rule 32(5) that bars the claimant from availing ITC on other inward supplies such as spare parts, repair and refurbishment services where such supplies are used in the course or furtherance of business. The general entitlement under Section 16(1) remains applicable and such credits are admissible subject to fulfillment of the conditions and restrictions contained in Sections 16 to 21 of the CGST Act and Rules 36 to 45 of the CGST Rules, 2017. The Authority accepted the applicant's factual position that repairs and minor refurbishment do not alter the essential character of the goods and therefore do not affect the applicability of the margin scheme to the vehicles themselves. [Paras 7]
Input tax credit on inward supplies such as spare parts, repairs and refurbishment services is admissible, subject to compliance with Sections 16-21 and Rules 36-45.
Entitlement to Input Tax Credit under Section 16 subject to Sections 16-21 and Rules 36-45 - Margin Scheme under Rule 32(5) of the CGST Rules - Admissibility of Input Tax Credit on other common business expenses and capital goods (office/showroom rent, telephone, advertisement, professional fees, capital goods, demo vehicles etc.) while applying the margin scheme for secondhand motor vehicles. - HELD THAT: - The Authority found no prohibition in Notification No. 08/2018CT (Rate) or in Rule 32(5) against claiming ITC on common business inputs or capital goods used in the course or furtherance of business, other than ITC on the purchase of the used vehicles themselves. The general scheme of Section 16 and the restrictions under Section 17 were examined and found not to operate so as to deny ITC on such common inputs or capital goods merely because the supplier opts for margin valuation under Rule 32(5). Admissibility remains subject to satisfaction of statutory conditions (Sections 16-21) and applicable rules (Rules 36-45). The Authority also noted precedents and administrative clarifications relied upon by the applicant as consistent with this view. [Paras 7]
Input tax credit on common business expenses and capital goods is admissible, subject to statutory conditions and rules; the margin scheme does not by itself disallow such ITC.
Classification of nilmargin transactions as taxable supplies with taxable value zero - Reversal of common ITC under Rule 42/Rule 43 attracted only for exempt supplies - Whether supplies of secondhand vehicles under Rule 32(5) with nil or negative margin are 'exempt supplies' for the purpose of ITC reversal under Rule 42/43. - HELD THAT: - The Authority held that Rule 32(5) is a valuation provision and does not change the taxability of the supply. Notification No. 08/2018CT (Rate) is a rate/valuation notification and not an exemption notification issued under Section 11; therefore supplies under the margin scheme where the computed margin is nil result in a taxable value of zero but remain taxable supplies under Section 9. A supply is an exempt supply only if it is so declared by a specific exemption notification or attracts a nil rate; neither condition is met here. Consequently, nilmargin transactions are not exempt supplies and do not attract reversal of common ITC under Rule 42/Rule 43, because reversal is triggered only by exempt supplies. [Paras 7]
Nilmargin transactions under Rule 32(5) are taxable supplies with taxable value zero and are not exempt supplies; therefore such transactions do not require reversal of common ITC under Rule 42/43.
Final Conclusion: The Authority ruled that (i) ITC on direct expenses such as spare parts, repairs and refurbishment is admissible provided statutory conditions are met, (ii) ITC on common business inputs and capital goods is also admissible subject to Sections 16-21 and Rules 36-45, and (iii) supplies under the margin scheme with nil margin are taxable supplies with taxable value zero and do not attract ITC reversal under Rule 42/43.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether "centage charges" collected as consideration for Project Management Consultancy (PMC) / consultancy services rendered to State Government departments and local authorities, in relation to functions under Articles 243G/243W, are exempt from GST as "pure services" under Entry 3 of the relevant exemption notification.
(ii) Whether refund of GST already paid on such centage charges can be claimed for past periods from 2017-18 onwards, including whether any relaxation beyond the statutory two-year limitation can be granted by the Authority, and what aspects fall outside the Authority's jurisdiction while answering the refund question.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): GST applicability on centage charges for PMC / consultancy services
Legal framework (as discussed by the Authority): The Authority examined the exemption for "pure services (excluding works contract service or other composite supplies involving supply of any goods)" provided to Central/State Government, Union territory, local authority, or governmental authority, by way of an activity in relation to functions entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W, under Entry 3 of the exemption notification. The Authority also considered the statutory meaning of "local authority" and assessed the linkage to Eleventh and Twelfth Schedule functions as part of determining whether the services were "in relation to" Articles 243G/243W functions.
Interpretation and reasoning: The Authority found, on facts, that the applicant's PMC services consisted of supervision, coordination, and administrative management of projects, without executing any works contract and without supplying goods. On that basis, the services were held to be "pure services." The recipients were found to be State Government departments (including the departments identified in the record) and Panchayats (District and Grama Panchayats), and therefore within the classes of recipients contemplated by Entry 3 (Government and local authorities). The Authority further examined whether the nature of the projects (including environmental protection-related projects and other civil/electrical/infrastructure works undertaken for such bodies) was connected to the functions listed in the Eleventh and Twelfth Schedules, and concluded that they were directly connected with functions entrusted under Articles 243G/243W.
Conclusion: The Authority conclusively held that GST is not applicable on the centage charges collected for such pure PMC/consultancy services rendered to Government/local authorities in relation to functions under Articles 243G/243W, since the supplies are exempt under Entry 3 of the exemption notification, subject to satisfaction of the stated conditions.
Issue (ii): Refund of GST already paid on centage charges; limitation and jurisdiction
Legal framework (as discussed by the Authority): The Authority treated refund as governed by the statutory refund provision, including the requirement that a refund application be filed within two years from the relevant date, and noted that the "date of payment of tax" was the relevant date in the context considered. The Authority also referred to the requirement that refund be processed by the jurisdictional proper officer in accordance with the applicable refund procedure rules.
Interpretation and reasoning: The Authority determined that it has no jurisdiction to extend or relax the statutory two-year time limit for filing a refund claim, being a statutory authority bound by the refund provision. It further reasoned that while a refund claim may be filed, the actual eligibility for refund cannot be ruled upon in the advance ruling because relevant factual aspects necessary for granting refund (expressly including unjust enrichment) were not before it and must be examined by the proper officer case-by-case.
Conclusion: The Authority conclusively decided that refund of GST already paid may be claimed only within the two-year limitation prescribed under the GST law, and that it cannot grant any relaxation beyond that limitation. It also conclusively decided that determination of refund eligibility on merits (including issues such as unjust enrichment) is outside the scope of its ruling on the material available and must be decided by the jurisdictional officer.
Levy of GST - centage charges collected for the PMC services - pure services or not - applicability of exemption under Entry No. 3 of N/N. 12/2017-Central Tax (Rate) dated 28.06.2017 - eligibility to seek refund of the GST already paid on such centage charges for the period from 2017-18 onwards - HELD THAT:- The term 'pure services' refers to supply of services without any involvement of supply of goods or transfer of property in goods. In the instant case, the applicant is engaged in rendering PMC services involving supervision, coordination and administrative management of projects, without undertaking any works contract or supplying any goods. Hence, the supply qualifies as pure services.
The services rendered by the applicant to the aforesaid Government Departments and local authorities pertain to activities such as supervision, coordination and administrative management of civil, electrical and infrastructure projects, including projects like the development of RRT & VET facilities for environmental protection - it is also opined that the services involved are pure services and such activities are directly connected with the functions enumerated in the Twelfth Schedule (relating to Article 243W) and the Eleventh Schedule (relating to Article 243G) of the Constitution of India, and therefore qualify as services provided in relation to functions entrusted to Municipalities under Article 243W or to Panchayats under Article 243G - the centage charges mentioned in the application are not taxable under GST and are exempted under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
Whether the applicant can claim refund of Tax already paid and further, they can avail refund of the period over and above the statutory limitation of two years as provided under Section 54 of the CGST Act, 2017? - HELD THAT:- Refund of tax already paid is governed exclusively by Section 54 of the CGST Act, 2017, which requires that refund applications be filed within two years from the relevant date, which in the present case is the “date of payment of tax” as per Explanation (2)(h) to Section 54. This Authority, being a creation of statute, does not possess jurisdiction to extend or relax the statutory time limit prescribed under Section 54.
GST is not applicable on the centage charges collected for pure PMC / consultancy services provided to Government / local authorities in relation to functions under Article 243G / 243W as these are exempt under Entry 3 of Notification No. 12/2017-CTR, subject to conditions - The applicant can claim refund of GST already paid for the past period, subject to the limitation of two years prescribed under the GST law. However, this authority cannot rule on the eligibility for refund against the claim since all facts related to the eligibility for refund are not available before this authority.
Issues: Whether healthcare services rendered for treatment of psoriasis, dandruff, dermatitis, anti-fungal infections, folliculitis, and similar dermatological conditions are exempt under Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
Analysis: The exemption under Sl. No. 74 applies to healthcare services provided by a clinical establishment, an authorised medical practitioner, or para-medics. For the benefit to apply, the service must answer the definition of healthcare services in paragraph 2(zg) of the Notification and be provided by an entity that qualifies as a clinical establishment under paragraph 2(s). The definition covers diagnosis, treatment or care for illness, injury, deformity, abnormality or pregnancy in a recognised system of medicine, while excluding hair transplant and cosmetic or plastic surgery except in the limited restorative situations stated in the Notification. The record showed that the applicant's services were rendered through qualified medical professionals, supported by consultation forms, prescriptions, diagnostic reports and patient records, and related to recognised medical conditions rather than mere beautification or aesthetic enhancement.
Conclusion: The services are healthcare services falling within the exemption and are covered by Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
Ratio Decidendi: A service is exempt under Sl. No. 74 only if it is genuine healthcare involving diagnosis or treatment of illness or abnormality by a clinical establishment, and not a purely cosmetic or aesthetic procedure.
Exemption from GST in terms of N/N. 12/2017-Central Tax (Rate) dated 28.06.2017 - healthcare services rendered by the applicant in connection with treatment of psoriasis in skin and scalp, dandruff, dermatitis, anti-fungal' treatment, folliculitis, and similar ailments - HELD THAT:- The applicant is eligible for exemption under SI. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 with regard to the healthcare services rendered in connection with the treatment of psoriasis, dandruff, dermatitis, anti-fungal infections, folliculitis, and similar ailments.
In the present case, the applicant has submitted a “Hair Transplant Consultation Form,” and in the IFTE & OS licence for its Thiruvalla unit, the business type is shown as “Personal Care” with the sub-type “Hair Fixing.” As already stated, services such as hair transplant or cosmetic/plastic surgery are not eligible for exemption under SI. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, except when performed to restore or reconstruct the anatomy or functions of the body affected by congenital defects, developmental abnormalities, injury, or trauma. In this regard, it is relevant to note that the Maharashtra Authority for Advance Ruling, in the case of M/s. Jyothi Ceramic Industries Put. Ltd., categorically held that cosmetic services not aimed at restoring or reconstructing the anatomy or function of the human body affected by such conditions are to be treated as purely cosmetic. Services undertaken solely for aesthetic enhancement or beautification, therefore, do not qualify as “health care services” under GST law.
The healthcare services provided by the applicant in connection with the treatment of psoriasis, dandruff, dermatitis, anti-fungal infections, folliculitis, and similar dermatological conditions are exempted under Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
Undisclosed income u/s 68 - Bogus purchases of sale proceeds of shares - penny stock - as alleged price movement of the company were not supported by financial fundamentals of the company - unexplained expenditure u/s 69C - gross delay of 154 days in filing the Special Leave Petition
HC [2025 (3) TMI 1561 - GUJARAT HIGH COURT] held that assessee has furnished complete evidence including contract note of shares, demat details, details of bonus shares and those evidences have not been doubted by the authorities. The entire transaction was done by the assessee through the platform of BSE by paying necessary security transaction tax and the transaction was undertaken by the share brokers, no such allegation was made against the said broker for indulging in any price manipulation
HELD THAT:- Delay has not been satisfactorily explained by the petitioner.
The Special Leave Petition is, accordingly, dismissed on the ground of delay.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether a notice issued under Section 148 for A.Y. 2015-16 on 23 April 2022 (i.e., after 1 April 2021) was liable to be dropped as time-barred / without jurisdiction, in view of the Revenue's concession recorded by the Supreme Court for A.Y. 2015-16.
(ii) Whether, once the Section 148 notice for A.Y. 2015-16 issued after 1 April 2021 is invalid, the consequential reassessment order, notice of demand, penalty orders/notices, and recovery notices can survive.
(iii) Whether the Court should decline writ relief on the ground of an available alternate remedy, where an appeal against reassessment was already filed and pending, despite the challenge turning on the invalidity of the Section 148 notice itself.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Validity of Section 148 notice dated 23 April 2022 for A.Y. 2015-16 (post 1 April 2021)
Legal framework (as discussed by the Court): The Court treated the determinative legal position as flowing from the Revenue's categorical concession (as recorded in the Supreme Court decision relied upon by the Court) that, for A.Y. 2015-16, all notices issued on or after 1 April 2021 under Section 148 "will have to be dropped".
Interpretation and reasoning: The Court noted that two foundational facts were undisputed: (a) the reassessment proceedings related to A.Y. 2015-16; and (b) the Section 148 notice was dated 23 April 2022. Given these undisputed facts, the Court held that the Revenue's concession, as recorded and subsequently followed in later Supreme Court orders (also relied upon by the Court), directly governed the case and required dropping such notices for A.Y. 2015-16 if issued on or after 1 April 2021.
Conclusion: The Court conclusively held that the Section 148 notice dated 23 April 2022 for A.Y. 2015-16 "has to be dropped" and was liable to be quashed and set aside.
Issue (ii): Survival of consequential reassessment, demand, penalty, and recovery actions once the Section 148 notice is invalid
Legal framework (as discussed by the Court): The Court proceeded on the principle (as applied in its reasoning) that if the initiating notice under Section 148 is unsustainable, consequential proceedings and orders founded upon it cannot stand.
Interpretation and reasoning: After holding the initiating Section 148 notice invalid on the decisive ground applicable to A.Y. 2015-16 notices issued after 1 April 2021, the Court treated all subsequent actions-reassessment order, notice of demand, penalty notices/orders, and recovery notices-as consequential to an invalid initiation. Since the jurisdictional foundation failed, the superstructure of subsequent orders and enforcement measures could not survive.
Conclusion: The Court quashed and set aside the Section 148 notice and, consequentially, the reassessment order, notice of demand, penalty orders/notices, and recovery notices.
Issue (iii): Maintainability of writ petition despite pending appeal (alternate remedy objection)
Legal framework (as discussed by the Court): The Court considered the objection that the petitioner had already filed an appeal (pending), but evaluated it against the undisputed jurisdictional defect found in the Section 148 notice.
Interpretation and reasoning: Although the Revenue urged dismissal on the basis of alternate remedy, the Court proceeded to decide the writ on the solitary dispositive ground that the Section 148 notice itself was required to be dropped for A.Y. 2015-16 if issued after 1 April 2021. The Court considered it "appropriate" to grant writ relief quashing the notice and all consequential actions, notwithstanding the pending appeal, because the matter turned on the invalidity of the initiating notice on undisputed dates and the binding concession relied upon by the Court.
Conclusion: The Court entertained and allowed the writ petition, granting full relief of quashing the impugned notice and consequential orders, notwithstanding the pendency of an appeal.
Post-decision direction tied to relief granted (as decided by the Court)
The Court accepted the petitioner's undertaking to withdraw the pending appeal within two weeks. The Court further directed that if the present order is challenged by the Revenue and set aside, the appeal would automatically stand revived and would be prosecuted on its own merits in accordance with law.
Validity of reopening of assessment u/s 147 - notice beyond period of limitation - Notice under section 148A(b) of New Law as amended by Finance Act, 2021 - scope of TOLA - New regime v/s old regime - HELD THAT:- The Department has conceded before the Hon’ble Supreme Court that all the notices issued under Section 148 after 1st April 2021 for A.Y.2015-16 have to be dropped. In the present case, the Notice under Section 148 is dated 23rd April 2022 and therefore, has to be dropped.
The decision in Rajeev Bansal [2024 (10) TMI 264 - SUPREME COURT (LB)] has been subsequently followed by the Hon’ble Supreme Court in Deepak Steel and Power Ltd[2025 (4) TMI 1367 - SC ORDER]
We find merit in the submissions as canvassed by the Petitioner. The Revenue has categorically made a concession that for A.Y.2015-16 they would drop all notices issued under Section 148 after 1st April 2021. Once this is the position, it is appropriate that the notice under Section 148 dated 23rd April 2022, and the consequential assessment order, notice of demand, penalty notices/orders as well as the recovery notices be quashed and set aside. It is accordingly so ordered.
Issues: Whether the rejection of the assessee's applications for registration under section 12AB and approval under section 80G(5) of the Income-tax Act, 1961, on the ground that no substantial charitable activity had been carried out and the genuineness of the activities was not established, was justified.
Analysis: The applications were rejected because the trust was said not to have carried on substantial charitable activity and the genuineness of its activities was doubted. The record showed that the trust had received limited contributions and the available funds were largely utilised for construction of Satsang Bhawan, which was consistent with its charitable objects. The completion of the construction and commencement of charitable activities, including Satsang, also supported the assessee's case. On these facts, the adverse finding of the lower authority could not be sustained.
Conclusion: The rejection was not justified. The applications under section 12AB and section 80G(5) were to be accepted, and the relief was in favour of the assessee.
Final Conclusion: The denial of registration and approval was set aside and the assessee was granted the benefit sought in both appeals.
Ratio Decidendi: A trust's registration and approval cannot be denied merely because its charitable work is at an stage where the available funds have been legitimately used to further its objects and the charitable activity has commenced.
Rejection of application for registration u/s 12AB and for approval u/s 80G(5) - As per revenue assessee was not carrying out any substantial charitable activity, as per objects of the trust - construction of Satsang Bhawan - HELD THAT:- We are persuaded by the submissions of assessee that the assessee had received limited contribution due to which the funds available with the assessee were spent mainly for construction of Satsang Bhawan and that construction of Satsang Bhawan is in accordance with the charitable objective of the assessee.
We are also persuaded by the submission of assessee that the other charitable work could not be carried out because of paucity of fund, which was used mainly for construction of Satsang Bhawan.
Presently, construction of Satsang Bhawan has been completed and charitable activities, including Satsang, are being carried out.
CIT (Exemptions) is directed to accept the applications of the assessee u/s 12AB and u/s 80G of the I. T. Act. Appeals of the assessee are allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether approval under Section 80G(5) can be denied solely because one of the stated objects permits organising "religious, social and cultural" programmes, thereby treating the institution as a religious-cum-charitable (composite) trust.
(ii) Whether Section 80G(5B) operates to permit approval under Section 80G(5) for a composite trust, subject to the statutory threshold regarding expenditure "of a religious nature", and whether the authority erred in treating "purely charitable" character as an absolute pre-condition independent of Section 80G(5B).
(iii) Whether, on the facts, the denial of approval could be sustained when the contention that no expenditure was incurred on religious activity was not controverted, and the denial rested on an incorrect legal approach to composite objects.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i) & (ii): Eligibility of a composite (religious-cum-charitable) trust for Section 80G(5) approval and the role of Section 80G(5B)
Legal framework (as discussed by the Tribunal): The Tribunal examined the statutory scheme of Section 80G(5), including clause (ii) and Explanation (3), together with Section 80G(5B), and applied the judicial interpretation adopted in an earlier Tribunal decision referenced and followed in the present order.
Interpretation and reasoning: The Tribunal rejected the approach that a composite trust is automatically disqualified from approval under Section 80G(5). It held that Section 80G(5) cannot be read in isolation to impose an absolute "purely charitable" requirement where Section 80G(5B) expressly addresses situations involving expenditure of a religious nature and deems eligibility when such expenditure remains within the prescribed threshold. The Tribunal accepted that the statutory design permits composite objects and that the decisive consideration is whether religious expenditure crosses the statutory limit contemplated by Section 80G(5B). The Tribunal further distinguished the reliance placed by the authority on another Tribunal order by holding that it dealt with a different statutory clause and a different mischief, and therefore did not govern the present controversy.
Conclusion: Denial of approval merely because one object refers to organising religious programmes, thereby branding the institution as composite, was held to be not in accordance with law. Composite character by itself was not a valid ground to refuse Section 80G(5) approval, in view of the statutory reading adopted by the Tribunal applying Section 80G(5B).
Issue (iii): Application of the above interpretation to the facts-uncontroverted stand of no religious expenditure
Legal framework (as applied): The Tribunal applied Section 80G(5)(ii), Explanation (3), read with Section 80G(5B), as the governing basis to determine whether the institution could be treated as "religious" so as to disentitle approval.
Interpretation and reasoning: The Tribunal noted that it was specifically asserted before the authority that no amount was spent on religious activities in the relevant period, and this factual position was not controverted before the Tribunal. Having already held that composite objects do not automatically bar approval, the Tribunal treated the absence of religious expenditure (and, in any event, the relevance of the statutory threshold under Section 80G(5B)) as decisive against the denial.
Conclusion: The institution was held not to be a religious trust for purposes of Section 80G(5)(ii) and Explanation (3), read with Section 80G(5B). The authority was directed to grant approval under Section 80G(5).
Denying approval u/s 80G - CIT(A) held that being a composite trust, it had violated the provisions of Section 80G(5)(ii) of the Act and, therefore, was not eligible for approval u/s.80G(5) - charitable trust v/s composite trust - whether assessee is religious trust?
HELD THAT:- We are not in agreement with the reasoning of the CIT(E) that a composite trust is disqualified from grant of approval u/s. 80G(5) of the Act. That Section 80G(5) of the Act is not to be read alongwith Section 80G(5)(ii) of the Act and that grant of approval u/s 80G(5) is applicable only to charitable trust and not composite trust.
The reason being that on identical issue the ITAT in a series of decisions has interpreted the law and held categorically that the law permits the existence of composite trust subject to the expenditure on religious activity being limited to the extent specified in Section 80G(5B) of the Act.
As recently decided in SHREE STHANAKVASI JAIN SANGH JIVRAJPARK [2025 (11) TMI 32 - ITAT AHMEDABAD] held that for denying assessee’s approval u/s.80G(5) of the Act for being religious in character, the mere existence of some objects being religious in nature is not crucial. A trust or a fund can be of a composite character having both charitable and religious purposes. It is only if the application of income of such fund or trust of religious purposes exceeds 5% of total income, that such trust or fund would be treated as religious in nature and not eligible to benefit u/s.80G of the Act.
We hold that the Ld. CIT(E)’s order denying grant of approval on account of the assessee being a composite trust is not in accordance with law. Moreover, we have noted that the assessee pointed out as a matter of fact to the Ld. CIT(E) that it had incurred no expenditure on religious activity which fact has not been controverted in any way before.
Thus, we hold that the assessee trust is not a religious trust as per the provisions of Section 80G(5)(ii) Explanation (3) and r.w.s. 80G(5B) of the Act. Ld. CIT(E) is, therefore, directed to grant the assessee trust approval u/s.80G(5) of the Act. appeal filed by the assessee is allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether an employee can be subjected to recovery of tax demand created on processing of return due solely to the employer's non-deposit of TDS, resulting in mismatch between TDS claimed (as per TDS certificate) and TDS reflected in Form 26AS.
(ii) Whether, in such circumstances, the proper course is for the Revenue to pursue recovery from the employer under the statutory TDS recovery machinery rather than enforce the demand against the employee-deductee.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Recovery from employee where TDS deducted but not deposited; mismatch with Form 26AS
Legal framework (as discussed): The Tribunal considered the statutory scheme governing deduction and deposit of TDS, including that recovery for failure to deposit TDS lies against the deductor under sections 200 and 201. In applying the relied-upon judicial approach, the Tribunal accepted that section 205 operates as a bar against calling upon the deductee to pay tax to the extent tax has been deducted, and that section 199 cannot be used to deny relief where the deductee had no control over deposit after deduction.
Interpretation and reasoning: The Tribunal found, on the facts, that salary was paid after deduction of tax at source and the assessee possessed a TDS certificate evidencing deduction, but the employer did not deposit the deducted amount, causing a mismatch with Form 26AS and consequent demand on processing. The Tribunal held that once tax is deducted by the employer, the employee cannot be compelled to "make good" the employer's failure to deposit. The Tribunal treated the employer's default as not transferable to the employee, particularly where the employee has no further control over remittance after deduction. The Tribunal expressly followed the principle that the Revenue cannot recover from the deductee amounts already deducted at source merely because the deductor failed to deposit them.
Conclusions: The demand created on account of TDS mismatch attributable to the employer's non-deposit was held not recoverable from the assessee-employee. The Tribunal set aside the appellate order upholding such demand and directed that no recovery be made from the assessee on this basis.
Issue (ii): Correct remedial action-proceeding against employer under TDS recovery provisions
Legal framework (as discussed): The Tribunal referred to sections 200 and 201 as the mechanism enabling the Revenue to proceed against the deductor for non-deposit of TDS. It also noted the factual complication that the employer was under liquidation, impacting practicality of recovery but not shifting liability to the employee.
Interpretation and reasoning: The Tribunal reasoned that the statutory responsibility to deposit TDS rests with the employer-deductor; therefore, the Revenue's remedy is to proceed against the employer for recovery or adopt other lawful remedial measures. The Tribunal rejected the approach of enforcing the demand against the employee as a substitute for action against the deductor, even where liquidation may hinder recovery from the employer.
Conclusions: The Tribunal directed the assessing authority not to recover the demand from the assessee and observed that the assessing authority may proceed against the employer to recover the amount or take other remedial steps consistent with law. The appeal was allowed on this basis.
Non-deposit of TDS by the employer of the assessee - mismatch between TDS claimed (as per TDS certificate) and TDS reflected in Form 26AS - responsibility to pay TDS - HELD THAT:- Non-deposit of TDS on the part of the employer cannot be slapped on the assessee more so no action against the employer can be taken under the Act. The case of the assessee find support from the decision of Shri Cintan Bindra [2023 (12) TMI 63 - DELHI HIGH COURT] as held petitioner having accepted the salary after deduction of income tax at source had no further control over it in the sense that thereafter it was the duty of his employer acting as tax collecting agent of the revenue under Chapter XVII of the Act to pay the deducted tax amount to the Central Government in accordance with law. The employer of the petitioner having failed to perform his duty to deposit the deducted tax with the revenue, petitioner cannot be penalized.
We direct the ld. AO not to recover any demand from the assessee. The ld. AO can proceed against the employer to recover such demand or take any other remedial measure. Consequently, the appeal of the assessee is allowed.
Issues: Whether the assessee was entitled to recognition under section 80G of the Income-tax Act, 1961 despite receiving income from outsourcing of hospital operations and other commercial receipts.
Analysis: The assessee failed to establish that its activities were charitable in nature. The receipts were linked to a percentage of the hospital turnover, the arrangement generated substantial surplus year after year, and the assessee did not demonstrate meaningful utilisation of the funds for pure charitable objects. The findings recorded by the Commissioner that the assessee was not following its stated objects and that the relief extended to patients was negligible compared with its income remained unrebutted. The reliance placed on the principle that charitable activity cannot be equated with commercial activity supported the conclusion that the arrangement was not a genuine charitable one for the purpose of recognition.
Conclusion: Recognition under section 80G was rightly refused, and the issue was decided against the assessee.
Final Conclusion: The appeals failed because the assessee could not prove charitable activity warranting approval under the relevant tax exemption regime.
Ratio Decidendi: Recognition for tax exemption or approval cannot be granted where the claimed charitable institution is found, on the facts, to be carrying on a substantially commercial arrangement rather than a genuine charitable activity.
Refusal of grant of recognition u/s. 80G - Charitable activity u/s 2(15) or commercial activity - assessee has obtained a building for running a hospital but as it was unable to run the hospital, it outsourced the hospital function to another trust - as per revenue assessee is receiving fee for professional services, which is evident that TDS being deducted and its rental income under the guise of professional receipts at a percentage of total turnover of the Super Speciality Hospital, thus this is purely a commercial activity - HELD THAT:- Outsourcing of the building of the assessee for the purpose of running a hospital is clearly not a charitable activity. The income generated by the assessee from the outsourcing of the building of the assessee for the purpose of running a hospital is at a percentage of the turnover of the hospital.
TDS in respect of remuneration or amount received by the assessee from the outsourcing of the building is being made u/s. 194JB of the Act.
CIT(E) has also brought out the fact that the mergers being the surplus is huge year after year. The assessee has not been able to show any utilization of the services for pure charitable activities.
CIT(E) has also brought out the fact that the assessee is not following its objects insofar as the objectives were clearly for the purpose of a running hospital, clinic etc.
CIT(E) has also brought out that the relief to the patients is barely Rs. 30 lakhs to a maximum in the financial year 2022-2023 though the income is more than a crore. The assessee has not been able to dislodge any of these findings of fact as has been recorded by the ld. CIT(E). This being so, as it is noticed that the assessee is not having any charitable activity nor has been able to prove its charitable activity, the denial of the recognition u/s. 80G by the ld. CIT(E) in both the appeals of the assessee is found to be in order and both appeals filed by the assessee stand dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether reassessment initiated after four years was legally sustainable where the underlying matters (cash payments alleged to attract section 40A(3) and alleged unexplained credit/difference in a lender's ledger) had already been examined in the original scrutiny assessment, and no fresh/tangible material came into the Assessing Officer's possession subsequently, rendering the reopening a mere change of opinion.
(ii) Whether, on the facts found by the Tribunal regarding full disclosure and prior examination in the original assessment, the notice issued for reopening and consequential reassessment were liable to be quashed as invalid in law.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i) & (ii): Validity of reopening after four years-change of opinion and absence of fresh/tangible material
Legal framework (as discussed/applied by the Tribunal): The Tribunal examined reopening beyond four years from the end of the assessment year and treated as determinative whether there was failure to disclose fully and truly all material facts necessary for assessment, and whether reopening was based on any fresh/tangible material, applying the principle that reassessment cannot be founded on a mere change of opinion where the issue was already examined in the original scrutiny.
Interpretation and reasoning: The Tribunal found that in the original scrutiny, the assessee had produced and the Assessing Officer had examined the books of account, audited financials, and relevant ledgers (including machinery rent, purchases, and carriage of material) along with supporting bills/vouchers and cash book entries. It further found that the original assessment order itself reflected application of mind to cash expenses supported by self-made vouchers (in the context of civil construction business) and resulted in an ad hoc disallowance to cover possible leakages, indicating the issue of cash expenditure had been examined earlier. The Tribunal also noted that the original scrutiny had examined interest/unsecured loan aspects and even included the very party whose closing balance difference later formed part of the recorded reasons for reopening.
On the ledger difference treated as unexplained credit in reassessment, the Tribunal concluded on facts that it was an accounting entry error: a bank transfer from a partner was wrongly credited to the lender's account instead of the partner's capital account, affecting inter se ledger balances but not changing the overall liability in the audited balance sheet, and the error was rectified in the next year. The Tribunal held this was apparent from the ledgers and bank statement and did not represent undisclosed income. Importantly, it held that all relevant materials were already available on record in the original proceedings, and no document/material fact was withheld.
Given these findings, the Tribunal held that no fresh or tangible material had come into the Assessing Officer's possession after completion of the original scrutiny assessment, and therefore reopening on the same set of facts amounted to an impermissible change of opinion.
Conclusions: The Tribunal held that the reopening and notice issued for reassessment were legally invalid and quashed the reassessment proceedings as being based on change of opinion without any tangible material, particularly in a reopening beyond four years where there was no failure of full and true disclosure of material facts. Consequently, the appeal was allowed and the reassessment could not be sustained.
Reopening of assessment u/s 147 after four years - Addition u/s 40A(3) on a/c of cash payments made above stipulated sums for machine rent, material purchase and carriage expenses - HELD THAT:- On perusal of the factual position we find that full set of books of accounts along with audited financials and copies of ledger accounts of “Machinery Rent”, Purchase A/c and Carriage of Material A/c has been produced and examined in details along with supporting bills / vouchers vis a vis entries in regular cash book and the ledger A/c contains the break up and the names of the payees to whom cash has been paid and each single entry to a single person per day was less than stipulated limit (eg 23/07/2013 Satpal Singh Rs. 10,000/- and Mela Singh Rs. 10,475/-) and so forth and so on.
AO has specifically applied his mind to the expenses debited in accounts such as labour charges, carriage material, machinery rent, against which he has given a categorical finding that payments were made in cash and were supported by self-made vouchers, which has been maintained as per the trade practice considering the fact that the assessee is engaged in civil construction and admittedly it is not possible to produce each and every bill, which calls for maintenance of self-made vouchers, and to cover possible leakages a disallowance was made on ad hoc on the above account.
Payments of interest to parties has also been examined by the AO which also includes the party “Ramesh Kumar and Co” the difference in closing balance of the said party, as available in assessment records, being one of the recorded reasons.
Addition u/s 68 on a/c of difference in ledger balance with one Ramesh Kumar & Co) - We find that the same is just an error in accounting entry, where the amount of Rs. 15 lakhs transferred through bank channel by the partner Bindu Jindal to the PFAS, from her HDFC bank a/c on 19/07/2013, has been wrongly credited in the ledger A/c of Ramesh Kumar and Co (instead in the capital A/c of Bindu Jindal, partner), resulting in closing balance of Rs. 26.40 lakhs in Ramesh Kumar & Co, unsecured loan A/c, creating a corresponding effect in the Bindu Jindal Partner capital A/c showing overdrawn balance of Rs. 11.50 lakhs, as on year end (in partners schedule of capital), but the overall liability in audited balance sheet as on 31/03/2014, remains the same, and the said accounting error has been rectified in the following year vide rectification of errors. This error is very transparent and apparent on the face of the ledger A/c vis a vis the bank statement, and has neither any effect on closing cash balance nor any effect in total liability reflected in balance sheet of the assessee firm.
As such we are of the opinion that in the instant case all materials has been properly disclosed in original proceedings and no material facts and documents has been withheld and no fresh or tangible materials has come to the possession of the AO post assessment, and the AO has completed the original proceedings after due application of mind and as such we are of the opinion that in absence of any tangible material or fresh material brought on record the reopening in the present case tantamount to change of opinion, which is not permissible under law in the case of CIT v Kelvinator India Ltd [2010 (1) TMI 11 - SUPREME COURT] - As such, we hold the initiation of reopening proceeding vide issue of notice u/s 148 is legally not valid and the same is quashed.
Appeal of the assessee is allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether deduction claimed under section 10AA could be disallowed in processing under section 143(1) on the ground that the prescribed audit report in Form 56F was not filed "within time", where the form was filed within the extended time granted by the CBDT.
(ii) Whether deduction under section 10AA for the relevant assessment year could be denied solely because the return was furnished under section 139(4) (i.e., beyond the due date under section 139(1)), in light of the statutory proviso introducing a due-date condition with effect from a later assessment year.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Disallowance of section 10AA deduction in section 143(1) processing for alleged non/late filing of Form 56F
Legal framework (as discussed by the Court): The Court examined the fact of filing of Form 56F and the effect of the CBDT's extension of time for filing the online Form 56F up to 31.12.2023. The controversy arose because the processing system treated Form 56F as belated and consequently denied the deduction under section 10AA.
Interpretation and reasoning: The Court found, on the record, that Form 56F had been filed on 27.11.2023, which fell within the extended time permitted by the CBDT. It held that the processing authority's disallowance proceeded on an incorrect factual premise that the form was filed beyond time, and noted that the extension had not been appropriately reflected in the processing outcome. The Court accepted that the appellate authority had correctly appreciated these facts and therefore allowed the claim.
Conclusion: Since Form 56F was filed within the extended period, the disallowance of section 10AA deduction on the ground of late/non-filing of Form 56F was unsustainable, and the appellate relief was upheld.
Issue (ii): Denial of section 10AA deduction for filing return under section 139(4) (late return) for the relevant assessment year
Legal framework (as discussed by the Court): The Court addressed the contention that the deduction was denied because the return was filed beyond the due date under section 139(1). It considered that a proviso inserting a condition that no deduction shall be allowed unless the return is furnished on or before the due date under section 139(1) was made effective from a later date (applicable from assessment year 2024-25 onwards).
Interpretation and reasoning: The Court followed the reasoning of a coordinate bench decision (as relied upon in the order) that, prior to the effective date of the inserted proviso, there was no statutory mandate in section 10AA requiring filing of the return within the section 139(1) due date as a pre-condition for the deduction. Therefore, for the assessment year under consideration, deduction under section 10AA could not be denied merely because the return was furnished under section 139(4).
Conclusion: For the relevant assessment year, late filing of the return under section 139(4) did not, by itself, justify denial of deduction under section 10AA; the later-inserted proviso could not be applied to deny the claim for that year.
Final outcome: The Court declined to interfere with the appellate authority's decision granting relief, and dismissed the challenge to the allowance of deduction under section 10AA.
Disallowance of deduction u/s 10AA - assessee failed to submit the relevant form-56F within time of filing return of income - as per revenue to claim deduction u/s 10AA it is mandatory to file Form- 56F on or before 31.12.2023, failing which, deduction will not be allowed - HELD THAT:- We observed that the assessee has filed its return of income u/s 139(4) of the Act and filed the Form 56F on 27.11.2023 within the extended period of time by the CBDT. The CPC while processing the return of income treated the Form 56F filed belatedly and accordingly denied the benefit claimed by the assessee u/s 10AA of the Act. The CPC wrongly treated the filing of Form56F beyond time whereas the CBDT has extended the filing of form upto 31.12.2023. The above facts were rightly and properly appreciated by the ld. CIT (A) and allowed the claim of the assessee.
As decided in Arvind Kumar Agarwal [2023 (4) TMI 1170 - ITAT DELHI] for the year under consideration i.e. assessment year 2018-19 there is no mandatory requirement of filing the return of income within the due date specified u/s 139(1) of the Act for availing exemption under section 10AA - Decided in favour of assessee.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether addition/disallowance on account of alleged non-genuine purchases could be sustained where the basis was primarily the alleged non-filing of returns by suppliers, despite the assessee producing purchase, transportation, receipt, and payment documentation and the suppliers being reflected as not being "specified persons" under Sections 206AB and 206CCA.
(ii) Whether gross profit estimation on "unverifiable/bogus purchases" was justified when the Assessing Officer neither discredited the assessee's supporting documents nor conducted independent inquiry establishing that the suppliers were accommodation entry providers, and when corresponding sales were not disturbed.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Sustainability of disallowance based primarily on suppliers' alleged non-filing of returns
Legal framework (as discussed by the Court/Tribunal): The Court considered the approach of allowing routine business expenditure where it otherwise satisfies the conditions laid down in Section 37(1), and noted the relevance of suppliers not being "specified persons" under Sections 206AB and 206CCA as a factual indicator bearing on whether they had filed returns for the relevant year.
Interpretation and reasoning: The Court upheld the finding that mere alleged non-filing of income tax returns by suppliers, by itself, is only a trigger for further investigation and cannot alone justify treating purchases as non-genuine when the assessee produced "ample documentary evidence" supporting purchase and delivery. The Court emphasized that the assessee furnished ledger accounts, invoices with goods receipt notes, E-way bills, transportation receipts, and bank statements showing payments, and that the suppliers were filing GST returns and the input tax credit corresponding to such purchases stood allowed. The Court also accepted the factual finding that the suppliers were not "specified persons" under Sections 206AB and 206CCA, supporting the conclusion that the pretext of non-filing for the relevant year was not made out. The Court further agreed that the assessee's responsibility does not extend to ensuring tax compliance by vendors where purchases are otherwise evidenced and recorded in duly audited books, and where there was no finding of violation in relation to such routine purchases.
Conclusion: Disallowance/addition could not be sustained merely on the ground of suppliers' alleged non-filing of returns when the assessee substantiated purchases through contemporaneous documentation, payments through banking channels, GST compliance indicators, and the factual material showing suppliers were not "specified persons" for the relevant year.
Issue (ii): Justification for GP addition on alleged bogus/unverifiable purchases without inquiry and without disturbing sales
Legal framework (as discussed by the Court/Tribunal): The Court treated the matter as turning on evidentiary appreciation and the necessity for the Revenue to establish bogus nature of purchases through findings on documents, inquiry into supplier existence/transactions, and linkage with accommodation entry activity; it also noted the "settled proposition" that disallowance of bogus purchases would necessarily require ignoring corresponding sales recorded against such alleged parties, which was not done.
Interpretation and reasoning: The Court found that the Assessing Officer did not record any finding on the veracity of the documents furnished by the assessee and did not identify the suppliers as accommodation entry providers, nor was any inquiry shown to have been conducted to verify their existence or whether they carried out business transactions. The Court held that audited books containing the recorded transactions, supported by bills and vouchers, corroborated genuineness in the absence of contrary findings. It further held that the Revenue failed to establish, by documentary or circumstantial evidence, that the purchases were accommodation entries or otherwise bogus, and that the Assessing Officer's approach of applying a high gross profit rate on alleged unverifiable purchases was unjustified on these facts. The Court additionally relied on the absence of any action to disturb corresponding sales, noting that disallowing purchases as bogus without addressing the matching sales undermined the basis for the addition.
Conclusion: The gross profit addition/disallowance on alleged bogus purchases was not justified because the Assessing Officer neither rebutted the assessee's documentary evidence nor conducted necessary independent verification to establish accommodation entry/bogus billing, and the corresponding sales were not rejected or ignored; therefore, deletion of the addition required no interference and the Revenue's challenge was dismissed.
Non-genuine purchases - Estimation of income - G.P estimation in the case of doubtful purchases - HELD THAT:- Assessee has furnished various documentary evidences such as ledger account, invoice copies with goods receipt notes, E-way bills, transportation receipts and bank statement reflecting payments made regularly and also the ITR details of party No.1 for A.Y. 2018-19, 2019-20 & 2020-21.
It is also an undisputed fact that these parties have been filing GST returns regularly showing substantial business transaction and also the finding of the Ld. CIT(A) that none of these parties are “specified persons” u/s 206AB & 206CCA, which substantiates that they have duly filed their return of income for the impugned year and disallowance of expenses towards purchases cannot be made merely on the ground that these parties have not filed their return of income, is not justifiable in our view.
AO has not given a finding on the veracity of the documentary evidences furnished by the assessee nor has she stated that these parties are alleged to be accommodation entry providers engaged in providing bogus purchase bills which is the modus operandi of a regular accommodation entry provider.
Pertinently, we also find no observation as to whether any enquiry was conducted in these companies as to their existence or whether or not there is any business transaction carried out by these companies has not been examined by the Ld. AO. The purported bogus purchases are said to have been backed by bills and vouchers along with the books of accounts of the assessee duly audited where the said transactions have been recorded, corroborates the fact that the assessee has proved the transaction to be genuine.
There is no iota of doubt that the Ld. AO has failed to establish that the parties through whom the assessee has purchased are accommodation entry providers neither by any documentary evidences nor by circumstantial evidences where the Ld. AO has not faulted with the supporting documents filed by the assessee to substantiate its case and we also reiterate the fact that no inquiry was carried out by the Revenue to justify the disallowance of 46% of the purchases by holding the same to be bogus. It is also a settled proposition of law that the Revenue while disallowing bogus purchases would necessarily have to ignore the corresponding sales recorded against the alleged parties, which has not been done so in the present case in hand.
In the absence of these findings, we do not find any justification in upholding the addition/disallowance made by the Ld. AO and thereby holding that there is no infirmity in the order of the CIT(A) in deleting the addition/disallowance made in the hands of the assessee and the same warrants no interference - Decided against revenue.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the assessment order was "erroneous in so far as it is prejudicial to the interests of the Revenue" because the Assessing Officer, after holding the purchases to be bogus/non-genuine, made the addition under section 37(1) instead of applying section 69C read with section 115BBE, thereby justifying revision under section 263.
(ii) Whether, on the facts found in assessment (no actual receipt of goods and only accommodation entries), the claim of purchase expenditure attracted section 69C, and whether reliance on the proposition that booked expenditure/payments through banking channels negate section 69C was applicable.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Validity of section 263 revision for non-application of section 69C r.w.s. 115BBE (and use of section 37(1) instead)
Legal framework: The Court examined section 263 (including Explanation 2), section 69C, section 115BBE, and section 37(1) as reproduced in the order. It treated the "twin conditions" for section 263-error and prejudice-as applicable, and also considered that loss of lawful tax due to incorrect application of law constitutes prejudice.
Interpretation and reasoning: The Court found that the assessment had conclusively recorded that the alleged suppliers were paper concerns, statutory notices/enquiries to such parties went unanswered, verification enquiries established that the purported proprietors admitted no such business activity, and documentary deficiencies showed absence of actual movement/supply of goods. On these facts, the Court held that the Assessing Officer's own findings established that the purchases "never happened" and that the assessee was effectively obtaining accommodation entries/commission-based bogus purchase bills. In that setting, the Court held that section 37(1) (which addresses allowability of business expenditure based on business purpose/commercial expediency and related limitations) was not the correct provision to govern such bogus purchase expenditure; rather, the case fit the statutory mischief contemplated by section 69C, and the consequent rate implication under section 115BBE was material. The non-application of section 69C r.w.s. 115BBE caused short levy of tax "lawfully payable," thereby satisfying both "erroneous" and "prejudicial" requirements for section 263.
Conclusions: The Court upheld the exercise of section 263 jurisdiction, holding that failure to apply section 69C r.w.s. 115BBE (and adopting section 37(1) instead) was a legally incorrect application leading to prejudice to the Revenue; the revisional direction to redo the assessment to that extent was confirmed.
Issue (ii): Applicability of section 69C to bogus purchase expenditure despite recording in books and banking channel payments; distinction of the relied-upon principle
Legal framework: The Court applied section 69C as requiring (a) incurring of expenditure, and (b) absence of satisfactory explanation about the "source of such expenditure." It also treated section 115BBE as consequential where income is determined under section 69C.
Interpretation and reasoning: The Court accepted the factual findings that no goods were supplied/received and that the "purchases" were accommodation entries; therefore, the expenditure claimed towards purchases was "bogus" and its source, in substance, was not satisfactorily explained through evidence of actual receipt of goods. The Court expressly held that mere payment through banking channels did not neutralize section 69C where the underlying purchase transaction itself was found non-existent and the assessee failed to produce basic supporting evidence (delivery documents, transport details, etc.) to prove receipt of goods. It further held that the relied-upon proposition (that where expenditure is recorded and source is explained, section 69C may not apply) was inapplicable on these facts, because here the enquiries established that the purchases were not genuine and that the assessee was only procuring bogus entries (commission), making the case factually distinguishable.
Conclusions: The Court concluded that the factual matrix attracted section 69C, and the Assessing Officer's treatment under section 37(1) was therefore faulty; as a result, the section 263 direction requiring correct application of law was sustained and the appeal was dismissed.
Revision u/s 263 - as per CIT AO after holding the purchases to be bogus made the addition u/s 37(1) instead of section 69C r.w.s.115BBE - scope of statutory provisions of sections 69C, 263, 115BBE and 37 - HELD THAT:- An assessing authority is empowered to conclude that certain expenses incurred by the assessee do not have any direct business purpose as they lack commercial expediency. The expenditure would be deemed to be lacking commercial expediency if there is no direct co-relation between the expenditure per se and the business purposes of the tax payer. Thus, a direct relationship between the expenses incurred with the business objectives of the tax payer deserves to be established so as to authorize their allowance as genuine business expenses. It is noted that no such controversy was existing in this case which prompted the ld. AO to have made addition u/s 37(1) of the Act.
Section 69C extracted clearly postulates that the same shall be invoked by as Assessing Officer in the event of two simultaneous events happening. Thus, there should be claim of an expenditure by the assessee and the assessee during the course of assessment proceedings does not offers any explanation regarding the source of such expenditure or the explanation offered by the assessee is unsatisfactory.
In the present case, the assessee has claimed an expenditure towards purchases. AO considering the accompanying circumstances, inter-alia, including enquiries by the GST Authorities as also his own independent enquiries concluded that the impugned expenses were bogus expenses. This conclusion was supported by the fact that the source of these expenses being the goods in question were never received by the assessee. The assessee miserably failed to allude any evidences to indicate that the goods were received by him. AO having arrived at the above conclusion proceeded to make the addition treating the same as non-business expenses under section 37(1). It is a settled principle of law that when the prescription of a statute is unambiguously clear, no different interpretation can be made. Section 69C clearly presumes its invocation in cases where source of an expenditure is either not explained by the assessee or unsatisfactorily explained. The impugned condition was totally applicable in the present case. The invocation of section 37(1) by the ld. AO was therefore faulty and constituted passing of an order which was erroneous in so far as it was prejudicial to the interest of the Revenue under section 263.
Directions issued by the PCIT vide her order are based upon correct understanding and interpretation of facts of the case and do not require any intervention at this stage - Decided against assessee.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the delay of 91 days in filing the appeal was supported by "sufficient cause" warranting condonation.
(ii) Whether the addition made under section 69 in respect of the claimed long-term capital gain from sale of shares (alleged penny stock transaction) could be sustained when the assessee produced documentary evidence of purchase/sale through banking and stock exchange channels and the assessing authority relied primarily on a general investigation report without finding defects in those documents or linking the assessee to price manipulation.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Condonation of delay of 91 days
Legal framework: The Court examined the concept of "sufficient cause" for condonation of delay and applied the approach that where substantial justice conflicts with technicalities arising from non-deliberate delay, substantial justice should prevail.
Interpretation and reasoning: The Court evaluated the affidavit explaining that the appellant, being over 80 years of age, was diagnosed with cancer, underwent major medical treatment, was advised bed rest, and had restricted movement; consequently, the appellate order escaped attention and the chartered accountant was not informed in time. The Court also noted that the lapse was realised upon receipt of a subsequent notice, after which steps were promptly taken to file the appeal.
Conclusions: Treating "sufficient cause" liberally and finding the explanation bona fide and beyond control, the Court condoned the 91-day delay, allowed the condonation application, and admitted the appeal on merits.
Issue (ii): Sustainability of addition under section 69 relating to alleged bogus long-term capital gain on penny stock shares
Legal framework: The Court proceeded on the basis that the assessee bears an initial onus to substantiate the genuineness of the share transaction with evidence; if such evidence is produced and not found defective, an addition cannot be sustained merely on a general investigation report without specific material connecting the assessee to accommodation entry operations.
Interpretation and reasoning: The Court found that the assessee supported purchase and holding through share application material, payment evidence through banking channels, share certificate, and demat records. For sale, the assessee furnished exchange-related documentation including system-generated contract notes containing trade identifiers and statutory levies, bank statements evidencing receipt of sale proceeds from the broker, demat statements showing the holding period, broker ledger, and related computations. The Court specifically noted that the assessing authority did not point out any defect in these documents and relied essentially on an investigation report described as general in nature, which did not assign any specific role to the assessee beyond being a beneficiary. The Court also noted that the assessee was not identified as an operator or as someone converting unaccounted money into accounted funds.
Conclusions: Holding that the assessee had discharged the initial onus and that the transaction's genuineness could not be doubted merely on a general investigation report without independent corroboration against the assessee or defects in the evidence, the Court set aside the confirmation of the addition and directed deletion of the addition made under section 69. The connected grounds challenging the appellate order on this point were allowed.
Addition made u/s 69 - bogus share transactions - AO received information from the investigation wing that the assessee had purchased shares from a penny stock company and was used to provide bogus LTCG / STCI to various beneficiaries and assessee was one such beneficiary - HELD THAT:- As in the case of Nidhi Manan Shah (Shah) [2024 (11) TMI 1567 - ITAT MUMBAI] wherein additions made in the identical scrip had already been deleted and the said decision also pertains to the same assessment year as in question. Therefore, we are of the view that the claim of purchase and sale of shares of M/s. Excel Castronics Ltd cannot be doubted with. Therefore, we direct the AO to delete the additions. Assessee appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether any disallowance of expenditure is sustainable under section 14A read with Rule 8D(2)(iii) where exempt income arises from shares/securities held as stock-in-trade, and the assessee has made a suo motu disallowance.
(ii) Whether profits of overseas branches covered by applicable tax treaties can be excluded from total income under section 90; and, if not excluded, whether only the income computed under foreign tax laws (and not under the domestic Act) can be brought to tax in India.
(iii) Whether foreign tax credit relating to an earlier year, not utilisable due to an overall loss in that year, can be allowed in the later year when the reduced brought-forward loss is set off and the foreign income becomes effectively "subjected to tax" in India; and the manner of quantification.
(iv) Whether section 115JB (MAT on book profits) applies for the relevant year to the assessee bank; and consequentially, whether book-profit adjustments urged by either side survive.
(v) Whether deduction under section 36(1)(viia) (percentage of "total income") is to be computed on income before or after set-off of brought-forward losses.
(vi) Whether the appellate direction regarding computation of interest on refund under section 244A (including treatment of earlier refund interest) warrants interference.
2. ISSUE-WISE DETAILED ANALYSIS
(i) Section 14A read with Rule 8D(2)(iii) where exempt income arises from stock-in-trade
Legal framework: The Court examined section 14A and Rule 8D(2)(iii) in the context of exempt dividend/interest earned on securities held as stock-in-trade, and relied on binding precedent in the assessee's own case for the immediately preceding year.
Interpretation and reasoning: The Court treated it as undisputed that the exempt income arose from shares/securities held as stock-in-trade. Applying the settled position adopted in the assessee's own case on materially identical facts, the Court held that disallowance under section 14A is unsustainable in such circumstances.
Conclusion: The disallowance under section 14A read with Rule 8D(2)(iii) was deleted; the alternative plea to restrict disallowance to the suo motu amount became infructuous.
(ii) Taxability in India of overseas branch profits and rejection of exclusion claim under section 90
Legal framework: The Court applied the approach already taken in the assessee's own case, treating the treaty expression "may be taxed" (as operationalised through domestic notification referred to in the order) as requiring inclusion of such income in India with relief by way of credit, not exclusion.
Interpretation and reasoning: Following the prior decision in the assessee's own case, the Court upheld inclusion of overseas branch profits in Indian taxable income and rejected the claim that treaty relief mandates exclusion. Since inclusion was upheld, the Court also rejected the contention that, even if taxed in India, only income computed under foreign tax law should be included; the Court applied the principle that such income is included in total income chargeable in India in accordance with domestic computation provisions, with credit mechanism to address double taxation.
Conclusion: Exclusion of overseas branch profits was denied; the alternative plea to adopt foreign-law computation for inclusion was also rejected.
(iii) Allowability in the current year of foreign tax credit relating to an earlier loss year (timing mismatch)
Legal framework: The Court examined section 90 (treaty credit mechanism), section 91 (non-treaty relief), constitutional limitation against unauthorised tax retention, and treaty credit clauses requiring credit where the income has been "subjected to tax" in both jurisdictions, together with the fact that Rule 128 was not applicable to the year under consideration.
Interpretation and reasoning: The Court accepted that no foreign tax credit can be given in a year where there is no Indian tax payable, since credit operates as a deduction from Indian tax and cannot result in refund of foreign taxes. However, on the undisputed facts, the Court found that the foreign profits of the earlier year reduced the loss carried forward, and that in the current year the reduced loss set-off resulted in a higher Indian tax burden traceable to that foreign income. Treating the current year as the year in which the foreign income became effectively "subjected to tax" in India (through reduced loss absorption), the Court held that treaty objectives to eliminate double taxation require granting credit notwithstanding the timing mismatch, subject to the limitation that credit cannot exceed the Indian tax attributable to such income. The same logic was extended to section 91 jurisdictions on the statutory conditions for doubly taxed income.
Conclusion: Foreign tax credit relating to the earlier year was held allowable in principle in the current year (for both treaty and non-treaty jurisdictions), but the quantification was remitted to the assessing authority to verify the domestic tax incidence on the relevant foreign-sourced income and to grant credit only up to that limit; the ground was allowed for statistical purposes.
(iv) Applicability of section 115JB (MAT) and survival of book-profit adjustment disputes
Legal framework: The Court followed the Special Bench decision holding that, for the relevant year, section 115JB does not apply to banks constituted as "corresponding new bank," notwithstanding the insertion relied upon by the assessing authority.
Interpretation and reasoning: Applying the Special Bench ruling, the Court held that MAT on book profits could not be levied on the assessee for the year under consideration. Consequently, issues raised by both sides relating to adjustments within section 115JB (including section 14A addition to book profit, wage revision provision, provision for bad and doubtful debts, and foreign branch profit adjustments in book profit) did not survive.
Conclusion: Section 115JB was held inapplicable; all grounds dependent on MAT computation were treated as infructuous/academic and dismissed without adjudication on merits.
(v) Computation of deduction under section 36(1)(viia): before or after set-off of brought-forward losses
Legal framework: The Court examined the statutory phrase "total income (computed before making any deduction under this clause and Chapter VIA)" and addressed the competing reliance on a non-jurisdictional High Court view versus coordinate bench decisions, applying binding principles on precedential hierarchy within the jurisdiction.
Interpretation and reasoning: The Court preferred the jurisdictional coordinate bench view that, for section 36(1)(viia), "total income" refers to business income for the purpose of computing the statutory deduction and should be taken before reducing brought-forward losses (and before Chapter VI-A deductions). The Court declined to follow the contrary non-jurisdictional High Court review order, finding it insufficiently reasoned and not binding within the territorial jurisdiction, while emphasising consistency with the coordinate bench precedent.
Conclusion: Deduction under section 36(1)(viia) was directed to be computed on the relevant income before set-off of brought-forward losses; the assessee succeeded on this issue.
(vi) Interest on refund under section 244A: treatment of earlier refund interest and recomputation direction
Legal framework: The Court considered the approach adopted in earlier years in the assessee's own case, which required recomputation of section 244A interest in accordance with the prescribed method (including Rule 119A), and the appellate direction to the assessing authority.
Interpretation and reasoning: The Court found no infirmity in the appellate direction requiring the assessing authority to recompute interest under section 244A afresh in accordance with the applicable computational framework and the approach already accepted in the assessee's own matters. The revenue challenge was rejected.
Conclusion: The direction on section 244A interest computation was upheld; the revenue's ground failed.
Disallowance u/s. 14A r/w Rule 8D - expenditure incurred in relation to income claimed exempt u/s. 10 - shares are held by assessee as stock-in-trade, HELD THAT:- As in assessee’s own case for AY 2012-13 [2023 (6) TMI 1346 - ITAT MUMBAI]in light of various decisions rendered after considering the judgment rendered in the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] deleting disallowance u/s. 14A where shares are held as stock-in- trade, we are of considered view that disallowance u/s. 14A of the Act is unsustainable in the instant case.
Exclusion of income of foreign branches - AO disallowed the claim of exclusion of profit in respect of income of Foreign Branches - HELD THAT:- We note that similar issue was dealt by the Co-ordinate Bench of ITAT, Mumbai in assessee’s own case in [2023 (6) TMI 1346 - ITAT MUMBAI] as held directed that in case the assessee furnishes the requisite details of the taxes paid abroad in respect of the profits of these branches, no tax credit has been claimed in respect of the same so far, and in case the claim so made is admissible in terms of the provisions of the related double taxation avoidance agreement, the AO will allow the tax credit, to the extent admissible, for the taxes so paid abroad on incomes of the branches abroad earned in tax jurisdictions with which India has entered into double taxation avoidance agreement. While granting the tax credit, the Assessing Officer will examine the provisions of the respective tax treaty, and compute the admissible tax credit separately for each jurisdiction in accordance with the scheme of related treaty. With these directions, the matter stands restored, for the limited purposes of granting tax credit, in terms of the related double taxation avoidance agreements, if, and to the extent, admissible.
Exclusion of income of foreign branches with whom India has DTAA -Exclusion of income not being allowed, income of foreign branch computed as per the provisions of respective countries only to be taxed - This issue has already been decided against the assessee in ground no. 2(A) taken by the assessee. Accordingly, this ground of appeal is dismissed.
Non granting of credit towards foreign tax credit carried forward - carry forward of foreign taxes paid in AY 2012-13 which could not be claimed in that year due to losses as there was no tax payable in that year and now adjust it in the present AY 2013-14 against the tax payable when brought forward losses are set-off - HELD THAT:- Deriving of income can be out of varying events owing to difference in domestic tax laws of the contracting state and the other state. Therefore, tax consequence can occur later in one state than in the other. Object and purpose of treaty can only be achieved effectively when "derived income" or "income subjected to tax" is interpreted independent of domestic tax law by considering income which results in a tax consequence. The phrase "the tax on the income of that resident" refers to the amount of tax in the residence state on the foreign sourced income which is independent of timing of its arousal.
In view of above understanding, income from the source state (UK) is not derived/subjected to tax (in India) until the assessee turns profitable, as this is only when it becomes (indirectly) taxable in the residence state (India) in subsequent years (AY 2013-14). Consequently, the source taxes paid in respect of that income are to be credited as soon as there are profits in the residence state, barring applicability of Rule 128 of the Rules which in the present case is not applicable.
There are jurisdictions where assessee has its branches with which India does not have a treaty. Claim for FTC in respect of non- treaty partner jurisdictions is addressed by provisions of section 91 of the Act. Assessee’s claim in this respect is already tabulated above. The most important condition which is to be met is that there should be doubly taxed income and the tax credit shall be granted on lower of doubly taxed income and lower of tax rate of both the countries.
Non-treaty partner jurisdictions include Hongkong, Jersey and Phnom Phen (Cambodia) whose income has already been subjected to tax in AY 2012-13. However, due to set off of global loss (i.e. overall domestic loss as reduced by foreign source income) during AY 2013-14, the said income is considered to be doubly taxed in current assessment year, on similar lines as that of income from treaty-partner jurisdictions, dealt by us in above paragraphs.
In conclusion, assessee is eligible to claim FTC in respect of both, treaty and non-treaty partner jurisdictions towards taxes paid in AY 2012-13 for which corresponding foreign sourced income got subjected to tax in India in the present AY 203-14 when set off of reduced brought forward loss was made which had resulted in higher tax burden in the hands of the assessee. Since FTC cannot exceed the domestic tax liability as deliberated above in detail, ld. Assessing Officer is directed to verify and ascertain the correct quantum of domestic tax incidence on the foreign sourced income against which FTC is claimed and accordingly, give credit for the same. This issue is therefore, remitted back to the file of ld. Jurisdictional Assessing Officer (JAO) for limited purpose of verification and ascertainment as directed herein above. Accordingly, this ground is allowed for statistical purposes.
Applicability of provisions of section 115JB to assessee bank - Issue is decided in favour of the assessee banks that clause (b) to sub section (2) of section 115JB of the Income-tax Act inserted by Finance Act, 2012 w.e.f. 1-4-2013, that is, from assessment year 2013-14 onwards, are not applicable to the banks constituted as 'corresponding new bank in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, the provision of Section 115JB cannot be applied and consequently, the tax on book profits (MAT) are not applicable to such banks.
Deduction u/s. 36(1)(viia) before set off of brought forward losses - AO adjusted the brought forward business losses from the net profit of the year under consideration and allowed deduction u/s 36(1)(viia) after set-off of these b/f losses - HELD THAT:- Under the guidance of binding nature from the Hon’ble jurisdictional High Court of Bombay in Thane Electricity Supply [1993 (4) TMI 37 - BOMBAY HIGH COURT] we with utmost respect are not persuaded enough by the decision in review petition of Syndicate Bank [2021 (7) TMI 332 - KARNATAKA HIGH COURT] and therefore, keeping consistency with the decision of Coordinate Bench (supra), we also in our considered view hold for the purpose of section 36(1)(viia), total income would be the business income before deducting the claim under the said section and eligible deduction under Chapter VI-A. Therefore, brought forward losses would not be deducted while computing the total income for the purpose of section 36(1)(viia). Resultantly, ground no. 4 raised by the assessee is allowed.
Interest u/s. 244A - assessee contended that refunds given to it earlier should be adjusted against the interest and then the principle in subsequent refunds arising out of appeal effect - HELD THAT:- As relying on the case of Union Bank of India [2016 (8) TMI 688 - ITAT MUMBAI] directed the ld. AO to follow the ratio decidendi of these judgments for granting of refund to the assessee - we do not find any infirmity in the direction so given by the ld. CIT(A).
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the Assessing Officer was justified in disallowing the entire claimed business loss on the premise of lack of profit motive and allegedly concessional pricing to a group customer, despite no rejection of audited books or specific defects.
(ii) Whether ESOP cross-charge paid to a non-resident holding company constituted allowable revenue expenditure under section 37(1), and whether non-deduction of tax at source under section 195 attracted disallowance under section 40(a)(i).
(iii) Whether manpower supply expenditure could be disallowed merely because the vendor (and its sub-vendors) was not traceable later and did not respond to notices, despite contemporaneous documentary evidence, banking payments, and TDS compliance.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Allowability of business loss; impermissibility of disallowing "loss" by importing notional income / questioning business prudence
Legal framework: The Court considered computation of business income/loss with reference to section 28 and the principle that, where audited accounts are accepted and no specific defects are found (including no invocation of section 145(3)), taxation must proceed on real income and not on hypothetical income; and the Revenue cannot substitute its perception of business prudence for that of the assessee.
Interpretation and reasoning: The disallowance was founded on allegations that services were rendered to a group entity at below-market rates while higher rates were paid to third-party vendors, implying absence of profit motive. The Court found that, on evidence (rate charts), the rates charged to the group customer and to unrelated customers were the same for the relevant year (and also shown for subsequent years). Consequently, the factual foundation for treating the arrangement as a deliberate discount to a related party was not sustained. The Court further accepted that the e-commerce logistics sector was highly competitive and that early-year losses could not, by themselves, justify treating losses as abnormal or as tax avoidance. Importantly, the Court noted that the expenses were recorded in audited accounts; no suppression of revenue, inflation of expenditure, breach of section 40A(2), or defect in books was established. The Court held that the mere comparison between customer billing and vendor payments could not be the sole basis for rejecting the loss, because the business model involved multiple additional unavoidable costs (freight, delivery vehicles, outside contracted services, statutory levies), which could independently explain losses even if there were parity in certain rate components. The approach of disallowing the entire loss was held to be based on conjecture and not supported by any specific statutory disallowance provision.
Conclusions: The Court held that the complete disallowance of business loss was arbitrary and contrary to law, and directed deletion of the disallowance; the same conclusion was applied to the identical business-loss issue in the subsequent assessment years considered.
Issue (ii): Deductibility of ESOP cross-charge; TDS under section 195 and disallowance under section 40(a)(i)
Legal framework: The Court examined section 37(1) for allowability of business expenditure and addressed section 195 withholding and section 40(a)(i) consequences, focusing on whether the payment carried an income element chargeable in India or was a cost-to-cost reimbursement.
Interpretation and reasoning: The Court upheld allowance of ESOP cross-charge as an employee compensation cost. It accepted that, under the cost-sharing arrangement, ESOP costs relatable to employees of the assessee were cross-charged and that such cost was treated as employee benefit expense with corresponding credit to the holding company, involving actual outflow. The Court rejected the premise that the expense was merely notional or belonged exclusively to the holding company, and treated it as incurred wholly and exclusively for business purposes to attract and retain employees. On withholding, the Court held that the payment to the non-resident holding company was not for receipt of services, but reimbursement of the proportionate ESOP expenditure attributable to employees of the assessee, and the claim that the reimbursement was on a cost-to-cost basis was not shown to be incorrect by the Assessing Officer. Accordingly, the Court held that section 195 withholding was not required on such reimbursement and therefore section 40(a)(i) disallowance could not be sustained.
Conclusions: ESOP cross-charge was held allowable under section 37(1). No TDS obligation under section 195 arose on the cost-to-cost reimbursement in the facts found, and the Revenue's challenge was dismissed.
Issue (iii): Disallowance of manpower expenses due to vendor non-traceability; sufficiency of contemporaneous evidence
Legal framework: The Court considered allowability of business expenditure on the test of genuineness and business purpose, and whether third-party non-compliance/non-traceability, by itself, can justify disallowance when the assessee produces contemporaneous records and payments are through banking channels with TDS.
Interpretation and reasoning: The disallowance was sustained by the first appellate authority primarily because the vendor and sub-vendors were not found at their addresses during later inquiries and notices under section 133(6) remained unanswered, and some invoices were computer-generated/unsigned. The Court found this insufficient to negate the assessee's contemporaneous evidence for the year of claim. It emphasized that the assessee produced agreements, invoices, payroll registers, statutory compliance records (including PF/ESI-related documents), and bank payment advices, and that TDS under section 194C was deducted. It also noted that manpower costs from numerous other vendors in the same year were accepted after verification, and there was no material showing cash-back, inflation, or tax evasion motive; additionally, the assessee was already reporting large losses, reducing any plausible incentive to fabricate expenses. The Court held that later non-traceability of the vendor may raise doubt but cannot, by itself, override contemporaneous evidence of services actually availed and paid for.
Conclusions: The manpower expense disallowance was held unjustified and the addition was directed to be deleted.
Disallowances of the claim of business loss - assessee declared a loss after set off of income from other sources and capital gain - case of the assessee was selected for complete scrutiny under CASS to verify the claim of huge loss - CIT(A) after considering the facts in totality rejected the argument advanced by the assessee and confirmed the disallowance of business loss - HELD THAT:- Section 28 allows deduction of any loss incidental to carrying on business, unless expressly prohibited. The Hon’ble Supreme Court in Badridas Daga [1958 (4) TMI 2 - SUPREME COURT] and Sassoon J. David [1979 (5) TMI 3 - SUPREME COURT] has settled that losses arising in the ordinary course of business and expenses incurred wholly and exclusively for business purposes are allowable, even if they do not result in immediate profit. The assessee’s loss is real, revenue in nature, incidental to trade, and not barred under any provision.
We, therefore, hold that the disallowance of the entire business loss by the AO and sustained by the ld. CIT(A) is arbitrary, based on conjecture, and contrary to law. The assessee’s claim of business loss deserves to be allowed in full. Therefore, direct the assessee to delete the disallowances made by him. Hence, the ground of appeal of the assessee is hereby allowed.
Claim of deduction on account of ESOP expenses - Assessee submitted that during the relevant year, it had incurred expenditure on account of cross-charge of ESOP cost relating to the Flipkart Stock Option Scheme 2012 (FSOP 2012) - AO concluded that section 37 of the Act mandates that only actual expenditure, incurred wholly and exclusively for the purposes of business, can be allowed. A notional or artificial book entry cannot be treated as deductible. Since in this case the assessee had not incurred any real expenditure and the so-called cross-charge was only a device to shift profits outside India, the AO held that the claim failed the conditions under section 37 of the Act - HELD THAT:- This Tribunal in assessee’s appeal in A.Y. 2012-13, decided the issue in favour of the assessee as held expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure.
We also notice that the issue of whether ESOP cross charge expenses are allowable u/s. 37 of the Act has already been decided by this Tribunal in favour of the assessee in the case of Biocon Ltd. [2013 (8) TMI 629 - ITAT BANGALORE] which has also been affirmed by the Hon'ble Karnataka High Court [2020 (11) TMI 779 - KARNATAKA HIGH COURT] by categorically holding that "the expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act.
We hereby hold that the assessee is eligible for claim of deduction on account of ESOP expenses.
Deduction of withholding tax as alleged by the AO - We note that the payment made by the assessee company to the parent company is not in nature of payment for the receipt of any services. As such the payment was made by the proportion of ESOP expenditure availed by the employee of the assessee company which has been reimbursed. The assessee claimed that the reimbursement was made on a cost-to-cost basis, and this contention of the assessee has not been found incorrect by the AO. Therefore, we are of the considered opinion that the assessee was not required to deduct tax as per section 195 on account of reimbursement of ESOP costs to the parent company. Hence, we do not find any reason to interfere in the finding of the learned CIT(A). Hence the ground of appeal raised by the revenue is hereby dismissed.
Disallowances of manpower expenses - during the course of survey at the premises of the assessee company, it was found that the assessee has received manpower supply services from various vendors for its operational requirement - notices issued under section 133(6) through ITB portal and physical services remained unresponsive by vendor - AO reiterated that the impugned party was not found at the given address in the inquiry conducted by the department through the inspector - HELD THAT:- The assessee has placed on record agreements, invoices, payroll registers, PF/ESI challans, bank payment advices, and other statutory compliance documents to substantiate that services were actually rendered and payments were made through proper banking channels with deduction of TDS under section 194C of the Act. The genuineness of the expenditure must be examined with reference to the year in which it was incurred, and once the assessee has produced sufficient evidence of availing services, non-traceability of the vendor at a later stage does not automatically render the transaction non-genuine. This principle has also been recognised in Diagnostic [2011 (3) TMI 15 - CALCUTTA HIGH COURT] wherein it was held that subsequent non-availability of a supplier cannot invalidate otherwise genuine purchases made earlier.
Revenue has accepted similar manpower expenses claimed by the assessee from other vendors in the same year, and no infirmity has been found in those cases. This consistent pattern of acceptance lends support to the assessee’s explanation that the manpower requirement was real, large-scale, and met through multiple vendors, including the disputed vendor. In the absence of any material to show that the assessee had received back money in cash or had inflated expenses for tax evasion, the disallowance made solely on the basis of suspicion and third-party non-compliance cannot be sustained. On the contrary, the evidence produced by the assessee, duly supported by statutory records and audited accounts, demonstrates that the expenditure was wholly and exclusively incurred for the purpose of business.
We also find force in the contention of the assessee that it has been incurring huge business loss from its operation therefore no occasion arises to book bogus expenses of manpower supply services from one vendor out of 28 vendors. It is because, the assessee is already not liable to tax because of the losses incurred in its business. In light of these facts, and guided by the judicial precedents relied upon, we hold that the disallowance on account of manpower expenses is unjustified. Accordingly, we set aside the order of the learned CIT(A) and direct the Assessing Officer to delete the addition made by him. Hence, the ground of appeal raised by the assessee is hereby allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the delay of 52 days in filing the appeal before the Tribunal was liable to be condoned on the facts stated in the affidavit.
(ii) Whether the addition of Rs. 4,74,000/- as unexplained cash credit under section 68, alleged to be linked to bogus long-term capital gain from shares, could be sustained when no such share transaction or credit was reflected in the assessee's books of account or bank statements for the relevant year.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Condonation of 52-day delay in filing appeal
Legal framework: The Tribunal examined whether the assessee was "prevented" from filing the appeal within the stipulated time, based on the explanation placed on record.
Interpretation and reasoning: The Tribunal considered the affidavit stating that the assessee, being a non-resident living abroad, did not track the appellate order on the portal due to oversight, and upon becoming aware, promptly approached counsel to file the appeal. On the facts and circumstances, the Tribunal accepted that the assessee was prevented by sufficient cause from filing within time.
Conclusion: The delay of 52 days was condoned and the appeal was admitted for decision on merits.
Issue (ii): Sustainability of addition under section 68 for alleged bogus share-related credit
Legal framework: The Tribunal applied the requirement implicit in section 68 that there must be a credit/entry in the assessee's books (and corresponding evidentiary material) capable of being treated as unexplained cash credit.
Interpretation and reasoning: On appraisal of the record, the Tribunal treated it as an admitted factual position that (a) no transaction in the shares in question was recorded in the assessee's books of account, and (b) there was no corresponding bank transaction of Rs. 4,74,000/-. The Tribunal also noted the assessee's submission that the return filed did not contain any such claim of long-term capital gain exemption. In the absence of evidence showing receipt of money or any credit from the alleged share transaction, and with no reflection of such entries in the books or bank statements for the relevant year, the Tribunal held that the factual precondition to attract section 68 was not met.
Conclusion: The addition of Rs. 4,74,000/- under section 68 was held to be not legal and was deleted; the grounds on merits were allowed, and other issues were treated as academic.
Treatment of unexplained cash credit under section 68 - entitlement to exemption claimed under section 10(38) - condonation of delay in filing appeal
Condonation of delay in filing appeal - Delay of 52 days in filing the appeal before the Tribunal was condoned. - HELD THAT: - The assessee filed an affidavit explaining that, being a non-resident Indian residing in Singapore, he could not follow the appellate order on the ITBA Portal and that the order was passed after a long gap; upon learning of the order he immediately instructed his authorised representative to prefer the appeal. The Tribunal found that the assessee was prevented from filing the appeal within the prescribed time and, having considered the facts and circumstances, exercised its discretion to condone the delay of 52 days. [Paras 2, 3]
Delay of 52 days condoned and appeal admitted for adjudication.
Treatment of unexplained cash credit under section 68 - entitlement to exemption claimed under section 10(38) - Addition of the amount treated as unexplained cash credit under section 68 was deleted on merits. - HELD THAT: - The Tribunal examined the material on record and recorded that there was no transaction of sale of shares reflected in the assessee's books of account or any corresponding bank entry for the amount alleged to be routed through sale of shares of the named company for the financial year 2010-11 (AY 2011-2012). The assessee also did not substantiate any claim of long-term capital gain under section 10(38). In absence of evidence to show receipt or credit of the said amount or entries in the books or bank statements that could attract section 68, the Tribunal held that the addition was not legally sustainable and deleted the addition. [Paras 5, 8]
Addition under section 68 deleted and grounds on merits allowed; appeal allowed.
Final Conclusion: Delay in filing the appeal was condoned and, on the merits for Assessment Year 2011-2012, the addition treating the alleged share-sale proceeds as unexplained cash credit under section 68 was deleted; the assessee's appeal is allowed.
1. ISSUES PRESENTED AND CONSIDERED
1) Whether the addition sustained on the premise that the assessee executed a joint development agreement/document of development rights was sustainable, when the underlying instrument was found to be only a General Power of Attorney and the assessee was not the owner of the property.
2) Whether a General Power of Attorney executed by joint owners in favour of the assessee, without transfer of any capital asset or development/ownership rights, could give rise to taxable capital gains in the assessee's hands.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Sustainability of the addition based on the alleged development agreement/JDA
Legal framework (as discussed by the Court): The Court examined whether the document evidenced a "transfer of any capital asset" resulting in capital gains "within the meaning of section 45".
Interpretation and reasoning: The addition sustained by the first appellate authority was premised entirely on the document treated as a JDA. On examining the instrument, the Court found it was "merely a GPA" executed by four joint owners in favour of the assessee, authorising her to act on their behalf. The Court noted that the document did not reflect an agreement to sell, did not transfer ownership or development rights, and did not evidence any transfer of a capital asset.
Conclusion: Since the foundational assumption that the assessee executed a JDA/transfer document was factually incorrect and the document was only a GPA, the basis of the addition failed. The Court directed deletion of the amount sustained.
Issue 2: Whether a GPA without ownership/transfer can trigger capital gains in assessee's hands
Legal framework (as discussed by the Court): The Court applied the requirement of "transfer" of a "capital asset" for capital gains under section 45.
Interpretation and reasoning: The Court recorded that it was undisputed the assessee was not the owner of the land/property. It reasoned that "in the absence of ownership of a capital asset, no capital gains can arise" in the assessee's hands. It further held that a GPA issued in favour of the assessee does not constitute a transfer, nor can it be treated as a JDA.
Conclusion: A mere GPA, without transfer of any capital asset and where the assessee is not the owner, cannot generate capital gains in the assessee's hands. The addition sustained was therefore deleted in full.
Note on reassessment validity: The Court expressly declined to adjudicate the challenge to the validity of reassessment proceedings, keeping it open, as the appeal was allowed on merits.
Capital gain arising from an alleged Joint Development Agreement - HELD THAT:- We find that the addition sustained by the CIT(A) is premised entirely on Document presumed to be a JDA. On perusal of the same, we find that it is merely a GPA, executed by four joint owners of a house property in favour of the assessee. We also observe that the document does not evidence transfer of any capital asset within the meaning of section 45 of the Act resulting in any capital gain in the hands of the assessee.
It is also undisputed that the assessee is not the owner of the land. In the absence of ownership of a capital asset, no capital gains can arise in the hands of the assessee. A GPA issued in favour of the assessee does not constitute transfer, nor can it be treated as a JDA. Thus, the very foundation of the addition fails. We accordingly direct the Ld. AO to delete the addition sustained by the Ld. CIT(A). Appeal of the assessee is allowed.
Issues: Whether the defendant bank was entitled to recover the differential 2% interest equalisation amount from the plaintiff under the RBI and DGFT circulars governing the Interest Equalisation Scheme, or whether the plaintiff was entitled to retain the 5% subvention for the entire tenor of the export credit.
Analysis: The scheme required banks to pass on the interest equalisation benefit completely and upfront to eligible exporters during the period when the scheme was in force. The later RBI circular extending the scheme from 1 October 2021 and reducing the rate to 3% was held not to authorise retrospective clawback of benefits already passed on for credits disbursed before 30 September 2021. The DGFT clarification was read to mean that the tenor of the advance beyond 30 September 2021 did not defeat the exporter's entitlement where disbursement had occurred earlier, and the bank's failure to seek timely reimbursement from the RBI could not be shifted onto the plaintiff.
Conclusion: The recovery of Rs. 3,45,37,097/- from the plaintiff was held to be wrongful, and the plaintiff was held entitled to refund of that amount with interest and costs.
Entitlement to interest subvention at the rate of 5% for the entire duration of the credit or the interest subvention would stand reduced to 3% with effect from 1st October, 2021 - HELD THAT:- The expression “only for the period upto 30th September, 2021” has been used in respect of benefits passed on by the Bank to the exporter and would not apply to the period of the credit. This becomes apparent from the subsequent words “irrespective of whether the tenor of the advance transcended beyond September 30, 2021” - The clarification of DGFT makes it clear that the tenor of the credit is not a relevant factor for determining the benefit to be paid to the eligible exporter.
It is important to bear in mind that the IE Scheme was launched to alleviate the interest burden on manufacturer exporters by providing subsidised pre and post shipment rupee export credit and thereby enhance the global competitiveness of Indian exports by lowering the cost of finance. Therefore, Clause 2(e) of the IE Scheme required the banks to completely pass on the interest subvention benefit upfront to the exporters and claim the same from RBI. The position taken by the Defendant Bank would completely defeat the objective of the IE Scheme.
The explanation given on behalf of the Defendant Bank that the benefit was given by the Defendant Bank to the plaintiff on the assumption or belief that the Scheme would be extended beyond 30th September, 2021, cannot be accepted. If the defendant was of the view that the subvention amount has wrongly been given to the plaintiff, it would have taken steps to recover the said amount soon after 30th September, 2021, when the Scheme was not extended. But it was only on 23rd February, 2022 that the Defendant Bank forwarded a clarification that it received from RBI. Even in the said letter, the Defendant Bank did not raise any demand on the plaintiff. The demand was made by the Defendant Bank for the first time only on 8th June, 2022, after the 8th March, 2022 Circular was issued by the RBI.
The relevant date for subvention would be the date when the plaintiff approached the Defendant Bank for discounting the Export Bills and the bills were discounted by the Defendant Bank, passing on the entire subvention benefit upfront to the plaintiff, knowing fully well that the term of the credit was till 17th June, 2022. The plaintiff would be entitled to interest subvention at the rate of 5% for the entire duration of the credit. Resultantly, the Defendant Bank has incorrectly recovered the amount of Rs. 3,45,37,097/- from the account of the plaintiff - the Defendant Bank has wrongfully recovered the sum from the plaintiff, and the plaintiff is entitled to recover a sum of Rs. 3,45,37,097/- from the Defendant Bank. The plaintiff is also entitled to interest @ 8% per annum from the date of making such recovery i.e. 22nd June, 2022, till the actual payment.
A decree is passed in favour of the plaintiff and against the defendant for recovery of a sum of Rs. 3,45,37,097/- along with interest @ 8% per annum from 22nd June, 2022 till the actual realisation of the amount. The plaintiff shall also be entitled to costs of the suit.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the imported modular cards/boards meant for a router system were correctly classifiable as "parts" under the tariff entry for parts, or as "machines/apparatus" (including "network interface cards") under the tariff entry covering communication machines for reception/conversion/transmission or regeneration of data (including switching/routing apparatus).
(ii) Whether the extended period of limitation for demand on the basis of alleged wilful mis-statement/suppression could be invoked merely because the importer self-assessed under the customs self-assessment regime, where the dispute substantially turned on classification.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Classification-"parts" of router vs "network interface cards/other communication apparatus"
Legal framework (as discussed by the Court): The Court examined the relevant tariff headings for communication apparatus and for "parts", and applied the Section Note governing classification of parts of machines in Chapters 84/85. It specifically applied the principle that if an item is itself an article covered by a heading in the Section, it is classifiable in its own heading; only where it is not so classifiable does classification as "parts" arise.
Interpretation and reasoning: The Court identified the decisive test for "parts/components" as: (a) whether the item has a separate identifiable/individual function distinct from the main machine; and (b) whether it is capable of operating independently of the main machine. If both are answered in the negative, the item remains a "part" rather than an independent apparatus. On facts, the imported cards/boards were found to become functional only when plugged into the dedicated slots of the router chassis, drawing power and "intelligence" from the router system, and could not communicate with other devices independently on a standalone basis. The manufacturer's certification that the items had no independent functional utility, were not capable of use in any system other than a router, and could not by themselves perform the complete function of a router, was treated as consistent with this conclusion. The Court rejected the approach that treating the items as Layer 1/Layer 2 devices under the OSI model automatically makes them "network interface cards", holding that mere presence of Layer 1/Layer 2 elements in router architecture does not convert router-specific line/interface modules into standalone NICs. It further reasoned that NICs, as understood in the judgment's analysis, are separable interface cards used to connect otherwise complete devices (such as computers) to networks, whereas the disputed router modules are tailor-made, inseparable components essential for router operation.
Conclusion: The imported items were held classifiable as "parts" under the tariff entry for parts, and not as "network interface cards" or "other communication apparatus" under the tariff entry for communication machines/apparatus.
Issue (ii): Extended period of limitation-self-assessment and allegation of wilful mis-statement
Legal framework (as discussed by the Court): The Court examined the statutory requirement of establishing the necessary elements for invoking the extended period (such as fraud, wilful mis-statement, or suppression with intent to evade), and considered the relevance of self-assessment to limitation.
Interpretation and reasoning: The Court rejected the reasoning that extended limitation follows merely because the importer self-assessed "incorrectly". It held that the existence of self-assessment does not dispense with the requirement that the department prove a deliberate act of suppression/concealment with intent to evade. The Court emphasized that an interpretation/classification dispute, by itself, does not justify drawing an inference of mala fide intent, and that treating every incorrect self-assessment as suppression would render the normal limitation period ineffective. On the facts as assessed by the Court, the extended period was held not invocable.
Conclusion: The extended period of limitation was held wrongly invoked; the demand relying on extended limitation could not be sustained.
Classification of imported goods - network interface cards or other communication apparatus - classifiable under Customs Tariff Item [CTI] 8517 70 90 as ‘Other’ under the sub-heading pertaining to ‘Parts’ or under CTI 8517 62 90, as ‘Other’, under the sub-heading pertaining to ‘Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus’ - invocation of extended period of limitation - suppression of facts or not - HELD THAT:- An item will not be considered as a ‘part’ if, on a standalone basis, it can be considered as an article classifiable under its own appropriate heading. It would, therefore, have to be seen whether the items imported can be considered to constitute articles covered by Heading 85.17. To appreciate this, reference can be made to HSN Explanatory Notes to Heading 84.79 which deals with machines having individual functions. The inference that can be drawn from the above is that HSN itself considers an article which has an individual function as an ‘independent machine’ and not as a ‘part’. This is clear from the examples provided therein. In the case of a carburetor for an internal combustion engine, it is explained that the function performed by carburetor is distinct from that of the engine. However, the said function is not an individual function as the operation of the carburetor is inseparable from that of the engine. Hence, the carburetor is considered as a part of the engine as opposed to an independent machine.
The Tribunal held in Vodafone [2022 (9) TMI 1600 - CESTAT NEW DELHI] that the products imported were parts of Routers as they cannot perform independently because unless and until they are slotted into the dedicated slot they cannot function. In the present case also, the imported items assist in setting up a communication apparatus, but the said function of communication can be achieved only when assembled with several other parts and cannot communicate with other devices independently. The imported parts on a stand-alone basis cannot perform any of the desired function and it is only when the imported parts are configured with other parts that it will produce the desired function. The imported items, therefore, deserve classification under CTI 8517 70 90 and not under CTI 8517 62 90.
Thus, the NIC is effectively a translator which allows a computer to communicate with a network by translating the output of the computer into a format understandable by the network and vice versa. If a computer is not to be connected to a network, there is no need for NIC of computer to function. Computer is complete in itself and does its job of data processing without any need for NIC - The function of a NIC is, therefore, distinct from that of the overall equipment (i.e. computer/data processing machine). Also, the said NIC is also clearly separable from the overall equipment.
NIC is a hardware which enables a device to connect to a network. For the purpose of such connection, it provides for a physical interface on the card (i.e. Layer 1 function, in the OSI Model) as well supports packet forwarding (i.e. Layer 2 function, in the OSI Model). Merely because a router is primarily a Layer 3 device (i.e. Network Layer), with only some elements of Layer 1 and Layer 2 would not mean that Router can be classified as NIC - the items imported by the appellant would merit classification under CTI 8517 70 90 as contended by the appellant and not CTI 8517 62 90 has contended by the department.
Extended period of limitation - suppression of facts or not - HELD THAT:- The Principal Commissioner has observed that as the appellant was aware of the correct classification, it intentionally classified the items under CTI 8517 70 90 in order to claim NIL rate of duty. This, according to the Principal Commissioner, would mean that the appellant intentionally classified them under this CTI in order to claim NIL rate of duty, which act points towards malafide intention on the part of the appellant and would amount to willful mis-statement. The Principal Commissioner also held that had the department not found out such non-payment of customs duty as a result of mis-classification, the issue would not have come to light. The Principal Commissioner also held observed that consequent upon introduction of self-assessment scheme, the extended period of limitation would have to be upheld as the selfassessment was contrary to the provisions of the Statute - the observations of the Principal Commissioner for invoking the extended period of limitation cannot be accepted - the extended period of limitation could not have been invoked in the facts and circumstances of the case. For this reason also the order passed by the Principal Commissioner deserves to be set aside.
The order passed by the Principal Commissioner deserves to be set aside and is set aside - appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether statements recorded during investigation under section 108 of the Customs Act could be treated as relevant evidence for adjudication when the statutory procedure under section 138B was not followed.
(ii) Whether confiscation under section 113(d), (g) and (i) could be sustained when (a) the finding of fraudulent diversion rested only on such section 108 statements, and (b) the goods had already been exported pursuant to Let Export Orders before investigation commenced.
(iii) Whether penalties under section 114(iii) and section 114AA could be sustained when confiscation under section 113 failed and the allegation of intentional use of false material particulars was proved only through inadmissible section 108 statements.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Relevance/admissibility of section 108 statements without compliance with section 138B
Legal framework: The Court examined the relationship between section 108 (power to summon and record statements) and section 138B (conditions governing when such statements become relevant for proving the truth of their contents in adjudication).
Interpretation and reasoning: The Court held that statements recorded under section 108 cannot automatically be treated as relevant evidence in adjudication. For such statements to be relied upon to prove their contents, the procedure contemplated by section 138B must be followed. Since the adjudication relied "merely on the basis" of section 108 statements, and the section 138B procedure was not followed, the evidentiary foundation for the core factual finding (fraudulent diversion by amendment of shipping bill copies) failed.
Conclusion: The section 108 statements were not relevant/admissible for proving the alleged diversion in the absence of compliance with section 138B, and could not be relied upon to sustain the impugned findings.
Issue (ii): Sustainability of confiscation under section 113(d), (g) and (i) after export and when the diversion finding fails
Legal framework: The Court examined section 113 as dealing with confiscation of goods "attempted to be improperly exported."
Interpretation and reasoning: The confiscation finding was derivative of the initial finding of fraudulent diversion, which itself was based solely on inadmissible section 108 statements. Once those statements were held irrelevant, the factual premise for confiscation could not survive. Independently, the Court held that section 113 was inapplicable because the goods had already been exported on the basis of Let Export Orders and the investigation commenced thereafter; section 113 addresses an improper attempt to export, not goods already exported.
Conclusion: Confiscation under section 113(d), (g) and (i) was unsustainable both because the foundational diversion finding collapsed and because section 113 did not apply to goods already exported pursuant to Let Export Orders.
Issue (iii): Sustainability of penalties under sections 114(iii) and 114AA
Legal framework: The Court treated section 114(iii) as imposing penalty in connection with improper export/attempt attracting confiscation, and section 114AA as addressing knowing/intentional making, signing, using, or causing to be made/used a false material particular for purposes of the Customs Act.
Interpretation and reasoning: For section 114(iii), the Court held penalty could not be imposed where section 113 confiscation failed; moreover, section 114(iii) penalises an attempt to export goods improperly, which was not the case when goods stood exported earlier. For section 114AA, the adjudicating authorities relied on section 108 statements to attribute instructions and intent to falsify destination particulars; since those statements could not be relied upon without section 138B compliance, the necessary proof for section 114AA was not established.
Conclusion: Penalties under section 114(iii) and section 114AA could not be sustained and were set aside along with the confiscation findings.
Relevancy of statements when the procedure contemplated u/s 138B of the Customs Act had not been followed - Fraudulent diversion of export consignments - export to Mogadishu, Somalia, a country notified under Focus Market Scheme(FMS)/Merchandise Export from India Scheme (MEIS) - not notified country under Focus Market Scheme(FMS)/Merchandise Export from India Scheme (MEIS) - Confiscation of goods u/s 113(d), (g) and (i) of the Customs Act, 1962 - HELD THAT:- Reference can be made to the decision of the Tribunal in M/s Surya Wires Pvt Ltd. vs. Principal Commissioner, CGST, Raipur [2025 (4) TMI 441 - CESTAT NEW DELHI]. The Tribunal examined the provisions of sections 108 and 138B of the Customs Act as also the provisions of sections 14 and 9D of the Central Excise Act, 1944 and observed 'What, therefore, follows is that a person who makes a statement during the course of an inquiry has to be first examined as a witness before the adjudicating authority and thereafter the adjudicating authority has to form an opinion whether having regard to the circumstances of the case the statement should be admitted in evidence, in the interests of justice. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of the persons making them would be of relevance for the purpose of proving the facts which they contain.' - the statements recorded under section 108 of the Customs Act cannot be considered as relevant.
Whether the goods were liable to confiscation under section 113(d),(g) and (i) of the Customs Act? - HELD THAT:- Section 113 on the Customs Act deals with confiscation of goods attempted to be improperly exported. In the instant case, as noticed above, the goods had already been exported on the basis of Let Export Orders and the investigation was started later. Section 113 of the Customs Act would not, therefore, be applicable.
Whether penalty could be imposed under section 114(iii) and 114AA of the Customs Act? - HELD THAT:- Penalty under section 114(iii) of the Customs Act could not have been imposed upon the appellant since penalty is imposed for attempt to export goods improperly. In any view of the matter, as the goods have been held not liable to confiscation under section 113, penalty could also not be imposed under section 114(iii) of the Customs Act - Section 114AA of the Customs Act provides that if a person knowingly or intentionally makes, signs or uses or causes to be made, any material particular, in the transaction of any business for the purposes of the Customs Act, shall be liable to a penalty not exceeding five times the value of goods. The Additional Commissioner has relied upon the statement made under section 108 of the Customs Act that the changes were made on the instructions given by the appellant. This statement, for the reasons stated above, cannot be relied upon as evidence. Thus, penalty under section 114AA of the Customs Act could not have been imposed upon the appellant.
Clearly, if the exporter applied for FMS scrips, it is the responsibility of the exporter to ensure that the goods reach that market and to produce proof as above. The responsibility of the exporter does not end with obtaining the Let Export Order. In this case, neither side produced before us the documents which were produced as proof that the goods reached the Focus Market. The Customs authorities investigating the matter should have summoned the relevant documents from the DGFT. Either the goods must have reached the Focus Market or if they were diverted, the exporter may have submitted fake documents as proof of landing or the DGFT may have issued the scrips without obtaining the proof of landing. The impugned order, however, does not address this issue.
The impugned order dated 06.04.2022 passed by the Commissioner (Appeals) confiscating the goods and imposing the penalties upon the appellant deserves to be set aside and is set aside - Appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether statements recorded during inquiry under section 108 of the Customs Act could be relied upon to establish fraudulent diversion/unauthorised amendment of export documents, when the statutory procedure for admissibility under section 138B was not followed.
(ii) Whether confiscation under section 113(d), 113(g) and 113(i) was sustainable where (a) the foundational finding of fraudulent diversion was based solely on inadmissible section 108 statements, and (b) the exports had already been completed on Let Export Orders before commencement of investigation, in light of section 113 addressing goods "attempted to be improperly exported".
(iii) Whether penalties under section 114(iii) and section 114AA could stand once confiscation under section 113 failed and the alleged role/knowledge was supported only by statements rendered inadmissible for non-compliance with section 138B.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Reliance on section 108 statements without following section 138B
Legal framework: The Court examined the interplay between section 108 (recording statements during inquiry) and section 138B (conditions for treating such statements as relevant for proving the truth of their contents) and treated the safeguards under section 138B as mandatory for adjudication purposes.
Interpretation and reasoning: The finding of fraudulent diversion/unauthorised amendment was recorded "merely on the basis" of statements of various persons recorded under section 108. The Court held that such statements could become relevant to prove their contents only if the procedure contemplated by section 138B was followed. Since the adjudication did not follow that procedure, the statements could not be treated as relevant evidence to establish the alleged diversion and fraudulent amendments.
Conclusion: Statements recorded under section 108 were held not to be relevant for proving the alleged misconduct because section 138B procedure was not complied with; consequently, the foundational finding of fraudulent diversion based solely on those statements could not stand.
Issue (ii): Sustainability of confiscation under section 113(d), (g) and (i) in completed exports
Legal framework: The Court considered section 113 as dealing with confiscation of goods "attempted to be improperly exported," and assessed its applicability where exports were already effected pursuant to Let Export Orders prior to investigation.
Interpretation and reasoning: The confiscation finding was derivative of the first issue, because liability to confiscation was concluded on the basis that the export documents were fraudulently amended and the destination was changed. Once the Court rejected reliance on section 108 statements, the basis for holding fraudulent diversion collapsed, and the confiscation finding became unsustainable. Independently, the Court held that section 113 would not apply because the goods had already been exported between January 2015 and July 2015 on Let Export Orders, while investigation started later; section 113 addresses improper "attempt" to export, not completed exports on that factual footing.
Conclusion: Confiscation under section 113(d), (g) and (i) was set aside both because it depended on an unsustainable factual finding founded on inadmissible statements, and because section 113 was held inapplicable to the case of goods already exported prior to investigation.
Issue (iii): Validity of penalties under sections 114(iii) and 114AA
Legal framework: The Court examined penalties linked to improper export (section 114(iii)) and penalty for knowingly/intentional use of false or incorrect material particulars in customs business (section 114AA).
Interpretation and reasoning: The Court held that penalty under section 114(iii) could not be sustained because it is tied to "attempt" to export goods improperly; moreover, once confiscation under section 113 failed, the penalty premised on such confiscation could not survive. As to section 114AA, the adjudicating authority had relied on section 108 statements to attribute instructions/knowledge; with those statements held inadmissible for non-compliance with section 138B, the evidentiary foundation for section 114AA penalties failed.
Conclusion: Penalties under section 114(iii) and section 114AA were held unsustainable and were set aside, as the statutory basis (attempt/improper export) and the evidentiary basis (inadmissible section 108 statements) did not support imposition of penalty.
Final outcome applied to the decision
The Court set aside the order upholding confiscation and penalties, holding that the core findings rested on statements that could not be relied upon absent compliance with section 138B, that section 113 was inapplicable to exports already completed before investigation, and that penalties under sections 114(iii) and 114AA consequently could not be maintained.
Confiscation of export goods - levy of penalty - fraudulent diversion of goods intended for export to Armenia and Bulgaria to Jebel Ali, UAE to wrongfully claim benefits under the Focus Market Scheme - confiscation of goods as exported using fraudulent documentation and were not cleared for export to the actual destination port - levy of penalties.
Whether the appellant had fraudulently diverted the export consignments covered under 62 Shipping Bills originally destined for export to Armenia and Bulgaria but diverted to Jebel Ali which is not a notified country under the Focus Market Scheme to avail undue benefits of focus market scheme? - HELD THAT:- The contention of the appellant is that these statements cannot be considered as relevant as the procedure contemplated under section 138B of the Customs Act had not been followed. This contention deserves to be accepted - Reference can be made to the decision of the Tribunal in M/s Surya Wires Pvt. Ltd. vs. Principal Commissioner, CGST, Raipur [2025 (4) TMI 441 - CESTAT NEW DELHI. The Tribunal examined the provisions of sections 108 and 138B of the Customs Act as also the provisions of sections 14 and 9D of the Central Excise Act, 1944 and observed that 'What, therefore, follows is that a person who makes a statement during the course of an inquiry has to be first examined as a witness before the adjudicating authority and thereafter the adjudicating authority has to form an opinion whether having regard to the circumstances of the case the statement should be admitted in evidence, in the interests of justice. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of the persons making them would be of relevance for the purpose of proving the facts which they contain.' - thus, the statements recorded under section 108 of the Customs Act cannot be considered as relevant.
Whether the goods were liable to confiscation under section 113(d),(g) and (i) of the Customs Act? - HELD THAT:- Section 113 on the Customs Act deals with confiscation of goods attempted to be improperly exported. In the instant case, as noticed above, the goods had already been exported between January, 2015 and July, 2015 on the basis of Let Export Orders and the investigation was started in August, 2015. Section 113 of the Customs Act would not, therefore, be applicable.
Levy of penalties - HELD THAT:- Penalty under section 114(iii) of the Customs Act could not have been imposed upon the appellant since penalty is imposed for attempt to export goods improperly. In any view of the matter, as the goods have been held not liable to confiscation under section 113, penalty could also not be imposed under section 114(iii) of the Customs Act - Section 114AA of the Customs Act provides that if a person knowingly or intentionally makes, signs or uses or causes to be made, any material particular, in the transaction of any business for the purposes of the Customs Act, shall be liable to a penalty not exceeding five times the value of goods. The Additional Commissioner has relied upon the statement made under section 108 of the Customs Act that the changes were made on the instructions given by the Praveen Rao. This statement, for the reasons stated above, cannot be relied upon as evidence. Thus, penalty under section 114AA of the Customs Act could not have been imposed upon the appellant and Praveen Rao.
The impugned order dated 06.04.2022 passed by the Commissioner (Appeals) confiscating the goods and imposing the penalties upon the appellant deserves to be set aside and is set aside - Appeal allowed.
Issues: Whether the Appellate Tribunal should interfere with the NCLT's order appointing a forensic auditor in a pending oppression and mismanagement petition.
Analysis: The impugned order was passed in a petition under Sections 241 and 242 of the Companies Act, 2013 on allegations and counter-allegations of mismanagement, siphoning of funds, irregular accounting, and related financial improprieties. The Tribunal treated the forensic audit as an aid to ascertain the truth and to enable fair adjudication of the pending company petition. The exercise was supported by the pleadings and fell within the discretionary power available to the NCLT under Section 242(4) of the Companies Act, 2013. In an appeal against a discretionary order, interference is not warranted merely because another view is possible; interference lies only where the discretion is shown to be arbitrary, capricious, perverse, or contrary to settled principles.
Conclusion: The direction for forensic audit was a proper exercise of discretion and did not call for appellate interference; the appeal was liable to be dismissed.
Ratio Decidendi: A forensic audit may be ordered as an interim aid in oppression and mismanagement proceedings when the pleadings disclose serious financial allegations, and an appellate forum will not interfere with such a discretionary order unless the discretion is shown to be arbitrary, perverse, or legally unsustainable.
Direction to conduct Forensic audit - main Petition filed un/s 241–242 of the Companies Act, 2013 contains no specific plea or relief seeking a forensic audit - scope of interim direction for such audit - grievance of the appellant is that without forming an opinion as to if there were any acts of oppression and mismanagement on the part of the appellants herein, such an order appointing Forensic Auditor ought not to have been passed - HELD THAT:- It is found from the impugned order that while keeping the main CP under Section 241-242 of the Companies Act, 2013 pending; in view of the hostile attitude between the two groups of shareholders and also in view of allegations and counter allegations, the Ld. NCLT had passed the order to find out the truth with regard to the running of the operations of Respondent No.2 company, in order to proceed further with the main Company Petition as the said Report would enable the Ld. NCLT to appreciate the issues necessary for fair and just adjudication of the Company Petition.
It is required to look into the allegations set out in the Company Petition to find out as to if there existed allegations, sufficient to exercise discretion, as is given under Section 242(4) of the Companies Act, 2013 - In the Company Petition there exist allegations against the appellants of mismanagement and siphoning of funds from the Respondent No.2 company.
There is no dispute to the law laid down but what is important to note is the cited judgement is a case where the company was still doing operations but whereas in the present case admittedly the company’s operations are nil and though allegedly the Respondents have resigned from the Management of the Company, yet for paying the debts of the company, taken during the tenure when the management of the company was in the hands of appellant, the Respondent had to dispose of their assets to clear of such debts of the Bank.
Thus in the circumstances when the company is not in operations and there being allegations and counter allegations, hence no fault can be found in the impugned order directing forensic audit, only to enable it to know the truth into the allegations to pass a judgement. More so when a discretion u/s. 242(4) is exercised during the pendency of company petition, on facts of the case in hand, then it would not be appropriate to set aside such discretion, only if it could have been exercised in some other manner.
Hence the appeal has no merit and it is accordingly dismissed.
Issues: Whether the Civil Appeal should be decided on merits by the Court or the company petition should be considered by the National Company Law Tribunal; and whether the parties should be left free to seek interim or final reliefs before the Tribunal.
Outcome: The Court did not examine the merits of the dispute, disposed of the Civil Appeal, and directed the National Company Law Tribunal to decide the company petition on merits expeditiously. All contentions were left open and the parties were permitted to seek interim and final orders before the Tribunal.
Term of directorship - merits of company petition - remand for fresh consideration - expeditious consideration by the National Company Law Tribunal - no observation on merits - interim relief before tribunal
Term of directorship - remand for fresh consideration - expeditious consideration by the National Company Law Tribunal - Civil appeal disposed without adjudication on merits and the company petition remanded to the NCLT for fresh and expeditious consideration. - HELD THAT: - The Court recorded that the term of directorship of the concerned director (01.04.2016 to 31.03.2021) had expired and, in the circumstances, declined to consider the case on merits. Instead of deciding the substantive controversy, the Civil Appeal was disposed of by directing the National Company Law Tribunal to consider the company petition on merits as expeditiously as possible. The order thereby remands the substantive issues for fresh adjudication to the NCLT rather than deciding them in this appeal. [Paras 3, 4]
Appeal disposed; company petition to be considered on merits by the NCLT expeditiously.
No observation on merits - interim relief before tribunal - Court expressly recorded that no observations were made on merits and left all contentions open; parties permitted to seek interim or final relief before the NCLT, with interim applications to be considered expeditiously. - HELD THAT: - The Court clarified that by remanding the matter it made no observations on the merits and that all contentions of the parties remain open for advance before the NCLT. Parties were placed at liberty to pursue any interim or final orders before the NCLT, and any application for interim relief filed by either party was directed to be considered expeditiously by the Tribunal. Pending applications before this Court, if any, were ordered disposed of. [Paras 5, 6, 8]
No merit-based observations; parties free to seek interim/final orders before the NCLT; interim applications to be considered expeditiously; pending applications disposed.
Final Conclusion: The Civil Appeal is disposed of without deciding the merits because the director's term had expired; the company petition is remitted to the NCLT for fresh and expeditious consideration, with all contentions left open and liberty to seek interim or final orders before the Tribunal.
Issues: (i) Whether the petition was barred by delay and laches; (ii) whether the documents relied upon to show transfer of shares and resignation from the board were reliable and sufficient to negate oppression and mismanagement.
Issue (i): Whether the petition was barred by delay and laches.
Analysis: The dispute was treated as one involving a continuing cause of action because the appellants were said to be still holding the original shares and were allegedly being kept out of the affairs of the company. On that basis, the finding that the petition was time-barred was rejected, and the record was held to justify interference with the dismissal on limitation grounds.
Conclusion: The petition was not barred by delay and laches.
Issue (ii): Whether the documents relied upon to show transfer of shares and resignation from the board were reliable and sufficient to negate oppression and mismanagement.
Analysis: The share transfer form, resignation letter, receipts, annual returns and related records were found to be incomplete, contradictory and suspicious. The documents did not bear essential particulars, the chronology was inconsistent, and the company records continued to show the appellants as directors even after the alleged transfer and resignation. The finding was that the appellants had been kept out of the company affairs in an oppressive manner and that the respondents' version was unsupported by trustworthy material.
Conclusion: The alleged transfer of shares and resignation were not accepted as proved, and the finding of oppression and mismanagement was sustained.
Final Conclusion: The appellate court's factual findings were affirmed and the challenge to the tribunal's order failed.
Oppression and mismanagement - delay and laches - continuing cause of action - validity and authenticity of share transfer documents - rectification of register of members
Delay and laches - continuing cause of action - Whether the petition was barred by delay or laches. - HELD THAT: - The Tribunal's conclusion that there was no delay or laches was accepted. The Appellate Tribunal held that the cause of action was continuous because the appellants continued to be deprived of participation in the company's affairs and were still holding original shares; thus the petition could not be dismissed on limitation. The Supreme Court found the Appellate Tribunal's reasoning unimpeachable and held that the Company Law Tribunal had misread the petition by treating it as time-barred without considering these material facts. [Paras 3, 5]
Petition not barred by delay or laches; the Appellate Tribunal's finding on limitation is affirmed.
Validity and authenticity of share transfer documents - oppression and mismanagement - rectification of register of members - Whether the documents relied on by respondents proved valid transfers and therefore negated claims of oppression and mismanagement. - HELD THAT: - The Appellate Tribunal examined the transfer paperwork and related records and found them to be incomplete, contradictory and suspicious (absence of execution dates, absence of company name, share certificate or folio numbers, missing mandatory stamp, inconsistent annual returns and director records, and receipts not referring to share particulars). On that basis it concluded that respondents' documents were unreliable and that appellants were being kept out of company affairs in an oppressive manner. The Supreme Court held these findings of fact by the Appellate Tribunal to be unimpeachable and found no error in law or fact in its conclusions. [Paras 4, 5]
Findings that the transfer documents were suspicious and unreliable and that oppression and mismanagement were established are affirmed.
Final Conclusion: The judgment and order of the National Company Law Appellate Tribunal in Company Appeal (AT) No.208 of 2017 dated 03.11.2017 are affirmed; the appeal is dismissed. Parties shall bear their own costs and pending applications stand disposed of.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether approval and implementation of the Resolution Plan resulted in extinguishment of the entire debt, so as to bar any claim against a third-party security provider/promoter in respect of the "Unsustainable Debt".
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Effect of the Resolution Plan on survival of rights against third-party security providers/promoters in relation to "Unsustainable Debt"
Legal framework: The Court examined the mandatory contents and operative terms of the approved Resolution Plan, particularly the Plan's treatment of "Sustainable Debt" and "Unsustainable Debt" and the specific reservation of rights in Clause 3.2(ix). The Court also applied the settled position that approval of a Resolution Plan does not ipso facto discharge a security provider's contractual liabilities.
Interpretation and reasoning: The Court found, from the Plan's admitted figures and steps integral to its implementation, that financial creditors received an upfront cash distribution only towards "Sustainable Debt", while "Unsustainable Debt" was addressed by conversion into equity followed by a planned reduction in face value and consolidation. This mechanism substantially reduced the ultimate value of equity held by financial creditors compared to the quantum of "Unsustainable Debt", demonstrating that the Plan did not provide full value of that component. On the Plan's express terms, Clause 3.2(ix) permanently extinguished creditors' rights/remedies against the company, except rights against third parties (including the existing promoter/security provider) in relation to any portion of "Unsustainable Debt" secured or guaranteed by such third parties. The Court also noted the Plan's stipulation that if a third-party guarantor or security provider makes any claim against the company or the resolution applicant/SPV due to invocation/enforcement, such claim would be settled at NIL value, reinforcing that the Plan contemplated continuing enforcement against third-party security.
Conclusions: The Court conclusively held that approval of the Resolution Plan did not extinguish the entire debt so as to bar claims against a third-party security provider/promoter in relation to "Unsustainable Debt". The issue was answered in the negative, and the finding that creditor rights could survive against third parties (as preserved by the Plan) was upheld, leading to dismissal of the appeal.
Approval of Resolution Plan and its effect on third-party liabilities - Preservation of rights against third-party security providers under a Resolution Plan - Conversion of debt into equity and discharge of the creditor - Haircut on unsustainable debt and its legal consequence - Interpretation of Clause 3.2 (ix) of the Resolution Plan
Approval of Resolution Plan and its effect on third-party liabilities - Preservation of rights against third-party security providers under a Resolution Plan - Conversion of debt into equity and discharge of the creditor - Interpretation of Clause 3.2 (ix) of the Resolution Plan - Approval of the Resolution Plan of ESL did not result in extinguishment of the entire debt so as to bar any claim against ECL as a security provider/third-party surety. - HELD THAT: - The Court examined the mandatory contents of the approved Resolution Plan and the sequence of steps contemplated therein. The Plan classified total admitted financial debt into sustainable and unsustainable portions, provided for conversion of unsustainable debt into equity and, critically, for reduction in face value and consolidation of shares as integral steps of the Plan. As implemented, the conversion and subsequent reduction resulted in the financial creditors receiving shares of substantially lower value than the unsustainable debt converted, demonstrating a consequential "haircut". Clause 3.2 (ix) of the Resolution Plan expressly preserved rights against any third party (including existing promoters and security providers) in relation to any portion of unsustainable debt secured or guaranteed by such third parties and provided that any claim by such third parties arising from enforcement of such guarantees/security would be settled at NIL value. The Plan therefore did not afford full value to creditors for the unsustainable debt and, by its terms, retained remedial rights against third-party guarantors/security providers. The Court further reiterated the settled position that approval of a Resolution Plan does not ipso facto discharge a security provider of liabilities under the contract of security. Applying these principles to the facts, the Court concluded that the approved Plan did not extinguish all liability so as to preclude claims against ECL as a security provider. [Paras 21, 22, 23, 24, 25]
The issue is answered in the negative: approval of the Resolution Plan of ESL does not extinguish the entire debt so as to bar any claim against ECL as a security provider/third-party surety.
Final Conclusion: The impugned judgment of the NCLAT is affirmed; the appeal is dismissed and there shall be no order as to costs.
Issues: Whether the impugned sale transaction could be declared void and fraudulent under the insolvency law on the ground that it was allegedly without consideration and intended to defraud creditors, and whether interference was warranted in appeal against concurrent findings rejecting that plea.
Analysis: To attract the fraudulent trading and related proceedings under the insolvency code, the applicant had to establish material showing that the corporate debtor carried on business or entered into the transaction with intent to defraud creditors or for a fraudulent purpose. The record did not show any pending creditor claim or suit at the time of the sale, the account of the corporate debtor was declared NPA only later, and the disputed property was shown in the debtor's own later prospectus as already sold. The registered sale deed carried a recital of payment, which carried a presumption of due execution, and the liquidator failed to rebut that presumption with cogent evidence. The concurrent factual findings of the NCLT and the NCLAT that no fraudulent transfer was made out were held to be plausible, leaving no substantial question of law for appellate interference.
Conclusion: The transaction was not proved to be fraudulent or void, and the appeal was liable to be dismissed.
Dismissal of application declaring sale tranaction as void and fraudulent - NCLT concluded that liquidator failed to discharge its burden of proving that sale was without consideration to defraud creditors - HELD THAT:- In the instant case, there exists no material, at least shown to us, to indicate that on 11.08.2008 when the disputed sale deed was executed a suit or claim of any creditor was pending against the CD. The materials brought on record would indicate that account of CD with the Bank was declared NPA much after the sale transaction. Moreover, that account was secured by other assets of CD as is clear from Bank’s notice issued to CD under Section 13(2) of SARFAESI Act - Admittedly, CIRP proceedings commenced in 2018, therefore, in absence of cogent material on record, it is difficult to conceive that in the year 2008 the sale was made to defraud the creditors. To prove that sale was with a view to defraud the creditors very heavy burden was on the liquidator which, according to NCLT and NCLAT, he failed to discharge.
No doubt learned counsel may be right in pointing out that letter dated 28.5.1989 acknowledging receipt of Rs. 50 lakhs by CD appears doubtful because it reflects mobile number when, by that time, mobile telephony might not have commenced. But this alone cannot be a ground to hold that no consideration was paid particularly, when CD in its prospectus issued in 1994 for raising funds acknowledged transfer of the land in question in favor of the respondent. The above document corroborates the recital in the sale deed which, in turn, corroborates Note 2 in the balance sheet of the respondent of 2008-09.
Insofar as lack of proper evidence to show payment by the respondent to CD is concerned, suffice it to say that more than a decade had passed since the date of sale before commencement of CIRP, and nearly three decades had passed since the date of alleged agreement for sale, in such circumstances, lack of old records with the respondent will not raise an adverse inference to the extent that it overrides the overall burden which lies on the liquidator to prove that transaction was fraudulent with the intent to defraud the creditors.
The argument that Note 2 in the balance sheet of the respondent for the year 2008-09 reflects arrangement with Shivalika Leasing and Finance Limited for sundry credit of Rs. 50 Lakhs therefore availability of requisite funds with the respondent in 1989 becomes doubtful, is not acceptable because consideration need not be provided by the promisee itself, it may be by any other person on its behalf - if both NCLT and NCLAT have concurrently taken the view that no case of fraudulent transfer is made out, it is a plausible view which does not raise any question of law as to warrant an interference under section 62 of IBC.
Appeal dismissed.
Outcome: The civil appeal was dismissed and the NCLT was directed to hear and dispose of the company petition within four months.
Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors (Homebuyers) - minimum threshold as required under Section 7 of the I & B, Code, 2016 (regarding minimum number of allottees), met or not - Respondents stated that total 39 Financial Creditors file the original application filed under Section 7 of the I & B Code, 2016 who were allotted 20 Real Estate Units of a Phase II having 170 units and therefore met the threshold limits.
HELD THAT:- Unfortunately, two years have already passed and there is no progress in the matter either way. In the facts and circumstances of the case, it is opined that interest of justice will be sub-served if it is directed that the National Company Law Tribunal to hear and dispose of the Company Petition (IB) No. 122/BB/2021 expeditiously.
The civil appeal is dismissed.
Outcome: The civil appeal was disposed of with liberty to the parties to advance their contentions before the NCLAT, and pending applications were transferred to the NCLAT for consideration.
Application for preponement of the date of hearing of the main appeal - HELD THAT:- The liberty is reserved to all parties to advance arguments on their respective contentions before NCLAT.
Application disposed off.
Issues: Whether interference with the impugned order was warranted and whether the costs imposed deserved reduction.
Analysis: The appeal was not accepted on the challenge to the impugned order. However, the direction as to costs was reconsidered and reduced from Rs.10 lakhs to Rs.5 lakhs. The costs were directed to be paid to the Supreme Court Middle Income Group Legal Aid Committee within two weeks. The observations made by the National Company Law Tribunal and the National Company Law Appellate Tribunal were confined to adjudication of the application under Section 9 of the Insolvency and Bankruptcy Code, 2016.
Conclusion: Interference with the impugned order was declined, but the costs were reduced to Rs.5 lakhs and the appeal was disposed of in those terms.
Dismissal of Section 9 Application filed before the Adjudicating Authority - initiation of CIRP - Existence of debt and default or not - quality of goods or services - breach of a representation or warranty - it was held by NCLAT that 'This disputed nature of the aforementioned facts raises serious doubts about the genuineness of the claim filed by the Petition Firm. Thus, the Intervener's contention with respect to the same holds merit and cannot be ignored.' - HELD THAT:- It is not inclined to interfere with the impugned order. However, learned counsel prays that the costs of Rs.10 lakhs imposed, is extremely onerous and prays for reduction of the same.
It is directed that instead of the amount, as directed in paragraph 19 of the order of the National Company Law Tribunal (NCLT), a sum of Rs.5 lakhs shall be paid as costs.
Appeal disposed off.
Whether there could be a judicial advice being imparted to a party to the proceedings, to opt to file an Application for amendment for the purposes of seeking a rectification of the date of default? - It was held by NCLAT that 'As per the settled principles of law governing to the field of amendment, the amendment cannot be permitted to be carried in the shape which withdraws a pleading already raised before the Ld. Tribunal or which has a substantial bearing on the very genesis of the proceedings, which are held before the Courts or the Tribunals or which amounts to withdrawal of an admission.'
HELD THAT:- No stay was granted by this Court during the pendency of this appeal and we are now informed that pursuant to the remand order, the NCLT, Amaravati Bench, has passed a fresh order on 25.07.2025, disposing of the subject I.A.
The present appeal no longer survives for consideration on merits, as the fresh order dated 25.07.2025 would give rise to a separate cause of action - Appeal dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether a challenge to an approved resolution plan, which has attained finality due to absence of a timely appeal, can be pursued indirectly through appeals against rejection of an intervention application and an application seeking permission to file an independent resolution plan.
(ii) Whether the appellant's knowledge of the contents of the approved resolution plan and of the alleged shortfall vis-à-vis liquidation value affects its ability to maintain indirect/parallel proceedings instead of filing a timely, proper challenge to the plan approval.
(iii) Whether the refusal to recall the appellate tribunal's earlier dismissal order, on the ground that it has no power to review its decisions under the insolvency law, warranted interference in appeal in the facts of the case.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Indirect challenge to an approved resolution plan after plan approval has attained finality
Legal framework (as discussed by the Court): The Court noted that appeals were filed under Section 62 of the insolvency law. The Court also referred to the statutory requirement relating to liquidation value payable to operational creditors (noted as arising in terms of Section 30(2)(b)).
Interpretation and reasoning: The Court treated the approval of the resolution plan by the adjudicating authority as having attained finality because no appeal was filed within time against that approval, and the belated appeal was dismissed on delay and was not pursued further. The Court held that, in such circumstances, the appellant could not be permitted to mount a challenge to the plan approval through "indirect proceedings" (i.e., by appealing against dismissal of its intervention request and its request to file an independent plan). Permitting such parallel routes would effectively reopen a plan approval that had become final.
Conclusions: The Court conclusively held that, once the plan approval order attained finality for want of a timely and proper challenge, the appellant could not maintain a challenge to the resolution plan through indirect or parallel proceedings. This was a material ground for dismissing the appeals.
Issue (ii): Effect of the appellant's knowledge of plan contents and alleged liquidation-value shortfall
Interpretation and reasoning: The Court found, on the record, that the appellant was aware of the resolution plan and its contents well before the adjudicating authority approved it. The appellant's representative attended an earlier creditors' meeting, and the record showed that minutes of subsequent meetings (including the meeting where plan approval by creditors occurred) were emailed to the appellant. Consequently, the Court rejected any claim of ignorance about the plan's terms, including the asserted position that operational creditors were being paid less than liquidation value. The Court reasoned that, given such awareness, it was incumbent on the appellant (or any operational creditor) to file a proper appeal against plan approval within time; having not done so, the appellant could not revive the issue through ancillary applications and related appeals.
Conclusions: The Court held that the appellant's knowledge reinforced the bar against indirect challenge: despite awareness of the alleged statutory breach to operational creditors, the appellant failed to pursue the proper, timely remedy against plan approval, and therefore could not be permitted to litigate the same grievance through other proceedings.
Issue (iii): Refusal to recall the appellate tribunal's dismissal order on the ground of no review power under the insolvency law
Interpretation and reasoning: The Court noted that, pursuant to liberty earlier granted, the appellant sought recall of the appellate tribunal's dismissal order, but the tribunal rejected the recall request on the ground that it had no power to review its decisions under the insolvency law. In the Court's assessment, given that the resolution plan approval itself had already attained finality and could not be reopened through indirect proceedings, no basis remained to interfere with either the tribunal's dismissal of the original appeals or its refusal to recall that dismissal.
Conclusions: The Court declined to interfere with the appellate tribunal's orders, and dismissed the appeals as lacking merit, primarily because the plan approval had become final and could not be attacked through indirect or parallel proceedings.
Rejection of appeal against the approval of the resolution plan on the ground of delay - HELD THAT:- Perusal of the record reflects that the appellant, ACPL, was well aware of the resolution plan submitted by MPWMPL and its contents. The representative of ACPL was present in the 5th Meeting of the Committee of Creditors [CoC], in terms of Section 24(3)(c) of the IBC, but did not participate in the CoC’s 6th and 7th Meetings. The approval of the resolution plan by the CoC was in its 7th meeting. However, the Resolution Professional placed on record a copy of the email dated 15.12.2022 addressed by him to the representatives of ACPL, attaching therewith the Minutes of the 6th and 7th Meetings of the CoC, long before the approval of the resolution plan by the NCLT, Hyderabad Bench-1. Therefore, ACPL cannot claim ignorance of the details of the resolution plan submitted by MPWMPL. Such knowledge appears to have been the source and basis for the appellant, ACPL, to file a separate application seeking permission to file a resolution plan of its own.
In such circumstances, when the appellant, ACPL, never challenged the approval of the resolution plan by way of properly instituted proceedings within time, it cannot be permitted to maintain such a challenge by way of these indirect proceedings. More so, as it was well aware of the details of the resolution plan and, in consequence, the fact that the operational creditors were being paid less than the liquidation value. Having suffered such a statutory breach to its own detriment and to the detriment of all the operational creditors, it was incumbent upon the appellant, ACPL, or any other operational creditor to file a proper appeal against the approval of the resolution plan. Once they failed to do so, it cannot be permitted a challenge to be maintained by way of parallel proceedings.
There are no reason to interfere with the impugned judgments/orders passed by the NCLAT, Chennai. The appeals are bereft of merit and are, accordingly, dismissed.
Issues: Whether the impugned paragraph permitting the respondents to file a fresh application for rectification and requiring decision on merits while taking into account the legal consequences under Section 420 of the Companies Act, 2013 warranted interference.
Analysis: The order records that the challenged paragraph was intended to protect the interest of both sides. It preserves the respondents' liberty to seek rectification under Rule 154 of the NCLT Rules and requires any such request to be decided on its merits, with due regard to the legal consequences flowing from Section 420 of the Companies Act, 2013.
Conclusion: The impugned paragraph was upheld and no interference was made with it.
Final Conclusion: The appeals were rejected, and the operative clarification in the impugned judgment remained undisturbed.
Seeking a rectification of the order which has to be decided exclusively on its merit - Section 420 of the Companies Act, 2013 - HELD THAT:- Para 19 of the impugned judgment should protect the interest of both the sides.
Civil appeal dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the existence of a record of dispute in the Information Utility (showing the default status as "DISPUTED") mandated rejection of the operational creditor's application under Section 9(5)(ii)(d).
(ii) Whether a notice of dispute and other material on record conclusively established a pre-existing dispute between the parties, requiring rejection of the application under Section 9(5)(ii)(d) and rendering insolvency adjudication inappropriate for deciding the underlying accounting/set-off controversy.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Effect of "record of dispute" in Information Utility on maintainability of Section 9 application
Legal framework: The Court examined Section 9(5)(ii)(d), which obliges rejection of an application if either (a) notice of dispute has been received by the operational creditor, or (b) there is a record of dispute in the information utility.
Interpretation and reasoning: The record of default (Form D) filed by the operational creditor itself showed that the corporate debtor disputed the default upon authentication, and the status was "DISPUTED". The Court held that Section 9 proceedings are summary and are not meant to resolve disputes; therefore, once the Information Utility record reflects a dispute, the Adjudicating Authority cannot ignore it and must reject the application. The Court found fault with the Adjudicating Authority for noticing the Information Utility material but not addressing the statutory consequence of the "DISPUTED" status.
Conclusion: Since there was a record of dispute in the Information Utility, the Adjudicating Authority was obliged to reject the Section 9 application under Section 9(5)(ii)(d). Admission of the application was unsustainable on this ground alone.
Issue (ii): Whether a "notice of dispute" and surrounding facts established a pre-existing dispute requiring rejection under Section 9(5)(ii)(d)
Legal framework: The Court applied Section 9(5)(ii)(d) and evaluated whether a notice of dispute had been received by the operational creditor and whether the dispute was of a kind that barred insolvency admission.
Interpretation and reasoning: The operational creditor's own pleadings and emails showed that, upon receiving the corporate debtor's ledger on 27.10.2023, the operational creditor objected on 30.10.2023 to two ledger entries reflecting amounts adjusted/set-off towards a third party. This exchange demonstrated a live dispute regarding reconciliation of accounts and the propriety of set-off. The Court further held that the corporate debtor's reply to the demand notice dated 20.07.2024 constituted a notice of dispute within the meaning of the Code, as it denied liability and asserted an existing dispute based on earlier correspondence. The Court emphasized that the controversy-whether the set-off/adjustment was permissible and whether any "excess payment" was refundable-required adjudication on evidence and could not be determined in Section 9 summary proceedings.
Conclusion: The Court held that (a) the 20.07.2024 reply was a notice of dispute, and (b) the October 2023 correspondence evidenced a pre-existing dispute over ledger entries/set-off. Therefore, the Section 9 application also deserved rejection under Section 9(5)(ii)(d) on the "notice of dispute" ground, and the admission order was set aside and the application rejected.
Admission of section 9 application - notice of dispute has been received by the Operational Creditor - existence of record of dispute in the information utility - HELD THAT:- The Operational Creditor itself brought on the record, the Record of Information Utility. Section 9 proceedings are summary proceedings, which an Operational Creditor can initiate on there being existence of debt and default having been committed by the CD. Section 9, sub- section (5)(ii) requires the Adjudicating Authority to reject the application, if any of the circumstances from (a) to (e) are found. When there is record of dispute in the Information Utility, the Adjudicating Authority is obliged to reject the application. The legislative scheme of Section 9 is not for resolving any dispute between the Operational Creditor and the CD and when the record of Information Utility contains mention of dispute, the Adjudicating Authority is obliged to reject the application. The learned Counsel for the Appellant has rightly relied on the judgment of this Tribunal in Bhawani Prasad Mishra vs. Armaco Infralinks Pvt. Ltd. & Anr. [2025 (5) TMI 163 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI - LB] where it was held that 'The application filed by the Operational Creditor did not deserve admission and was liable to be rejected as required by Section 9(5)(ii)(d) of the IBC. Adjudicating Authority neither adverted to Section 9(5)(ii)(d) nor addressed itself to the said condition and proceeded to admit the application which order cannot be sustained.'
It is also relevant to notice that Records of the Information Utility was produced and annexed by the Operational Creditor itself in its Section 9 application and in the reply to Section 9 application, the CD referring to the Record of Dispute in Information Utility has clearly pleaded that Section 9 application deserves rejection on this ground alone - The Adjudicating Authority in the impugned order has noticed in paragraph 7 (x) record of financial information and Form-D. However, in its consideration has not adverted to Record of Dispute as captured in the Certificate of Information Utility.
Thus, there being Record of Dispute in the Information Utility, the Adjudicating Authority was obliged to reject Section 9 application as required by Section 9, sub-section (5)(ii)(d) and the order of admission of Section 9 application, cannot be sustained on this ground alone.
Pre-existing dispute between the parties - HELD THAT:- The CD has supplied the giga pipes to Operational Creditor sourced from Giga Pipe Systems. Payments were made by the Operational Creditor to the CD and last payment was received by the CD on 24.08.2021. There was complete silence from Operational Creditor regarding excess payment made to the CD and it was for the first time in October 2023, when Statement of Account of Financial Year 2020-21 was sent by Operational Creditor to the CD, requiring confirmation - Section 9 application also deserved rejection under Section 9(5)(ii)(d) on the first ground that is notice of dispute having received by the Operational Creditor. The reply to Demand Notice on 20.07.2024 was clearly notice of dispute received from the CD. In view of above discussions, the order of the Adjudicating Authority admitting Section 9 application is unsustainable and deserves to be set aside.
The impugned order dated 31.07.2025 is set aside. Section 9 application is rejected - appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether, on the material placed, an operationally enforceable "financial debt" remained due and payable so as to constitute "default" warranting admission of an application under Section 7.
2. Whether the Adjudicating Authority committed error in relying on the Corporate Debtor's audited financial statements (showing NIL loan payable and showing receivables from the Financial Creditor) to conclude absence of debt/default.
3. Whether, in the facts, the Adjudicating Authority's refusal to trigger insolvency was justified given the underlying dispute between the concerned shareholder groups and the Court's conclusion that the application was not a proper case for initiation of insolvency resolution.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Existence of financial debt and default for Section 7 admission
Interpretation and reasoning: The Court considered that the Corporate Debtor did not dispute receipt of funds and that repayments had been made, but the decisive question was whether any amount remained due and payable at the time relevant for insolvency initiation. The Court noted that the Corporate Debtor's financial statements (prepared much prior to the Section 7 filing) reflected NIL amount due towards the alleged loan as on the stated date and also recorded amounts receivable by the Corporate Debtor from the Financial Creditor. On these facts, the Court agreed with the Adjudicating Authority that the record did not support subsisting debt/default capable of grounding insolvency initiation.
Conclusion: The Court upheld the finding that there was no debt in respect of which insolvency could be proceeded with, and therefore no error in rejecting Section 7 admission.
Issue 2: Evidentiary reliance on audited financial statements showing NIL liability
Interpretation and reasoning: The Court emphasised that the audited financial statement relied upon was as on 31.03.2021, i.e., much before initiation of Section 7 proceedings in 2024, and thus constituted contemporaneous evidence of the parties' financial positioning prior to the insolvency trigger attempt. Since the audited financial statement reflected NIL amount payable to the related party and also reflected receivables from the Financial Creditor, the Court held that the Adjudicating Authority did not commit any error in relying on these statements to conclude absence of a debt for which insolvency could be initiated.
Conclusion: Reliance on the Corporate Debtor's audited financial statements to determine the absence of an actionable debt/default was affirmed as correct on the facts.
Issue 3: Justification for refusing insolvency initiation in light of broader inter se disputes
Interpretation and reasoning: The Court accepted the relevance of the admitted presence of dispute between the Financial Creditor and the Corporate Debtor's shareholders (as noticed by the Adjudicating Authority) while assessing whether insolvency initiation was warranted on the presented facts. Coupled with the contemporaneous financial statements indicating no outstanding debt, the Court concluded that refusal to initiate insolvency "cannot be faulted" in the circumstances.
Conclusion: The Court affirmed the refusal to initiate insolvency resolution and dismissed the appeal, finding no error in the impugned order.
Rejection of application under Section 7 filed by the Appellant - Adjudicating Authority has rejected the application relying on the Corporate Debtor’s financial statement which reflected that NIL amount to the Financial Creditor - no existence of debt - HELD THAT:- The submission which has been much pressed by the Appellant is that unilateral set off is not permissible and the term sheet specifically provided that no set off can be granted. Present is a case where Adjudicating Authority has looked into the facts which have been brought before the Court including the financial statement of the Corporate Debtor which financial statement as on 31.03.2021 i.e. much before the proceedings under Section 7 was initiated. Proceedings under Section 7 has been initiated only in the year 2024. The financial statement of the Corporate Debtor when reflects ‘NIL’ amount to the related party and which also shows receivables from the Financial Creditor to the Corporate Debtor, the Adjudicating Authority did not commit any error in relying on the said financial statement for coming to the conclusion that there is no debt for which insolvency can be proceeded. It is further relevant to notice that there is dispute between the Financial Creditor and Corporate Debtor’s shareholders which has already been noticed by the Adjudicating Authority.
Thus, in the facts of the present case, refusal of Adjudicating Authority to initiate insolvency in the facts cannot be faulted.
There are no error in the order of the Adjudicating Authority - The Appeal is dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether dismissal of a creditor's application on the ground that the "net amount payable" fell below the statutory threshold was sustainable when the adjudicating forum did not examine and compute disputed contractual components (including alleged double fee for overstay and contractual interest) that could affect threshold satisfaction.
(ii) Whether the adjudicating forum erred in refusing to consider the creditor's claim for double license/amenities fees and contractual interest by treating them as unsubstantiated, without addressing relevant contractual clauses and the admitted/argued timeline of notice and vacation.
(iii) Whether, in the above circumstances, the proper appellate outcome was to set aside the dismissal and remand for a fresh, reasoned ("speaking") determination on computation and threshold.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i) & (iii): Sustainability of dismissal for falling below threshold without proper computation; propriety of remand
Legal framework (as discussed): The Court treated maintainability as turning on whether the "net amount payable" met the minimum threshold under Section 4 for an application filed under Section 9 of the Code, requiring a proper determination of the payable amount before rejecting the application on threshold grounds.
Interpretation and reasoning: The Court found that the controversy arose from two written agreements (a leave & license arrangement and an amenities arrangement) and the termination/vacation timeline. The adjudicating forum had dismissed the application by (a) excluding the rent-free period component, (b) rejecting "double fee" as inapplicable because the premises were stated to have been vacated, and (c) treating interest, power-connection related claim, and GST/expenses as unsubstantiated, concluding that the remaining payable fell below the threshold. The Court held that, on the record and submissions, the adjudicating forum did not "thoroughly" examine the issues raised, nor did it properly calculate the amount necessary to determine whether the threshold was crossed. In particular, because the notice/vacation timeline was contested and could materially impact computation, threshold rejection without a complete examination and calculation was erroneous.
Conclusion: The Court set aside the dismissal and remanded the matter for reconsideration and a speaking order, restoring the application for fresh decision on computation/threshold.
Issue (ii): Failure to examine double fee for overstay and contractual interest as potentially material components
Legal framework (as discussed): The Court relied on the existence of contractual stipulations: (a) a provision permitting charging of interest at 2% per month for delayed payment, and (b) a clause basis for "double" charges linked to non-vacation/overstay, making these claims potentially relevant to quantum and threshold.
Interpretation and reasoning: The Court noted submissions that the termination communication required a notice period, and the respondent's counsel accepted that the notice given for three months would expire earlier than the date when the premises were claimed to have been vacated. If the premises were retained beyond the notice-expiry, the creditor's contention regarding applicability of double license/amenities charges would "definitely crop up" and required examination, which the adjudicating forum failed to undertake. Separately, the Court itself "noticed" the contractual interest rate (2% per month) from the agreement, and found that the adjudicating forum's dismissal-on the basis that the interest claim was not substantiated-was not preceded by adequate consideration of the issue in the context of the contractual term and overall computation exercise.
Conclusion: The Court held that the adjudicating forum committed error by not considering these potentially decisive components while determining the payable amount and threshold; the matter therefore required remand for proper issue-by-issue determination and calculation.
Maintainability of Section 9 application under Insolvency and Bankruptcy Code, 2016 - calculation of operational debt for threshold under Section 4 of the IBC - effect of rent-free concession and amenities charges on the claim - entitlement to contractual remedies including double fee and contractual interest - remand for speaking order and fresh adjudication
Maintainability of Section 9 application under Insolvency and Bankruptcy Code, 2016 - calculation of operational debt for threshold under Section 4 of the IBC - effect of rent-free concession and amenities charges on the claim - Whether the Learned Tribunal erred in dismissing the Section 9 application without determining correctly whether the claimed operational debt, after accounting for amounts received and contractual concessions, met the statutory threshold for maintainability under the Code. - HELD THAT: - The Appellate Tribunal found that the Learned Tribunal recorded relevant contractual concessions (notably a 15-month rent-free concession) and certain disallowances in paragraph 13(ii), but failed to undertake a thorough calculation to decide if the net claim met the threshold under Section 4 of the IBC. The Bench observed that the Tribunal did not sufficiently examine or compute the claim after adjusting amounts received and conceded deductions, and therefore did not determine maintainability on the basis of a complete quantification. Because the question whether the admitted and disputed components, including rent, amenities and other adjustments, cumulatively crossed the statutory threshold is determinative of the application's maintainability, the Appellate Tribunal held that the matter required fresh consideration by the Tribunal with a speaking order and proper calculation. [Paras 8, 14, 17, 18, 19]
Impugned order set aside and the question of maintainability remanded to the Learned Tribunal for fresh adjudication with a speaking order and proper computation of the claim.
Entitlement to contractual remedies including double fee and contractual interest - effect of rent-free concession and amenities charges on the claim - remand for speaking order and fresh adjudication - Whether the Learned Tribunal erred in declining to examine, on merits, the Appellant's claims for double license/amenities fee, contractual interest and the claimed deduction in respect of power connection, and whether those claims should be considered in computing the operational debt. - HELD THAT: - The Bench noted factual disputes recorded in the pleadings and admissions before the Tribunal - including the period of notice, the date of vacation, the contractual clause permitting 2% per month interest, the concessionary rent-free period and the claim relating to power connection - which are material to determining entitlement to double fees, interest and other contractual remedies. The Appellate Tribunal held that the Learned Tribunal prematurely declined to delve into these merits once it concluded that certain heads were unsubstantiated, without examining the admitted facts (for example, the period of vacating) that could give rise to liability under the contract. Given these unresolved contentions going to substantive contractual rights and liabilities, the matter must be considered afresh by the Tribunal so that these specific claims are examined, substantiated or disallowed with reasons and then included in the computation required for maintainability. [Paras 13, 15, 16, 17, 18]
Claims for double fee, contractual interest and the power-connection deduction remitted to the Learned Tribunal for fresh, reasoned consideration and quantification as part of the Section 9 adjudication.
Final Conclusion: The appeal succeeds; the Impugned Order dated 01.02.2024 is set aside. C.P. (IB) No. 592/MB/2023 is restored and remitted to the Learned Tribunal to decide the application afresh by passing a speaking order addressing the computation of claim and the contested contractual heads; parties to appear on the listed date. No costs.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the direction requiring the incoming Resolution Professional to explore interim finance and the Committee of Creditors to consider it for payment of the outgoing Resolution Professional's unpaid fees was legally correct, having regard to the treatment and payment mechanism of CIRP costs under the Code and the CIRP Regulations.
(ii) Whether any individual members of the Committee of Creditors could be held personally responsible on the basis of an "undertaking" for payment of the outgoing Resolution Professional's fees, or whether the statement recorded was only on behalf of the Committee of Creditors.
(iii) Whether, in view of subsequent developments recording deposit/availability of CIRP costs under the approved resolution framework and dismissal of the pending challenges that could affect those funds, the appeal survived for adjudication or had become infructuous; and the appropriate consequential relief.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Correctness of directing exploration of interim finance for payment of the outgoing Resolution Professional's fees
Legal framework (as discussed by the Court): The Court treated the outgoing Resolution Professional's fees as falling within "CIRP costs" and referred to the payment mechanism contemplated under the Code and Regulations 34 and 34B, including that payment can be made from funds available with the corporate debtor, contributions by the applicant or Committee of Creditors members, or funds raised by way of interim finance.
Interpretation and reasoning: The impugned direction required the incoming Resolution Professional to explore the possibility of raising interim finance and required the Committee of Creditors to consider the proposal positively. The Court held that since the outgoing Resolution Professional's fees are CIRP costs, and interim finance is one of the recognized avenues for meeting such costs, the Adjudicating Authority's direction aligned with the prescribed manner of funding and paying CIRP costs.
Conclusion: The Court conclusively held that the Adjudicating Authority "correctly passed" the impugned order directing exploration of interim finance and consideration by the Committee of Creditors for payment of the outgoing Resolution Professional's dues.
Issue (ii): Personal liability of individual Committee of Creditors members and the nature of the recorded "undertaking"
Legal framework (as discussed by the Court): The Court proceeded on the basis that CIRP costs are the responsibility of the Committee of Creditors in accordance with the statutory/regulatory scheme governing their determination and payment, and that an individual member cannot be fixed with responsibility contrary to that framework.
Interpretation and reasoning: The Court accepted the submission that the Committee of Creditors was a necessary party for adjudication on CIRP costs and that "no individual member of the CoC can be held responsible" for such payment. On the alleged undertaking, the Court examined the specific statement recorded in the order dated 22.09.2022 and found it to be a statement by senior counsel "on behalf of the CoC" that the outgoing Resolution Professional's fee "shall be paid as decided by the CoC." From this, the Court concluded that the statement did not create any personal undertaking or individual liability of particular members; it reflected a commitment attributable to the Committee of Creditors' decision-making.
Conclusion: The Court rejected the outgoing Resolution Professional's contention that individual members had given an enforceable personal undertaking to pay his dues, and held that responsibility for such CIRP-cost payment rests with the Committee of Creditors, not individual members.
Issue (iii): Whether the appeal had become infructuous due to subsequent deposit/availability of CIRP costs and resolution of pending challenges; consequential relief
Interpretation and reasoning: The Court noted subsequent developments that funds towards CIRP costs had been deposited in the form of a fixed deposit and that the outgoing Resolution Professional's only surviving concern was the possibility that pending challenges could succeed, leading to reversion of deposited amounts and non-payment. The Court addressed this apprehension by relying on its contemporaneous decisions dismissing the pending appeals that could have impacted the availability of the deposited funds, thereby removing the basis of the apprehension. Given that CIRP costs had been deposited and the contingency feared by the outgoing Resolution Professional no longer survived, the Court held that no live dispute remained requiring appellate interference with the impugned order.
Conclusion: The Court held that the appeal had become infructuous and disposed of it, granting liberty to the outgoing Resolution Professional to approach the Adjudicating Authority in terms of the impugned order if any grievance arises later.
Non-payment of the fee and charges of the Erstwhile RP of the CD - alleged contempt by the other Respondents for not making payments to the Appellant - HELD THAT:- It is noted that as per Section 5(13)(a) and (b) of the Code, the fees payable to the Resolution Professional, along with any interim finance, squarely falls within the ambit of CIRP Costs. The manner of payment of such fees, being an integral component of CIRP Costs, is expressly provided under Regulations 34 and 34B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. In terms of Regulation 34B (5) of the CIRP Regulations, the fees of the Resolution Professional can only be paid from funds available with the Corporate Debtor; contributions made by the applicant or members of the CoC and funds raised by way of interim finance - the Adjudicating Authority has correctly passed the Impugned Order.
It has been brought to notice that since then SRA has deposited Rs. 4,50,65,981/- in Form of FD in favour of Registrar NCLAT. All the Respondents submitted that in view of these developments and deposit of CIRP Cost by SRA, the present application of Appellant has become infructuous.
The appeal is disposed off with liberty to the Appellant to approach the Adjudicating Authority in terms of the Impugned Order, in case he finds any grievances later.
1. ISSUES PRESENTED AND CONSIDERED
1) Whether the direction requiring payment of CIRP dues within a further time period, coupled with a warning that contempt proceedings may be initiated on continued non-compliance, warranted appellate interference when the underlying order fixing liability to pay CIRP costs had not been challenged.
2) Whether an appeal lies, or any present cause of action arises, against an order that is only consequential and enforcement-oriented, intended to secure compliance of an earlier unchallenged order, and which merely contemplates possible contempt action without actually drawing contempt or imposing punishment.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Interference with a consequential enforcement order directing payment of CIRP dues
Legal framework (as discussed by the Court): The Court treated the earlier direction to pay "CIRP dues as per law" as binding and operative in the absence of challenge or setting aside by a superior forum, and considered the later order as an instrument to enforce compliance with that subsisting direction.
Interpretation and reasoning: The Court examined the earlier order which had found no sufficient cause to exempt non-payment of CIRP dues and had directed payment within four weeks with a requirement to file a compliance memo. The impugned order was characterised as "simpliciter" meant to ensure compliance with that earlier direction and lacking "independent existence" because it only reiterated enforcement. Since the earlier order had not been challenged, its determination fastening liability to pay CIRP cost "continues to exist in the eyes of law," making compliance mandatory. Therefore, issuance of a follow-up direction fixing a shorter timeline due to continued non-compliance was treated as a natural consequence of the earlier binding order.
Conclusions: The Court held the impugned order could not be faulted and did not warrant interference because it merely enforced an unchallenged, subsisting order that had already determined liability to pay CIRP costs.
Issue 2: Maintainability / cause of action against an order that only contemplates contempt action
Legal framework (as discussed by the Court): The Court distinguished between an order that merely contemplates initiation of contempt proceedings upon non-compliance and a situation where contempt is actually drawn or punishment imposed, noting that the impugned order had not reached that stage.
Interpretation and reasoning: The Court treated the impugned order's reference to contempt as only an opinion/warning regarding possible initiation in the event of continued non-compliance. Because the earlier order remained unchallenged and non-compliance persisted, the Court held that attaching a consequence of possible contempt initiation was an expected enforcement step. The Court further reasoned that, in the present posture, there was "no cause of action as such" to challenge the enforcement order, particularly when the substantive determination of liability was contained in the earlier order that the appellant had not challenged.
Conclusions: The Court declined to interfere, holding that the impugned order merely contemplated action for drawing contempt proceedings and did not itself draw contempt or impose punishment; accordingly, no present cause of action was made out to sustain the appeal against it. The appeal was dismissed, while leaving open the appellant's right to seek appropriate recourse under law against the earlier order fastening liability to pay CIRP cost.
Wilful disobedience of the order of the Tribunal - EPFO/Appellant failed to make the payment of CIRP dues within a week and file compliance memo - HELD THAT:- Admittedly, the order of 07.03.2025, has not been put to challenge by the Appellant in any proceedings and in that eventuality, the directions that has been given by the Learned Tribunal for remitting the amount towards the CIRP cost stands determined by the order passed of 07.03.2025. As a result, since the order dated 07.03.2025, continues to exist in the eyes of law without being challenged or being set aside by a superior court or a forum, the directions given therein are mandatorily required to be complied by the Appellant.
Since the order of 07.03.2025, has not been challenged and has not been complied with, passing of the impugned order to enforce compliance of the directions to pay the CIRP dues under the threat of drawing of contempt proceeding in the event of non-compliance is a natural consequence and cannot be faulted. Accordingly, in the instant Company Appeal, there are no logic to interfere with the impugned order dated 06.06.2025, because the said direction has been issued only because of non-compliance of the order dated 07.03.2025 and because, the impugned order only contemplates taking of an action for drawing a contempt proceedings and it has not reached the stage of drawing of a contempt or passing of an order of punishment under contempt of Courts Act.
Hence, it could be said that, there is no cause of action as such as of now for the Appellant, to put challenge to the impugned order of 06.06.2025, and more importantly, when the Appellant itself has not challenged the order of 07.03.2025, in which the actual determination was made with respect to fixing of the Appellant's liability to pay the CIRP cost.
Appeal dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the Tribunal had jurisdiction to set aside an auction of a corporate debtor's movable asset conducted pursuant to an order of a criminal court and completed before commencement of the corporate insolvency resolution process.
(ii) Whether Section 14 moratorium could be invoked to invalidate such pre-commencement auction proceedings.
(iii) Whether, while deciding the challenge to setting aside the auction, the Tribunal should adjudicate entitlement to, or distribution of, the sale proceeds realised from the auction.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Tribunal's jurisdiction to set aside a pre-commencement auction conducted under a criminal court's order
Legal framework: The Court examined the limits of the Tribunal's jurisdiction in the context of an auction conducted under an order passed by a criminal court, and considered that the impugned interference was not shown to arise from insolvency resolution proceedings in a manner permitting such intervention.
Interpretation and reasoning: The Court found it undisputed that the movable asset was auctioned pursuant to a prior order authorising sale in criminal proceedings, and that the auction took place before commencement of the insolvency process. On these facts, the Court held that the Tribunal's act of setting aside the auction was not sustainable, as the auction stemmed from and was carried out under the criminal court's directions and occurred prior to insolvency commencement. The Court accepted that the Tribunal lacked jurisdiction to interfere with such auction in the manner it did.
Conclusion: The Tribunal had no jurisdiction to set aside the auction conducted under the criminal court's order before initiation of insolvency proceedings; the impugned order cancelling the auction was therefore set aside.
Issue (ii): Applicability of Section 14 moratorium to invalidate a pre-commencement auction
Legal framework: The Tribunal below had relied on Section 14 moratorium. The Court evaluated whether Section 14 could apply to an auction conducted before the insolvency commencement date.
Interpretation and reasoning: The Court held that the Tribunal's reliance on Section 14 was "misplaced" because the auction was conducted "much before" initiation of the insolvency process. Since the moratorium operates upon and after commencement, the Court concluded that the auction could not be treated as conducted in violation of Section 14.
Conclusion: Section 14 moratorium was inapplicable to the auction in question; it could not be used as a basis to set aside an auction conducted prior to commencement of insolvency proceedings.
Issue (iii): Adjudication of entitlement to auction sale proceeds in the present appeals
Interpretation and reasoning: Although an argument was advanced disputing whether the auction proceeds could be given solely to one stakeholder, the Court confined itself to the legality of the Tribunal's order setting aside the auction. The Court expressly declined to consider or express any opinion on entitlement to or handling of the auction proceeds within these proceedings, stating that parties were free to take steps regarding the deposited amount in accordance with law.
Conclusion: No determination was made on distribution/entitlement to the auction proceeds; the Court left that question open for appropriate proceedings, while restoring the auction by setting aside the impugned interference.
Jurisdiction to set aside auction conducted prior to initiation of CIRP - binding effect of auction conducted under a court order prior to commencement of insolvency proceedings - application of moratorium under Section 14 of the IBC - powers of the Adjudicating Authority vis-a-vis orders of criminal courts and decisions in the realm of public law - public law decisions not amenable to supervisory jurisdiction of NCLT/NCLAT
Jurisdiction to set aside auction conducted prior to initiation of CIRP - application of moratorium under Section 14 of the IBC - binding effect of auction conducted under a court order prior to commencement of insolvency proceedings - powers of the Adjudicating Authority vis-a-vis orders of criminal courts and decisions in the realm of public law - Whether the Adjudicating Authority had jurisdiction to set aside the auction of the yacht which was conducted pursuant to an order of the Additional Chief Metropolitan Magistrate on 25.11.2019 and carried out on 22.03.2021 prior to initiation of CIRP on 30.04.2021 - HELD THAT: - The auction impugned in the Adjudicating Authority's order was conducted pursuant to a court order of the Additional Chief Metropolitan Magistrate dated 25.11.2019 and took place on 22.03.2021, i.e., before the commencement of the CIRP on 30.04.2021. The Adjudicating Authority set aside that auction relying on the protection of the moratorium under Section 14 of the IBC and authorities addressing post-moratorium protection. The Appellate Tribunal found that the reasoning in the impugned order misapplied Section 14 because the auction was completed prior to the imposition of the moratorium and was conducted under express judicial permission in criminal proceedings. Further, the Tribunal relied on the principle that decisions taken by courts or statutory authorities in the realm of public law fall outside the supervisory jurisdiction granted to NCLT/NCLAT under the IBC, as explained in the quoted portions of Kalyani Transco. Applying these principles, the Tribunal concluded that the Adjudicating Authority lacked jurisdiction to set aside an auction lawfully conducted under a prior court order before the CIRP commenced. The Appellate Tribunal therefore held that the impugned order could not be sustained. The court expressly declined to adjudicate on entitlement to or distribution of the sale proceeds and left the parties free to take appropriate steps in accordance with law. [Paras 11, 12, 16]
The Adjudicating Authority had no jurisdiction to set aside the auction conducted prior to initiation of CIRP; the impugned order setting aside the auction is set aside and the appeals are allowed, with no expression on the distribution of sale proceeds.
Final Conclusion: The appeals are allowed. The NCLT's order setting aside the auction of the yacht (conducted prior to initiation of CIRP under a criminal court order) is quashed for lack of jurisdiction; parties remain free to pursue rights regarding the sale proceeds in accordance with law.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether non-payment of wages and employment benefits claimed by an employee can constitute an "operational debt" for the purpose of initiating proceedings under Section 9 of the IBC.
(ii) Whether, on the facts placed on record, there existed a pre-existing dispute between employer and employee, such that the Section 9 application was not maintainable and could not be admitted.
(iii) Whether the employer's defence disputing the salary claim and asserting misconduct, misappropriation, and resulting loss was a "moonshine" defence, or a genuine dispute barring admission under Section 9.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Wages/benefits as "operational debt"
Legal framework (as discussed by the Court): The Court considered the scope of "operational debt" and noted that it includes any debt relating to employment.
Interpretation and reasoning: The Court accepted the substance of the appellant's contention that unpaid wages and employment-related dues fall within "operational debt."
Conclusion: Non-payment of wages/employment benefits can constitute an operational debt; however, this did not lead to admission because the case turned on the existence of a pre-existing dispute.
Issue (ii): Existence and effect of pre-existing dispute barring Section 9 admission
Legal framework (as applied by the Court): The Court applied the principle that where a notice of dispute exists within the meaning of Section 9, the adjudicating authority cannot proceed to admit the application.
Interpretation and reasoning: The Court relied on the record showing that the employee issued a legal notice seeking salary payment, which was replied to by the employer denying liability and alleging fraudulent transactions and financial loss attributable to the employee. The employer continued to dispute the claim in its response to the demand notice, asserting that no amounts were outstanding, that salary up to a particular period had been paid, and that further sums were not payable due to suspension and alleged misconduct. The Court held that these materials demonstrated a dispute existing much prior to the issuance of the demand notice and continuing thereafter.
Conclusion: A pre-existing dispute between employer and employee was established on the record; therefore, the Section 9 application could not be admitted, and rejection was warranted.
Issue (iii): Whether the employer's defence was "moonshine" and the limits of Section 9 adjudication
Legal framework (as articulated by the Court): In Section 9 proceedings, the Court is not to enter into or record findings on contested allegations; it is only to see whether the defence is a moonshine defence or not. Disputed questions between employer and employee cannot be determined in Section 9 proceedings.
Interpretation and reasoning: The Court examined the employer's reply disputing the salary claim and asserting loss and damages allegedly caused by the employee, including assertions of ongoing investigation and other grounds to deny payment. The Court declined to treat these assertions as sham at the threshold, holding that the defence did not appear to be moonshine. It further held that whether the allegations were substantiated was not to be decided within Section 9, and the appropriate remedies for adjudication of such disputes lay elsewhere.
Conclusion: The defence was not moonshine and constituted a genuine dispute; consequently, the Section 9 application was correctly dismissed, and the dismissal was upheld.
Rejection of Section 9 application - non-payment of wages and benefits can be termed as operational debt or not - moonshine dispute - HELD THAT:- There is a pre-existing dispute between the employer and the employee and the said dispute is going on between both employer and employee much prior to issue of demand notice and when notice of dispute was issued after demand notice, the said is notice of dispute within meaning of Section 9 of the IBC and when notice of dispute has been given, adjudicating authority could not proceed to admit.
The submission of the counsel for the appellant that defence raised appears clearly is a moonshine defence does not commend here. It is already noticed that the reply to demand notice where the claim is disputed and employer claim loss and damages. The issues between the employer and employee cannot be determined under Section 9 proceeding. Appellant if advised may take appropriate remedy in accordance with law.
The only thing has to be looked into as to whether defence is moonshine defence or not. In the facts of the present case, there are no defence to be moonshine. The order dismissing Section 9 application is upheld for the reasons given in this judgment.
Appeal dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether, on the facts found, continued pre-trial incarceration under the money-laundering law, despite statutory bail restrictions, violated the accused's right to speedy trial under Article 21 so as to justify grant of regular bail.
(ii) Whether the prosecution's objections to bail-alleged witness-influencing and alleged dissipation of attached properties-were substantiated so as to negate bail.
(iii) Whether delay in progress of the case was attributable to the prosecution or the accused, and its bearing on the bail decision.
2. ISSUE-WISE DETAILED ANALYSIS
A. Prolonged pre-trial incarceration vis-à-vis Article 21 and statutory bail restrictions
Legal framework (as discussed by the Court): The Court examined bail in the context of Section 45 of the money-laundering law and the constitutional guarantee of personal liberty and speedy trial under Article 21. It treated the maximum prescribed punishment (seven years) as a relevant indicator while assessing "gravity" for bail. The Court also considered that economic offences cannot be treated as a homogeneous class for a blanket denial of bail, and that statutory restrictions cannot be allowed to produce indefinite pre-trial detention contrary to Article 21.
Interpretation and reasoning: The Court held that the right to speedy trial is not eclipsed by the nature of the offence, and that prolonged incarceration without commencement or reasonable progress of trial risks converting pre-trial detention into punishment. Applying this to the case, the Court relied on the following decisive factual findings: the accused had been in custody for about 16 months and 20 days; the maximum sentence was seven years; the evidence was primarily documentary and already in the prosecution's custody; investigation as regards the accused stood concluded (as recorded by the Special Court); cognizance had not yet been taken and the matter remained at scrutiny-of-documents stage; and there were about 210 witnesses, making early commencement of trial unlikely. The Court found no material showing effective steps leading to early trial progression despite the prosecution's stated request for day-to-day hearing.
Conclusion: The Court concluded that continued incarceration in these circumstances violated Article 21 and warranted grant of regular bail, notwithstanding the statutory bail rigour, since indefinite pre-trial detention could not be justified where trial was not likely to commence soon and the prosecution already possessed the documentary material.
B. Whether allegations of witness-influencing justified denial of bail
Interpretation and reasoning: The Court tested the credibility of the allegation that the accused instructed a person (later cited as a prosecution witness) not to join the investigation. It found the allegation did not "inspire confidence" because the accused had been in custody since 09.07.2024, whereas the concerned person was formally arrayed as a witness only much later. On this timeline, the Court found the accusation to be "wholly incredulous".
Conclusion: The Court rejected witness-influencing as a substantiated ground to deny bail on the facts before it.
C. Whether alleged dissipation of proceeds of crime/immovable properties was established against the accused
Interpretation and reasoning: The Court examined the allegation that immovable properties were disposed of after attachment. It found that the disposals related to a company with which no material link to the accused had been established at that stage, and there was no evidence showing the accused was a signatory to any sale document. Given these factual gaps, the Court held the allegation of dissipation by the accused was untenable at that stage.
Conclusion: The Court held that alleged dissipation of properties was not established against the accused so as to justify continued custody or denial of bail.
D. Attribution of delay and its impact on bail
Interpretation and reasoning: The Court examined the record and found that after the prosecution complaint was filed, proceedings before the trial court were stayed for about eight months due to the prosecution's challenge to the trial court's notice to proposed accused persons; the stay ended only when the challenge was withdrawn. The Court therefore held the delay was attributable to the prosecution and not to the accused. This conclusion reinforced the finding of Article 21 violation due to lack of trial progress while the accused remained incarcerated.
Conclusion: The Court held that the prosecution-caused delay materially supported grant of bail.
Result and operative directions (material to decision): The Court set aside the refusal of bail and directed release on regular bail on terms to be fixed by the trial court, with additional conditions requiring the accused to provide a contact phone number, surrender passport, and not leave India without permission.
Money Laundering - seeking grant of regular bail - allegation of appellant being the ultimate beneficiary of the fraud which was a wellorchestrated scheme - diversion and siphoning of public funds through layered entities, resulting in substantial wrongful loss to Public Sector Banks - HELD THAT:- The court while dealing with the prayer for grant of bail has to consider gravity of offence, which has to be ascertained in the facts and circumstances of each case. One of the circumstances to consider the gravity of offences is also the term of sentence i.e., prescribed for the offence, the accused is alleged to have committed. The court has also to take into account the object of the special Act, the gravity of offence and the attending circumstances along with period of sentence. All economic offences cannot be classified into one group as it may involve various activities and may differ from one case to another. Therefore, it is not advisable on the part of the Court to categorize all the offences into one group and deny bail on that basis.
It is well settled that if the State or any prosecuting agency including, the court, concerned has no wherewithal to provide or protect the fundamental right of an accused, to have a speedy trial as enshrined under Article 21 of the Constitution, then the State or any other prosecuting agency should not oppose the plea for bail on the ground that the crime committed is serious. Article 21 of the Constitution applies irrespective of the nature of the crime.
The record reveals that the prosecution complaint was filed on 06.09.2024. The Special Judge issued notice on 07.09.2024 to all proposed accused persons under the proviso to Section 223 of BNSS. The respondent challenged the said order before the High Court, resulting in eight months stay of proceedings, before the Special Judge, which was lifted on 23.05.2025 only upon withdrawal of the petition. The delay in the trial is thus attributable only to the respondent, not the appellant - The appellant has been in custody since 09.07.2024. The disposal of immovable properties occurred on 24.12.2024 and 17.02.2025 and pertains to M/s Marichika Properties, with which no material link to the appellant has been established. There is no evidence that the appellant was signatory to any sale document. The allegation of dissipation of proceeds of crime by him is, therefore, untenable at this stage.
The impugned judgment and order dated 19.08.2025 is quashed and set aside - Appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether, in the circumstances of a successful corporate insolvency resolution, the attached properties (or their substituted deposit) should be restored to the Successful Resolution Applicant under Section 8(8) of the PMLA, as a restitution measure.
(ii) Whether, having regard to Section 32A of the IBC, the Corporate Debtor must be deleted from the pending prosecution complaint, while permitting continuation of prosecution and confiscation proceedings against erstwhile directors/persons in control/conspirators/abettors.
(iii) What conditions and consequences should govern the grant of Section 32A benefit to the Successful Resolution Applicant, including the Directorate of Enforcement's liberty if later facts undermine the foundation for such benefit.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Restoration of attached properties/substituted deposit to the Successful Resolution Applicant under Section 8(8) PMLA
Legal framework (as applied by the Court): The Court proceeded on the parties' common position that Section 8(8) PMLA is intended to ultimately restore attached properties to bona fide claimants with a legitimate interest, and expressly treated the restitution direction as one made under the second proviso to Section 8(8).
Interpretation and reasoning: The Court found the present context to be similar to prior instances where the Directorate of Enforcement consented to restoration to a successful resolution applicant. Here, the Successful Resolution Applicant had stepped into the shoes of the Corporate Debtor pursuant to a concluded resolution. Given the parties' consent and the stated object of Section 8(8), the Court accepted a consent-based resolution without adjudicating merits.
Conclusions: The Court confirmed the setting aside of the Provisional Attachment Order and directed restoration of the attached properties to the Successful Resolution Applicant. Since the properties stood substituted by a deposit under an earlier direction, the Court ordered release of the deposited amounts with accrued interest (if any) within two weeks, and declared that the Directorate of Enforcement would have no right or lien over those properties or other assets forming part of the approved resolution plan. The Court expressly kept all questions of law and merits open and directed that the order should not be treated as precedent.
Issue (ii): Deletion of the Corporate Debtor from the prosecution complaint under Section 32A IBC, while continuing proceedings against individuals
Legal framework (as applied by the Court): The Court expressly invoked Section 32A of the IBC to determine the consequence of successful resolution on the Corporate Debtor's prosecution status.
Interpretation and reasoning: On the footing of Section 32A and successful resolution, the Court held that the Corporate Debtor should not remain in the array of accused in the pending prosecution complaint. At the same time, it clarified that this does not impede continuation of proceedings concerning culpable individuals associated with the prior management/control and their properties/entitlements.
Conclusions: The Court directed deletion of the Corporate Debtor from the prosecution complaint, while allowing continued prosecution of erstwhile directors and/or persons in control or conspirators or abettors, and continuation of confiscation in respect of their attached/restrained properties/entitlements, if any. It further reiterated that the ongoing investigation/proceedings against such individuals would continue and the present order would have no bearing on them.
Issue (iii): Conditions attached to Section 32A benefit and the Directorate of Enforcement's liberty upon erosion of foundational facts
Legal framework (as applied by the Court): The Court conditioned the Section 32A protection on the Successful Resolution Applicant not being connected with erstwhile directors and not being a beneficiary of proceeds of crime derived from the alleged scheduled offence.
Interpretation and reasoning: The Court treated these conditions as foundational to granting relief. It contemplated the possibility that ongoing investigation could reveal contrary material, in which event the basis for protection would be undermined.
Conclusions: The Court held that if the stated foundation is eroded during investigation, the Directorate of Enforcement would be at liberty to take appropriate steps in accordance with law, including questioning the resolution plan. Additionally, any challenge by the Directorate of Enforcement to the approval of the resolution plan was closed on the terms recorded, subject to the above conditional liberty.
Money Laundering - seeking to restore any attached properties to bona fide claimants who have a legitimate interest in the property attached - HELD THAT:- In view of Section 32A of the IBC, the name of the Corporate Debtor shall be deleted from the array of accused while continuing with the prosecution of the erstwhile directors and/or persons in control or conspirators or abettors and confiscation of their attached/restrained properties/entitlements, if any.
Needless to state, the benefit of Section 32A of IBC is subject to the condition that the SRA is neither connected with the erstwhile Directors of the Corporate Debtor nor is the SRA a beneficiary of proceeds of crime derived from the alleged scheduled offence. If this foundation is eroded in the ongoing investigation, the Directorate of Enforcement shall be at liberty to take appropriate steps in accordance with law, including questioning the resolution plan.
Thus, any challenge of the Directorate of Enforcement to the approval of the Resolution Plan by the National Company Law Tribunal, Mumbai, shall stand closed, and accordingly the Directorate of Enforcement shall have no right or lien either on the properties of the Corporate Debtor attached under Provisional Attachment Order No. 18/2024 dated 25.04.2024 in ECIR/MBZO-I/38/2020 (as modified through the Original Complaint dated 22.05.2024), or on any other assets of the Corporate Debtor that form part of the resolution plan approved by NCLT. The Resolution Plan already stands substantially implemented in accordance with law. The amounts deposited by the Respondent No. 2 with the Directorate of Enforcement, in terms of this Court's directions dated 02.07.2025, shall be released to the Respondent No. 2 along-with accrued interest, if any, within a period of two weeks from the date of this order.
Appeal disposed off.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the hospital's arrangements with visiting specialist doctors, including providing infrastructure and administrative facilities and retaining a portion of patient collections, amount to taxable "Support Services of Business or Commerce/Business Support Services", or whether the activity remains provision of "Health Care Services" not liable to service tax.
(ii) Whether the extended period of limitation could validly be invoked for raising the demand, in a dispute turning on interpretation and having been subject to divergent views across the country.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Classification of the activity as "Business Support Services" versus "Health Care Services"
Legal framework (as discussed by the Tribunal): The dispute was examined in the context of liability alleged under "Business Support Services/Support Services of Business or Commerce" under the Finance Act, 1994, as invoked by the department to tax infrastructure/administrative support allegedly provided to doctors.
Interpretation and reasoning: The Tribunal treated the core question as whether, on the true nature of the agreements and conduct, the hospital was providing support services to doctors as "business", or whether the hospital was itself providing healthcare by availing doctors' professional services. The Tribunal relied on its consistent view in earlier decisions, including in the appellant's own case, that hospitals in such revenue-sharing/contractual doctor arrangements are engaged in delivering healthcare services to patients. The essential features emphasised were that the hospital manages patient flow and treatment processes, allocates doctors, maintains and retains patient records, raises treatment bills in its own name, and collects payments itself. The visiting doctors are engaged to work for the hospital's healthcare delivery and are remunerated based on work done, indicating that doctors are service providers to the hospital for enabling the hospital's healthcare service, not recipients of a business-support service from the hospital. On this understanding, the retained amount from patient collections was treated as part of consideration for healthcare delivered through the hospital's system and not consideration for a separate taxable support service to doctors.
Conclusions: The Tribunal conclusively held that the hospital's activity does not fall under "Business Support Services/Support Services of Business or Commerce" and instead falls within "Health Care Services" which are exempt/not taxable during the relevant periods. Accordingly, the service tax demand on this classification basis was unsustainable.
Issue (ii): Validity of invoking the extended period of limitation
Legal framework (as discussed by the Tribunal): The demand had been raised by invoking the extended period under the Finance Act, 1994, on allegations of suppression and non-reflection in returns.
Interpretation and reasoning: The Tribunal held that the dispute was essentially one of interpretation of statutory provisions and classification, and that the issue was pan-India with decisions in favour of assessees on the same question. In such circumstances, the Tribunal concluded that extended limitation could not be invoked merely because the department took a different interpretative view of taxability.
Conclusions: The Tribunal held that invocation of the extended period was not permissible on the facts, since the matter involved interpretative doubt rather than a basis warranting extended limitation.
Final determination and relief: On the above findings, the Tribunal set aside the impugned order confirming demand, interest, and penalties, and allowed the appeal with consequential relief.
Classification of services - business support services or health care services - hospital's arrangements with visiting specialist doctors, including providing infrastructure and administrative facilities and retaining a portion of patient collections - invocation of extended period of limitation - HELD THAT:- The Tribunal in various cases has decided the issue in favour of the assessees/appellants wherein it has been consistently held that the services rendered by the hospitals do not fall under the category of ‘Business Support Services’ rather the said services fall under the category of ‘Health Care Services’ which are exempt from the payment of service tax.
Invocation of extended period of limitation - HELD THAT:- The issue involved in the present case was relating to interpretation of statutory provision, therefore, the extended period cannot be invoked as the issue was pan India and the Tribunal/Courts in various decisions have held that the services provided by the Hospitals are not ‘Business Support Services’ rather these services are ‘Health Care Services’ which are not subject to service tax.
The impugned order is not sustainable in law and is liable to be set aside - Appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the arrangements under which specialised diagnostic and allied service providers operate within a hospital on a revenue-sharing basis amount to the hospital providing taxable "Support Services of Business or Commerce" to such providers.
(ii) Whether the demand could validly invoke the extended period of limitation where the dispute turns on interpretation and the assessee acted under a bona fide belief regarding non-taxability/exemption of healthcare-related activities.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Taxability under "Support Services of Business or Commerce" of revenue-sharing arrangements with specialised service providers operating within hospital premises
Legal framework (as discussed by the Tribunal): The Tribunal proceeded on the premise that the demand was raised by classifying the hospital's activity as "Support Services of Business or Commerce" under the Finance Act, 1994 (as invoked in the impugned demand), and examined whether the factual arrangement satisfies that taxable description.
Interpretation and reasoning: The Tribunal treated the controlling question as the real nature of the contractual relationship and the flow of consideration. It accepted that the agreements were service simpliciter on principal-to-principal basis and essentially revenue-sharing from amounts collected from patients for diagnostic tests/procedures. It found that the Department's assumption-i.e., that the hospital rendered infrastructure/administrative support to the service providers for consideration-did not align with the contractual structure as examined in comparable, identical arrangements already decided by the Tribunal. The Tribunal relied on its earlier decisions holding that, in such principal-to-principal revenue-sharing models, the retained portion by the hospital is not "consideration" for a separate support service to the providers, and the arrangement is integrally connected with provision of healthcare to patients. The Tribunal also applied the principle recognised in the departmental circular cited by the appellant that principal-to-principal revenue-sharing transactions are not to be treated as provision of service between the contracting parties.
Conclusions: The Tribunal held that revenue-sharing arrangements between the hospital and specialised providers operating from within the hospital premises are not liable to service tax under "Support Services of Business or Commerce". Consequently, the service tax demand confirmed on that classification was unsustainable.
Issue (ii): Validity of invoking the extended period of limitation
Legal framework (as discussed by the Tribunal): The Tribunal examined whether the ingredients for invoking the extended limitation under the service tax law were satisfied, particularly in the context of alleged suppression/intent to evade versus disputes involving interpretation.
Interpretation and reasoning: The Tribunal found the controversy to be interpretational and noted that the issue had been considered across jurisdictions and decided in favour of assessees in similar matters. It accepted that the assessee acted under a bona fide belief that the activities were part of non-taxable/exempt healthcare-related services and that, in such circumstances, extended limitation could not be applied merely because the Department took a different interpretive view.
Conclusions: The Tribunal held that the extended period was not invocable on the facts as the dispute was one of interpretation and the assessee's conduct reflected bona fide belief rather than suppression with intent to evade.
Resultant relief (consequential to the above findings): Since the demand itself was held unsustainable, the Tribunal set aside the impugned order confirming tax, and the associated interest and penalties imposed thereunder did not survive.
Levy of service tax - Support Services of Business or Commerce - service simpliciter agreement on principal-to-principal basis - extended period of limitation - HELD THAT:- The issue involved in the present appeals is no longer res integra and has been settled by the Tribunal in favour of the assessees/appellants in various cases - In this regard, reference made to decision of the Tribunal in the case of OP Jindal Institute of Cancer & Research [2024 (10) TMI 824 - CESTAT CHANDIGARH], wherein this Tribunal has considered the identical issue along with the agreements entered into by the Appellant with the DSPs and has held that revenue sharing arrangements between the Appellant and the DSPs are not subject to service tax.
Extended period of limitation - HELD THAT:- The issue involved in the present case was relating to interpretation of statutory provision, therefore, the extended period cannot be invoked as the issue was pan India and the Tribunal/Courts in various decisions have held that revenue sharing arrangements between the Appellant and the DSPs are not subject to service tax; moreover, the appellant was under a bona fide belief that Healthcare Services are not liable to service tax since the issue involved is that of interpretation; hence, extended period of limitation cannot be invoked.
The impugned order is not sustainable in law and is liable to be set aside - Appeal allowed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the Revenue could lawfully club the turnover/clearances of other vendor firms with the appellant's clearances to deny SSI benefit and to quantify duty demand, when those firms were not issued notice and mutuality of interest/flow-back was not evidenced.
(ii) Whether the goods cleared were "prefabricated buildings" classifiable under the tariff heading for prefabricated buildings, or only iron/steel structures and parts of structures classifiable under the tariff heading for structures, considering that multiple bought-out items were supplied separately and assembly was undertaken by the buyer.
(iii) Whether seizure and confiscation of goods lying in the factory (including inputs and semi-finished goods) was sustainable when the foundational duty/classification and SSI-clubbing allegations failed.
(iv) Whether the extended period of limitation could be invoked on allegations of suppression/intent to evade, in light of recorded transactions, statutory filings, and the nature of the dispute.
2. ISSUE-WISE DETAILED ANALYSIS
(i) Clubbing of turnover/clearances of other firms for SSI denial and duty quantification
Legal framework (as discussed): The Court treated "clubbing" as requiring proof of a principal-dummy arrangement, including mutuality of interest and flow-back of consideration, and held that adding another entity's turnover without putting it to notice offends principles of natural justice.
Interpretation and reasoning: The demand computation was founded on adding the turnover of "firms of relatives" directly to the appellant's turnover. The record showed those firms had their own statutory registrations and were assessed independently; their statements did not accept that their turnover belonged to the appellant. The Revenue neither identified any flow-back/mutuality nor explained how the appellant was the sole beneficiary of contracts executed by those firms. Crucially, the vendor firms were not made co-noticees, depriving them of an opportunity to answer the allegation that they were dummy/shell entities.
Conclusions: Clubbing and the consequential SSI denial and demand quantification were held illegal; the proceedings were vitiated on this ground alone, warranting setting aside of the confirmed demand.
(ii) Classification: structures versus prefabricated buildings
Legal framework (as discussed): The Court contrasted the tariff heading for prefabricated buildings (complete buildings assembled/unassembled, including built-in equipment normally supplied therewith) with the tariff heading for structures and parts of structures (excluding prefabricated buildings).
Interpretation and reasoning: The Court held that mere fabrication and clearance of structural elements falls under the structures heading, whereas classification as prefabricated buildings required evidence that what was cleared (even in CKD/SKD) constituted a complete building or an incomplete building having the essential character of a prefabricated building. On facts, Part B items comprised general market goods (e.g., fasteners, tiles, furniture, wiring items, sanitary and electrical items) capable of being procured from any vendor and supplied in piecemeal without direct linkage to Part A structures. The Court found no evidence that Part B items were design-specific or essential such that Part A plus Part B, by themselves, necessarily resulted in a prefabricated building; further, assembly at the buyer's site was not undertaken by the appellant.
Conclusions: The Court rejected the Revenue's CKD/SKD "prefabricated building" theory and held the clearances to be prefabricated iron/steel structures classifiable under the structures heading, not under the heading for prefabricated buildings.
(iii) Seizure and confiscation of goods within the factory
Legal framework (as discussed): The Court proceeded on the premise that confiscation must rest on a sustainable allegation of contravention; it also accepted the contention that inputs and semi-finished goods are not liable to be treated as finished excisable clearances merely on presumption of future removal.
Interpretation and reasoning: Since the Court found (a) the classification adopted by Revenue to be incorrect and (b) the SSI-clubbing-based demand foundation to be invalid, the premise that the goods were "likely to be cleared without payment of duty" collapsed. The Court also noted that the goods were within the factory premises, and the seizure included VAT-paid inputs and semi-finished goods, not finished goods removed without documents.
Conclusions: Confiscation and redemption fine were held not sustainable in law and were set aside.
(iv) Extended period of limitation and suppression
Legal framework (as discussed): The Court applied the principle that invoking the extended period requires something positive beyond mere failure/inaction-namely fraud, wilful misstatement, suppression, or contravention with intent to evade; a bona fide belief amidst interpretational doubt does not justify the extended period.
Interpretation and reasoning: The appellant's activities were longstanding; transactions were recorded in books and supported by statutory filings, VAT-paid invoices, and banking channels. The demand itself was quantified from those records. The Court found no proper evidence of deliberate suppression or intent to evade; the Revenue also failed to substantiate the dummy-unit theory through proof of mutuality/flow-back.
Conclusions: The extended period was held not invocable, and the confirmed demand for the extended period was set aside as time-barred.
Classification of goods as prefabricated buildings v. prefabricated structures - clubbing of turnover of related/relative firms for denial of SSI exemption - requirement of proof of mutuality of interest and notice to conoticees - seizure and confiscation of inputs / semifinished goods - invocation of extended period of limitation for suppression or fraud - bona fide belief / doubt on excisability and effect on extended period - inclusion of boughtout items in assessable value / CKD valuation
Clubbing of turnover of related/relative firms for denial of SSI exemption - requirement of proof of mutuality of interest and notice to conoticees - Addition of turnover of other firms to the appellant's turnover and consequent denial of SSI exemption - HELD THAT: - The Tribunal held that Revenue quantified demand by directly adding turnovers of several independent proprietary firms (described in SCN as 'firms of relatives') to the appellant's clearances without issuing show cause notices to those firms or otherwise proving mutuality of business interest or flow back of consideration. The records and statutory registrations (PAN, VAT, bank accounts) and recorded statements of those firms showed independent assessment and operations. Revenue failed to demonstrate that the alleged related firms were dummies or that their finances/management were controlled by the appellant; no evidence of mutuality or flow back was produced. In the absence of notice to those firms and proof of principaldummy relationship, clubbing their turnovers was held to be arbitrary and violative of principles of natural justice and established precedents, rendering the quantification and denial of SSI benefit unsustainable. [Paras 11, 12, 14, 17, 21]
Clubbing of the turnover of other firms with the appellant's turnover is illegal; quantified demand based on such addition and denial of SSI benefit set aside.
Classification of goods as prefabricated buildings v. prefabricated structures - inclusion of boughtout items in assessable value / CKD valuation - Whether the goods cleared by the appellant are classifiable under CET 94.06 as prefabricated buildings (CKD/SKD) or under CET 73.08 as structures/parts of structures - HELD THAT: - On construction of the tariff headings and examination of documents (supply orders, appendices and invoices) the Tribunal found that the appellant manufactured limited iron/steel structural parts (Part A) and procured general items (Part B) from thirdparty vendors. The Part B items (nuts, bolts, tiles, fans, wiring, furniture etc.) are ordinary market items, not shown to be specially designed or indispensable to convert Part A into a complete building. Evidence including Chartered Engineer and Chartered Accountant certificates, and the nature and mode of supply (Part B supplied piecemeal, Army assembling at site) established that the appellant's activity produced prefabricated structures/parts falling under CET 73.08. Revenue did not prove that Part A and Part B together necessarily constituted prefabricated buildings under CET 94.06 or that the items were proprietary or integral parts such that they must be classified with the building. [Paras 22, 23, 30, 31, 33]
Goods cleared by the appellant are structures/parts of structures classifiable under CET 73.08, not prefabricated buildings under CET 94.06; Revenue's classification rejected.
Seizure and confiscation of inputs / semifinished goods - seizure of goods within factory premises and presumptions of subsequent clearance - Legality of seizure and confiscation of goods found in factory premises - HELD THAT: - Having held that the goods are not excisable as prefabricated buildings and that turnover clubbing was unsustainable, the Tribunal concluded that the foundational premise for seizure - that the goods were likely to be cleared without payment of duty - collapsed. The goods were inputs and semifinished items within factory premises; Revenue produced no proper basis for presuming future clearance without duty. In these circumstances prior authorities were found to support that seizure and confiscation of such goods is not legally sustainable. [Paras 34, 35]
Seizure and confiscation (and redemption fine) set aside as legally unsustainable.
Invocation of extended period of limitation for suppression or fraud - bona fide belief / doubt on excisability and effect on extended period - Validity of demands made for the extended period (timebar) under allegation of suppression with intent to evade - HELD THAT: - The Tribunal applied settled Supreme Court principles that extended limitation is invocable only upon proof of positive acts of fraud, collusion, wilful misstatement or suppression with intent to evade. Given the appellant's long standing registration with VAT and Income Tax authorities, maintenance of books, VATpaid invoices for purchases from the socalled related firms and reliance on judicial precedents supporting bona fide belief in nonexcisability, the Tribunal found no evidence of deliberate suppression or intent to evade duty. Revenue failed to prove mens rea or positive suppression; consequently invocation of the extended period was not justified and demands for the extended period were timebarred. [Paras 36, 37, 38]
Confirmed demand for the extended period set aside on the ground of timebar; no suppression proved.
Final Conclusion: The appeal is allowed: (a) clubbing of other firms' turnover with the appellant's turnover and consequent denial of SSI benefit is set aside; (b) goods are held to be structures/parts classifiable under CET 73.08 (not prefabricated buildings under CET 94.06), and Revenue's classification is rejected; (c) seizure, confiscation and redemption fine are set aside; and (d) demands raised for the extended period are set aside as timebarred. The appellant is entitled to consequential relief as per law.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the activities of assembling bought-out coupling components and undertaking ancillary operations (painting, fitting, fixing nuts and bolts, making bore and key way, etc.) to supply couplings as per customer requirements amounted to "manufacture" for levy of central excise duty.
(ii) Whether mere labelling of such goods constituted "manufacture" under the statutory deeming provision applicable to Third Schedule goods.
(iii) Whether invocation of the extended period of limitation was sustainable for demands arising from audit objections, when the Department was already aware of the assessee's activities from the earlier audit and there was no suppression.
(iv) Whether penalty was imposable when suppression with intent to evade was not established, and how far admitted/voluntarily-paid duty liabilities survived, including treatment of refund and payment within the normal period with interest.
2. ISSUE-WISE DETAILED ANALYSIS
A. "Manufacture" by assembling and completing couplings
Legal framework (as discussed by the Tribunal): The Tribunal examined "manufacture" under Section 2(f) of the Central Excise Act, 1944, and applied Section 2(f)(ii) read with Section Note 6 of Section XVI (Chapter 84/85) of the Central Excise Tariff Act, 1985, which treats conversion of an incomplete/unfinished article having the essential character of the finished article into a complete/finished article as amounting to "manufacture".
Interpretation and reasoning: The Tribunal found that the goods concerned fell under Chapter 84 and that the assessee undertook processes including assembly, painting, fitting, fixing bolts and nuts, and making bore and key ways (including through job workers) to make the couplings complete and marketable as per customer requirements. Applying the tariff Section Note, the Tribunal held these processes completed an unfinished/incomplete article into a finished article and therefore constituted "manufacture".
Conclusion: The Tribunal conclusively held that the processes of assembling and other finishing operations undertaken to complete couplings falling under Chapter 84 amounted to "manufacture", making the goods liable to central excise duty on merits.
B. Whether labelling amounted to "manufacture" in this case
Legal framework (as discussed by the Tribunal): The Tribunal considered Section 2(f)(iii), which deems certain processes (including labelling/re-labelling) to be "manufacture" only in relation to goods specified in the Third Schedule.
Interpretation and reasoning: The Tribunal found that the relevant goods (classified under the stated tariff sub-heading) were not covered by the Third Schedule. As a result, the deeming fiction for labelling/re-labelling did not apply to these goods.
Conclusion: The Tribunal held that labelling undertaken on these goods did not amount to "manufacture" under Section 2(f)(iii) because the goods were not Third Schedule goods.
C. Limitation and sustainability of extended period for the demanded duty
Legal framework (as applied by the Tribunal): The Tribunal assessed whether the extended period could be invoked, focusing on whether suppression of facts was established and whether the Department had prior knowledge of the relevant activities.
Interpretation and reasoning: The Tribunal found that the issue had been raised by audit in 2006 and that the assessee had responded and even paid part duty then. The Tribunal concluded that the Department was well aware of the assessee's activities from 2006, and that there was no suppression of information by the assessee. On this basis, demands confirmed by invoking the extended period were held unsustainable.
Conclusions: (i) The entire demand confirmed on the basis of the first audit memo (covering the earlier period) was held unsustainable on limitation and was set aside. (ii) For the demand arising from the second audit as well, invocation of the extended period was held unsustainable; however, liability could still survive to the extent it fell within the normal period and to the extent admitted by the assessee, with interest.
D. Effect of admitted/voluntary payments, refund, interest, and penalty
Interpretation and reasoning: The Tribunal noted that certain amounts were voluntarily paid/admitted by the assessee and were expressly not contested. For the amount paid pursuant to the first audit objection and not disputed, the Tribunal held it was not refundable. For the second audit, where the assessee itself worked out and admitted a specific duty liability and had partly paid it, the Tribunal directed payment of the balance of that admitted amount along with interest. For the remaining disputed portion, the Tribunal held that any part falling within the normal limitation period would be payable with interest.
Conclusions: (i) The voluntarily-paid and uncontested duty corresponding to the first audit objection was not eligible for refund. (ii) The assessee was held liable to pay the balance of the admitted duty for the later period with interest after adjusting sums already paid. (iii) Any portion of the remaining balance demand that fell within the normal period was held payable with interest. (iv) Since suppression with intent to evade was not established, no penalty was imposable and the penalty was set aside.
Process amounting to manufacture - activity of assembling the bought out items into a coupling and labelling - time limitation - penalty - HELD THAT:- It is observed that the goods assembled by the appellant in the present case fall under the Sub-Heading no. 84836010, which is not covered under Section 2(f)(iii) of the Central Excise Act, 1944 and accordingly, the process of labelling undertaken by the appellant did not amount to manufacture.
In the present case, it is found that the goods in question fall under Chapter 84. The appellant has undertaken processes such as painting, assembly, fixing of bolts & nuts, making bore & key way, etc. Some of these activities were undertaken by the appellant by engaging ‘job workers’. In terms of the aforementioned Section Note 6, read with Section 2 (f)(ii) of the Central Excise Act, 1944, it is observed that the processes undertaken makes the product complete and marketable as per the requirement of the customers. Therefore, by virtue of Section 2(f)(ii) of the Central Excise Act, 1944 read with Note 6 reproduced above, we hold that the processes of assembling, painting, fitting, fixing bolts nuts, making of bore and key ways etc., undertaken by the appellant to complete the Couplings of various kinds falling under Chapter 84 of the Central Excise Tariff Act, 1985, amounted to ‘manufacture’. Thus, on merits, the appellant is liable to pay central excise duty on the said goods manufactured by them.
Extended period of limitation - suppression of facts or not - HELD THAT:- The appellant have not suppressed any information from the Department. The Department was in fact well aware of the activities undertaken by the appellant from 2006 itself. It is observed that the entire demand raised on the basis of first audit memo was raised and confirmed in the impugned order by invoking extended period limitation. As the appellant has not suppressed any information, it is held that the entire demand confirmed on the basis of the first Audit Memo is not sustainable - the appellant have not suppressed any information from the Department. Accordingly, the demand of central excise duty confirmed in the impugned order, on the basis of second audit objection, by invoking extended period of limitation is not sustainable.
Levy of penalty - HELD THAT:- As there was no suppression of fact with intention to evade the tax established in this case, no penalty is imposable on the appellant. Accordingly, the penalty imposed on the appellant in the impugned order stands set aside.
The processes of assembling, painting, fitting, fixing bolts nuts, making of bore and key ways etc., undertaken by the appellant to complete the Couplings of various kinds falling under Chapter 84 of the Central Excise Tariff Act, 1985, amounts to ‘manufacture’ - the entire demand confirmed on the basis of the first Audit Memo, for the period 2005-06, is not sustainable on the ground of limitation and hence, the same is set aside - penalty imposed on the appellant stands set aside.
Appeal disposed off.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether, under the proviso to Section 142(1)(b) of the Negotiable Instruments Act, a Court can validly take cognisance of a complaint presented beyond the prescribed period before recording satisfaction of "sufficient cause" and condoning the delay.
(ii) Whether subsequent condonation of delay cures the prior act of taking cognisance on a time-barred complaint so as to sustain the proceedings.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Requirement that condonation of delay must precede taking cognisance
Legal framework: The Court examined the proviso to Section 142(1)(b), which permits cognisance after the prescribed period only if the complainant satisfies the Court that there was "sufficient cause" for not filing within time. The Court treated this proviso as controlling the Court's power to take cognisance of a belated complaint.
Interpretation and reasoning: The Court held that the proviso's language makes the power to take cognisance of a belated complaint conditional upon the complainant first satisfying the Court regarding "sufficient cause." This satisfaction, resulting in condonation, must precede the act of taking cognisance. The Court rejected the view that condonation and cognisance are interchangeable steps. It reasoned that limitation-linked delay prevents a proceeding from being treated as a regular matter on the file until delay is condoned, and therefore taking cognisance first is contrary to the proviso's mandate.
Conclusion: Taking cognisance of a belated complaint without first condoning delay is impermissible; the Magistrate erred in taking cognisance before condoning the two-day delay.
Issue (ii): Whether later condonation cures earlier improper cognisance
Legal framework: The Court applied the same proviso to Section 142(1)(b) to assess whether subsequent condonation could validate cognisance taken earlier.
Interpretation and reasoning: The Court disagreed with the approach that the defect is merely curable by later condonation. It held that, because the statutory condition requires prior satisfaction and condonation, subsequent condonation cannot retrospectively legitimise cognisance already taken in breach of that condition. The Court also held that earlier non-challenge to intermediate orders did not matter, since condonation occurred much later and the core illegality concerned cognisance having been taken before delay was condoned.
Conclusion: Subsequent condonation does not cure the illegality of cognisance taken prior to condonation; the High Court's refusal to quash was incorrect, and the complaint was quashed as a consequence.
Dishonour of cheque - cognizance of offence by learned Magistrate without first condoning the delay in the filing of the complaint - sufficient cause for delay or not - HELD THAT:- The power conferred upon the Court to take cognisance of a belated complaint is subject to the complainant first satisfying the Court that he had sufficient cause for not making the complaint within time. The satisfaction in that regard, resulting in condonation of the delay, must therefore precede the act of taking cognizance. Ordinarily, a proceeding instituted with limitation-linked delay before a Court of law does not actually figure as a regular matter on its file until that delay is condoned. For example, Order XLI Rules 3A and 5(3) of the Code of Civil Procedure, 1908, make this position amply clear in the context of belated presentation of civil appeals. Therefore, the approach of the High Court in treating this crucial aspect as a mere interchangeable exercise, i.e., either to first condone the delay or to first take cognisance, is not in keeping with the mandate of the aforestated proviso. We may note that the respondent was herself responsible for this imbroglio as she had made a categorical statement in her complaint that it was filed within time, when it was not.
There are no hesitation in holding that the learned Magistrate erred in taking cognisance of the respondent’s complaint under Section 138 of the NI Act, even before the delay of two days in its presentation was condoned. The order passed by the High Court refusing to quash the same is, thus, set aside.
Appeal allowed.
TaxTMI 