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Issues: Whether proceedings under Section 129 of the Central Goods and Services Tax Act, 2017 could be sustained where the only discrepancy in the e-way bill was a wrong invoice number by one digit and no other defect in the goods or accompanying documents was found.
Analysis: The goods were intercepted in transit and the only discrepancy noticed was that the e-way bill mentioned invoice number 3096 instead of 3063. No discrepancy was found in the quality, quantity, or description of goods. Circular No. 64/38/2018 dated 14.09.2018 specifically states that proceedings under Section 129 may not be initiated where there is an error in one or two digits of the document number mentioned in the e-way bill. Such circulars are binding on the authorities.
Conclusion: The proceedings under Section 129 were unsustainable and the impugned orders were liable to be quashed in favour of the assessee.
Levy of penalty - e-way bill Invoice number was wrongly mentioned as 3096 in place of 3063 - HELD THAT:- The record shows that the goods were in transit when the same were intercepted and discrepancy in e-way bill was pointed out as tax invoice number 3096 was mentioned in place of 3063, however no other discrepancy whatsoever was pointed out with regard to quality, quantity or difference of items as mentioned in the accompanying documents.
On perusal of circular no. 64/38/2018 - dated 14.9.2018, it shows that if there is any error in one or two digits, the proceedings under Section 129 of the Act should not be initiated.
Conclusion - If there is any error in one or two digits, the proceedings under Section 129 of the Act should not be initiated.
The entire proceedings itself are bad and not sustainable in the eyes of law - Petition allowed.
Issues: Whether the appellate order dismissing the appeal for alleged non-deposit of the mandatory pre-deposit under section 107 of the Central Goods and Services Tax Act, 2017, could be sustained when the petitioner's deposit through the electronic credit ledger was not put in issue before the order was passed.
Analysis: The appeal had been dismissed on the ground that the mandatory pre-deposit under section 107 was not made. The record showed that the petitioner was not confronted with the objection that the amount deposited through the electronic credit ledger would not satisfy the statutory requirement. In these circumstances, the appellate authority was required to afford an opportunity to meet that objection before deciding the appeal on merits.
Conclusion: The dismissal order could not be sustained and was quashed. The matter was remanded to the Commissioner (Appeals) for fresh decision after hearing both sides on whether deposit through the electronic credit ledger amounts to valid pre-deposit under section 107 of the Central Goods and Services Tax Act, 2017.
Validity of pre-deposit under Section 107 of the GST Act - electronic credit ledger as a mode of pre-deposit - quashing of order and remand for fresh decision
Quashing of order and remand for fresh decision - The impugned order dated 28.10.2024 dismissing the appeal for non-deposit under Section 107 of the GST Act was set aside and the matter remanded to the Commissioner (Appeals) for fresh decision. - HELD THAT: - The Court noted that objection as to non-deposit (and the contention that deposit made through the electronic credit ledger was not a valid pre-deposit) was not raised at the time of admission or hearing in such a manner as to afford the petitioner an opportunity to meet it. By consent of the parties, the order dismissing the appeal on the ground of non-deposit was quashed. The matter is remitted to the Commissioner (Appeals) to decide the appeal afresh after hearing both parties on the question of validity of the deposit and any authorities relied upon. [Paras 5]
Order dated 28.10.2024 quashed and appeal remitted to the Commissioner (Appeals) for fresh adjudication.
Validity of pre-deposit under Section 107 of the GST Act - electronic credit ledger as a mode of pre-deposit - Whether a deposit made through the electronic credit ledger qualifies as the pre-deposit required under Section 107 of the GST Act was remitted for fresh consideration. - HELD THAT: - The Court did not decide the legal question on the merits. Instead, it directed that the Commissioner (Appeals) shall permit both parties to argue whether a deposit made through the electronic credit ledger constitutes a valid pre-deposit under the statutory prescription, and shall decide the point afresh after considering the parties' submissions and any judgments they rely upon. [Paras 5]
The validity of electronic credit ledger deposits as pre-deposit under Section 107 GST Act is remitted to the Commissioner (Appeals) for fresh adjudication.
Final Conclusion: By consent, the High Court quashed the order dismissing the appeal for non-deposit and remitted the matter to the Commissioner (Appeals) to decide afresh, permitting both parties to address and the Commissioner to rule on whether deposits made through the electronic credit ledger satisfy the pre-deposit requirement under Section 107 of the GST Act.
The Court considered the following core legal questions:
1. Whether the dismissal of the Petitioner's appeal by Respondent No. 2 due to the lack of proof of authorization for the signatory was justified under the CGS (Appeals) Rules, 2017.
2. Whether the rejection of the Petitioner's application for rectification of the dismissal order was appropriate under Section 161 of the CGST Act, 2017.
3. Whether the principles of natural justice and fair play were violated by Respondent No. 2 in the process of dismissing the appeal.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Dismissal of Appeal Due to Lack of Proof of Authorization
- Relevant Legal Framework and Precedents: The CGS (Appeals) Rules, 2017, govern the procedural requirements for filing appeals, including the necessity for proper authorization of the signatory. The Court referenced previous decisions where similar dismissals were overturned due to procedural inadequacies.
- Court's Interpretation and Reasoning: The Court noted that Respondent No. 2 dismissed the appeal on the basis that the petitioner failed to produce a board resolution or equivalent proof of authorization. However, the Court found that the Petitioner had indeed submitted the required authorization during a personal hearing and via email.
- Key Evidence and Findings: The Petitioner provided a Power of Attorney (POA) and other documents to establish the authorization of the signatory. This evidence was submitted both in person and electronically, as recorded in an email dated 04.05.2024.
- Application of Law to Facts: The Court applied the principles of procedural fairness, determining that the evidence of authorization was sufficient and that Respondent No. 2 should have considered it before dismissing the appeal.
- Treatment of Competing Arguments: The Court acknowledged the Respondent's position but emphasized the procedural oversight in not considering the submitted authorization evidence.
- Conclusions: The Court concluded that the dismissal was unjustified, as the Petitioner had complied with the authorization requirements.
Issue 2: Rejection of Rectification Application
- Relevant Legal Framework and Precedents: Section 161 of the CGST Act, 2017, allows for rectification of errors apparent on the record but does not permit a review of the order.
- Court's Interpretation and Reasoning: The Court found that Respondent No. 2 misapplied Section 161 by treating the rectification application as a request for review, rather than addressing the procedural error in the original dismissal.
- Key Evidence and Findings: The Court identified that the Petitioner sought rectification to address an apparent error regarding the authorization evidence, not to alter the substantive nature of the order.
- Application of Law to Facts: The Court held that the rectification application should have been considered to correct the procedural oversight.
- Treatment of Competing Arguments: The Court dismissed the Respondent's argument that the rectification would amount to a review, clarifying the distinction between correcting procedural errors and substantive review.
- Conclusions: The Court concluded that the rejection of the rectification application was improper and warranted reconsideration.
Issue 3: Violation of Principles of Natural Justice
- Relevant Legal Framework and Precedents: The principles of natural justice require fair opportunity for parties to present their case and for decisions to be made based on all available evidence.
- Court's Interpretation and Reasoning: The Court determined that Respondent No. 2 failed to provide the Petitioner with an opportunity to rectify the alleged deficiencies in the documentation, thus violating natural justice principles.
- Key Evidence and Findings: The Court noted that the Petitioner was not given notice or an opportunity to address the issue of self-certification of documents before the appeal was dismissed.
- Application of Law to Facts: The Court emphasized that procedural fairness required Respondent No. 2 to inform the Petitioner of the deficiencies and allow them to be corrected.
- Treatment of Competing Arguments: The Court found the Respondent's procedural handling inadequate, stressing the need for adherence to natural justice.
- Conclusions: The Court concluded that the dismissal violated natural justice, necessitating a fresh hearing.
SIGNIFICANT HOLDINGS
- The Court set aside the Impugned Order-in-Appeal dated 21.06.2024 and the Rectification Order dated 08.11.2024, restoring the Petitioner's Appeal for fresh consideration.
- The Court emphasized the necessity for Respondent No. 2 to provide a fair opportunity for the Petitioner to submit self-certified copies of documents and to conduct a hearing before making a decision.
- The Court reiterated the importance of procedural fairness and the principles of natural justice in administrative proceedings.
- The Court directed Respondent No. 2 to dispose of the appeal expeditiously, with a deadline set for 30th June, 2025, and to communicate the decision promptly.
- The Court maintained that all contentions of the parties remain open for consideration during the fresh hearing.
Authority of signatory to institute appeal - principles of natural justice and fair hearing - curable defects in documentary compliance - rectification under Section 161 of CGST Act, 2017 limited to apparent errors - restoration of appeal for fresh consideration - opportunity to cure procedural defects
Authority of signatory to institute appeal - principles of natural justice and fair hearing - Validity of dismissal of the appeal for want of proof that the person signing the appeal was an authorised signatory - HELD THAT: - The Court found that the petitioner produced proper material demonstrating that the signatory to the appeal memo was authorised. Respondent No. 2 had directed production of authorisation during personal hearing and the petitioner's authorised representative submitted the power of attorney in person and again by email (recorded on 04.05.2024). Respondent No. 2 rejected the appeal without considering that submission and without giving notice of further objections or an opportunity to be heard. Denial of the opportunity to address any objection to the authorisation amounted to a breach of the principles of natural justice and fair play. For these reasons the dismissal on the ground of want of authorised signatory was held to be unsustainable. [Paras 7, 8, 10]
Impugned dismissal of the appeal for lack of authorised signatory set aside and the appeal restored for fresh consideration.
Rectification under Section 161 of CGST Act, 2017 limited to apparent errors - Validity of the rectification order rejecting the petitioner's application for rectification of the order dismissing the appeal - HELD THAT: - The Court recorded that rectification under Section 161 is confined to correcting errors apparent on the record and cannot be used to change the nature of an order so as to effect a review. The Rectification Order rejecting the petitioner's application was set aside in view of the Court's finding that the underlying rejection of the appeal was occasioned by failure to consider the authorisation submitted and by denial of opportunity to cure defects. [Paras 4, 10]
Rectification Order set aside and the matter remitted for fresh consideration of the appeal on merits.
Curable defects in documentary compliance - opportunity to cure procedural defects - Whether non-self-certified photocopies relied upon by the petitioner justified rejection of the appeal without affording an opportunity to cure - HELD THAT: - Respondent No. 2 held that the documents submitted by the petitioner were photocopies and not self-certified and therefore not admissible. The Court held that the absence of self-certification is a curable defect. Respondent No. 2 ought to have given the petitioner an opportunity to file self-certified copies before rejecting the appeal. The petitioner undertook to submit self-certified copies within two weeks and the Court directed submission of self-certified copies (including the adjudication order) within that period. [Paras 9, 10, 11]
Petitioner permitted to supply selfcertified copies within two weeks; appeal restored for fresh adjudication after allowing cure of documentary defects.
Restoration of appeal for fresh consideration - opportunity to cure procedural defects - Directions as to further conduct of the proceedings on remittal including timeline for disposal - HELD THAT: - The Court restored the appeal to the file of Respondent No. 2 for fresh consideration on merits and as per law, keeping all contentions open. Respondent No. 2 was directed to grant an opportunity of hearing to all parties, to consider the cured documents and to pass a reasoned order. The Court requested disposal of the appeal expeditiously and in any event on or before 30th June, 2025, and directed communication of the order to the parties. [Paras 10, 12, 13]
Appeal restored; Respondent No. 2 to grant hearing, decide on merits and communicate a reasoned order by 30th June, 2025.
Final Conclusion: The impugned OrderinAppeal dated 21.06.2024 and the Rectification Order dated 08.11.2024 are set aside; the petitioner's appeal is restored for fresh consideration after the petitioner files selfcertified copies within two weeks, with Respondent No. 2 to afford hearing, pass a reasoned order and communicate it to the parties by 30th June, 2025.
The core legal questions considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS
1. Compliance with Sections 75(6) and 75(7) of the Act
Relevant legal framework and precedents: Section 75(6) of the Goods and Services Tax Act, 2017, mandates that any order passed under the Act must contain reasons for the conclusions reached. Section 75(7) requires that any notice for penalty must clearly indicate the amount of penalty proposed.
Court's interpretation and reasoning: The Court found that the order in question was "speaking in nature" and contained sufficient reasons for the conclusions reached. The authority had reiterated the discrepancies noted in the show cause notice and substantiated the same with the material available on record. The Court referenced a precedent where it was established that authorities need not anticipate potential defenses that an assessee might raise in the absence of a response.
Key evidence and findings: The show cause notice clearly pointed out the discrepancies and called upon the petitioner to show cause why the tax, penalty, and interest should not be imposed. The table included in the writ petition indicated the amounts for tax, interest, and penalty as per the CGST Act, 2017.
Application of law to facts: The Court applied the provisions of Sections 75(6) and 75(7) to the facts, noting that the order contained sufficient reasons and that the notice had adequately indicated the imposition of penalty as per the CGST Act, 2017.
Treatment of competing arguments: The petitioner argued that the order lacked reasoning and that the penalty was imposed without proper notice. The respondents contended that the order was justified due to the petitioner's failure to respond to the notices. The Court sided with the respondents, finding no merit in the petitioner's arguments.
Conclusions: The Court concluded that the order complied with Sections 75(6) and 75(7) of the Act, as it contained sufficient reasoning and the notice adequately indicated the imposition of penalty.
2. Adequacy of Notice for Imposition of Penalty
Relevant legal framework and precedents: Section 73 of the Act requires that a show cause notice be issued to the taxpayer, indicating the discrepancies and calling for an explanation.
Court's interpretation and reasoning: The Court found that the show cause notice issued under Section 73 was clear and specific, pointing out the discrepancies and indicating the imposition of tax, penalty, and interest as per the CGST Act, 2017.
Key evidence and findings: The show cause notice included a table that detailed the amounts of tax, interest, and penalty. The notice also stated that the penalty would be levied "as per CGST Act, 2017," fulfilling the requirement of Section 75(7).
Application of law to facts: The Court applied the provisions of Section 73, noting that the notice was adequate in informing the petitioner of the potential imposition of penalty.
Treatment of competing arguments: The petitioner claimed that the notice did not adequately indicate the penalty amount. The respondents argued that the notice was clear in its intent to impose a penalty. The Court agreed with the respondents.
Conclusions: The Court concluded that the notice was adequate and fulfilled the requirements of Section 75(7) regarding the indication of penalty.
3. Justification for Passing the Order in Absence of Response
Relevant legal framework and precedents: The Act allows authorities to pass orders based on the material available when a taxpayer fails to respond to notices.
Court's interpretation and reasoning: The Court noted that the petitioner did not respond to multiple notices and reminders. As such, the authority was justified in passing the order based on the available record.
Key evidence and findings: The petitioner failed to respond to notices issued under Sections 61 and 73, as well as subsequent reminders.
Application of law to facts: The Court applied the provisions that allow authorities to proceed in the absence of a response, finding that the authority acted appropriately.
Treatment of competing arguments: The petitioner did not provide any substantial argument against the authority's decision to proceed without a response. The respondents maintained that the authority acted within its rights, and the Court agreed.
Conclusions: The Court concluded that the authority was justified in passing the order in the absence of a response from the petitioner.
SIGNIFICANT HOLDINGS
Preserve verbatim quotes of crucial legal reasoning: "The authority has recorded sufficient reasons for coming to the conclusion that the petitioner was liable to pay the tax, penalty and interest."
Core principles established: Authorities are not required to anticipate potential defenses in the absence of a response. Notices that indicate penalties "as per CGST Act, 2017" fulfill statutory requirements.
Final determinations on each issue: The Court dismissed the petition, finding that the order complied with statutory requirements and that the petitioner had been adequately notified of the penalties. The authority's decision to proceed without a response was justified.
Challenge to SCN issued - petitioner was provided adequate notice regarding the imposition of penalty under the CGST Act, 2017 or not - violation of principles of natural justice - HELD THAT:- Admittedly, despite issuance of notices under Sections 61 and 73 of the Act and reminders, no response was filed by the petitioner. The show cause notice issued was very clear and specific, pointing out the discrepancies and calling upon the petitioner to show cause as to why the tax, penalty and interest as indicated be not imposed. The table at page 38 of the writ petition clearly indicates the amount of interest and the penalty as per CGST Act, 2017 and the amount of tax based on show cause notice. When the response was not filed, the order impugned was passed. In the order, the authority has noticed the allegations made in show cause notice and has clearly reiterated the discrepancies as pointed out in the show cause notice and in absence of any response, has levied the tax as indicated in the show cause notice.
Once the response was not filed, the authority was not required to raise probable grounds which the assessee could raise and deal with the same. The authority was required to apply its mind to the show cause notice and substantiate the same with the material available on record and was not required to simply make reference to the notices issued under Sections 61 and 73 of the Act, as laid down by this Court in M/s New Manoj Medical Store Vs. State of U.P. and 2 others, [2025 (4) TMI 489 - ALLAHABAD HIGH COURT]. In the present case, the authority has recorded sufficient reasons for coming to the conclusion that the petitioner was liable to pay the tax, penalty and interest.
Conclusion - The authority is justified in passing the order in the absence of a response from the petitioner.
There are no reason to interfere with the order impugned. The petition has no substance, the same is, therefore, dismissed.
The relevant legal framework includes Section 29(2)(c) of the CGST Act, which empowers an officer to cancel the GST registration if a registered person fails to furnish returns for a continuous period as prescribed. Rule 21(h) of the CGST Rules supports this by stating that registration is liable to be canceled if returns are not filed for six consecutive months. Rule 22 outlines the procedure for cancellation, requiring a Show Cause Notice in FORM GST REG-17 and an order in FORM GST REG-19 if the registration is to be canceled.
The Court interprets these provisions by emphasizing the need for a speaking order, which should clearly state the reasons for cancellation. The Court finds that the impugned order dated 10.02.2021 did not comply with this requirement, as it failed to provide any reasoning for the cancellation of the petitioner's GST registration. The Court also notes that the Show Cause Notice did not specify the months for which returns were not filed, further highlighting the lack of clarity and specificity in the proceedings.
The key evidence includes the Show Cause Notice dated 05.01.2021, which alleged non-filing of returns for six months, and the impugned order dated 10.02.2021, which canceled the registration without providing reasons. The petitioner claims they did not submit a reply or attend a personal hearing, contrary to what the order suggests. The Court observes that no counter-affidavit or instructions were filed by the respondents to rebut the petitioner's assertions.
The application of law to facts reveals that the cancellation order did not meet the statutory requirements of a speaking order, as mandated by the CGST Act and Rules. The Court underscores the importance of recording reasons for decisions, particularly when they have adverse consequences for the affected party. The absence of reasons in the cancellation order renders it arbitrary and unjust.
The Court addresses competing arguments by acknowledging the petitioner's delay in filing the writ petition but asserts that the statutory breaches in the cancellation order outweigh the delayed approach. The Court emphasizes that the vulnerability of the order due to lack of reasons is more significant than the delay in seeking redress.
In conclusion, the Court finds the impugned order dated 10.02.2021 to be non-compliant with statutory requirements and sets it aside. The matter is reverted to the stage of the Show Cause Notice, allowing the petitioner to respond or fulfill pending obligations within a specified timeframe. The Court grants the petitioner one month to either submit a reply or furnish pending returns and dues, after which the Proper Officer must proceed in accordance with the prescribed procedure.
Significant holdings include the Court's reiteration of the necessity for a speaking order in administrative decisions affecting rights. The Court establishes that failure to provide reasons constitutes a violation of natural justice and statutory prescriptions, rendering such orders invalid. The decision underscores the need for due process and fair play in administrative actions under the GST regime.
Cancellation of GST registration for non-filing of returns - Requirement to furnish monthly returns under the GST regime - Obligation to pass a speaking order and record reasons - Procedure for cancellation under Rule 22 and Forms GST REG-17/REG-19/REG-20 - Suspension pending cancellation under Rule 21A - Remand to show-cause stage for fresh reply or compliance
Cancellation of GST registration for non-filing of returns - Obligation to pass a speaking order and record reasons - Procedure for cancellation under Rule 22 and Form GST REG-19 - Validity of the impugned order dated 10.02.2021 cancelling the petitioner's GST registration - HELD THAT: - The order of cancellation dated 10.02.2021 did not record reasons as required by the procedure embodied in Rule 22 and as reflected in Form GST REG-19. A speaking order is one that expressly states reasons and demonstrates application of mind; absence of reasons renders an order nonspeaking and susceptible to quashing, particularly where the statute and prescribed form contemplate recording of reasons. Although the Show Cause Notice alleged non-filing of returns for a continuous period of six months, the notice did not specify the months or period of default and the cancellation order merely recited a generic 'return not filed' without assigning casespecific reasons. The respondents failed to place on record any material to rebut the petitioner's assertion that no reply was filed and no personal hearing attended. For these reasons the cancellation order was held to be nonspeaking, passed without application of mind, and therefore liable to be quashed. [Paras 17, 22, 23, 24, 25]
The impugned order dated 10.02.2021 is quashed as nonspeaking and passed without application of mind.
Remand to show-cause stage for fresh reply or compliance - Procedure for cancellation under Rule 22 and Forms GST REG-17/REG-19/REG-20 - Requirement to furnish pending returns or make payment as alternative remedy - Post-quash procedure and relief available to the petitioner - HELD THAT: - On quashing the cancellation order, the matter was restored to the stage of issuance of the Show Cause Notice in FORM GST REG-17. The Court observed that Rule 22 contemplates that a person served with such a notice may either file a reply in FORM REG-18 or, alternatively, furnish all pending returns and make full payment of tax dues with applicable interest and late fee, whereupon the Proper Officer shall drop proceedings and pass an order in FORM GST REG-20. The Court granted the petitioner one month to either submit a reply to the original Show Cause Notice or to furnish pending returns and clear dues; if requested, the Proper Officer must supply details of outstanding dues within that period. Thereafter the Proper Officer shall decide in accordance with Section 29 of the CGST Act and Rule 22 of the CGST Rules and pass the appropriate order in FORM GST REG-19 or FORM GST REG-20 expeditiously, but not later than one month after the petitioner's compliance or reply. [Paras 27, 28, 29]
The matter is remitted to the showcause stage; petitioner granted one month to reply or comply, and the Proper Officer to act as directed and pass appropriate order within a further month.
Final Conclusion: The Court quashed the cancellation order dated 10.02.2021 as nonspeaking and without application of mind, restored the matter to the stage of the Show Cause Notice, granted the petitioner one month to either file a reply or furnish pending returns and pay dues, and directed the Proper Officer to provide dues details if requested and to pass the consequential order in accordance with the statutory procedure within a further month; no order as to costs.
The core legal questions considered in this judgment are:
1. Whether the petitioner is entitled to the withdrawal of the assessment order under Section 62(2) of the Goods and Services Tax Act, 2017 (GST Act) despite filing returns beyond the prescribed 60-day period due to ill-health.
2. Whether the 60-day period prescribed under Section 62(2) for filing returns is mandatory or directory, allowing for condonation of delay under certain circumstances.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to Withdrawal of Assessment Order
Relevant Legal Framework and Precedents: The relevant legal framework is Section 62 of the GST Act, which deals with the assessment of non-filers of returns. Subsection (2) provides that if a registered person furnishes a valid return within sixty days of the service of the assessment order, the assessment order shall be deemed withdrawn.
Court's Interpretation and Reasoning: The Court noted that the petitioner failed to file the returns for the specified period within the prescribed 60-day timeframe due to ill-health. The petitioner argued that the assessment order should be quashed as the returns were eventually filed, albeit late.
Key Evidence and Findings: The petitioner filed the returns on 05.02.2021 and 06.02.2021, beyond the 60-day period from the assessment order dated 26.12.2020.
Application of Law to Facts: The Court acknowledged the petitioner's delay in filing returns and considered whether the delay could be condoned given the circumstances.
Treatment of Competing Arguments: The respondents argued that the petitioner was only entitled to the benefit under Section 62(2) if the returns were filed within the 60-day period. The petitioner sought condonation of the delay due to ill-health.
Conclusions: The Court concluded that the petitioner had not filed an application for condonation of delay. Therefore, the petitioner was directed to file such an application, and the second respondent was instructed to consider the reasons for the delay.
Issue 2: Nature of the 60-day Period under Section 62(2)
Relevant Legal Framework and Precedents: Section 62 of the GST Act, particularly subsection (2), prescribes a 60-day period for filing returns after an assessment order is served.
Court's Interpretation and Reasoning: The Court analyzed whether the 60-day period is mandatory or directory, considering the implications of the amendment in Section 16(5) of the GST Act.
Key Evidence and Findings: The Court noted that the 60-day period is intended to provide an opportunity for the registered person to file returns and have the assessment order withdrawn.
Application of Law to Facts: The Court considered the petitioner's circumstances and the potential for condonation of delay if sufficient reasons are provided.
Treatment of Competing Arguments: The respondents maintained that the 60-day period is a strict deadline, while the petitioner argued for flexibility due to unforeseen circumstances.
Conclusions: The Court determined that the 60-day period is directory rather than mandatory. If the petitioner provides sufficient reasons for the delay, the delay may be condoned, allowing the petitioner to file returns after payment of applicable interest and fees.
SIGNIFICANT HOLDINGS
Preserve Verbatim Quotes of Crucial Legal Reasoning: "The limitation of 60 days period prescribed under Section 62(2) of the Act appears to be directory in nature and if the assessee was not able to file the returns for the reasons, which are beyond his/her control, certainly the said delay can be condoned."
Core Principles Established: The 60-day period under Section 62(2) is directory, allowing for condonation of delay if sufficient reasons are provided. The assessee's right to file returns cannot be curtailed solely due to the lapse of the 60-day period.
Final Determinations on Each Issue: The petitioner is directed to file an application for condonation of delay within 15 days. The second respondent must consider this application on its merits and, if satisfied with the reasons for delay, permit the petitioner to file revised returns.
Assessment of non-filers of returns - Deemed withdrawal of assessment order on filing return within sixty days - Liability for interest and late fee continues despite deemed withdrawal - Directory nature of statutory time limit and condonation of delay
Deemed withdrawal of assessment order on filing return within sixty days - Liability for interest and late fee continues - Effect of Section 62(2) where returns are filed after bestjudgment assessment but within the statutory sixty days - HELD THAT: - The Court construed Section 62(2) of the GST Act to mean that where a registered person furnishes a valid return within sixty days of the service of an assessment order under Section 62(1), that assessment order is deemed to have been withdrawn; however, liability to pay interest under Section 50(1) and late fee under Section 47 continues. The provision therefore affords an opportunity to the assessee to file returns after a bestjudgment assessment, and the deemed withdrawal operates upon compliance with the sixtyday temporal condition. The Court extracted and applied Section 62(1) and (2) to the facts where the petitioner had been assessed under Section 62(1) on 26.12.2020 and subsequently filed the outstanding monthly returns in February 2021, noting the legal effect prescribed by Section 62(2). [Paras 8, 9, 11, 12]
Where returns are filed within sixty days of service of an assessment order under Section 62(1), the assessment order shall be deemed withdrawn, subject to continued liability for interest and late fee.
Directory nature of statutory time limit and condonation of delay - Assessment of non-filers of returns - Whether the sixtyday limitation in Section 62(2) is mandatory or directory and whether delay beyond sixty days can be condoned permitting filing of returns - HELD THAT: - The Court held that the sixtyday period prescribed by Section 62(2) is directory in nature and does not operate to extinguish the assessee's right to file returns where nonfiling was for reasons beyond the assessee's control. The Court reasoned that permitting assessment at the earliest and fixing a sixtyday period should not curtail the substantive right, created by amendments elsewhere in the Act, to have returns considered; accordingly, an application for condonation of delay accompanied by sufficient reasons must be entertainable by the authority. The Court observed that where such an application is filed and the authority is satisfied with the reasons, delay can be condoned and the assessee permitted to file revised returns upon payment of applicable interest, late fees and other charges. [Paras 13, 14, 15]
The sixtyday limitation under Section 62(2) is directory; delay beyond sixty days may be condoned on sufficient reasons and the authority may permit filing of returns subject to payment of interest and late fee.
Assessment of non-filers of returns - Directions for further proceedings in the case at hand - HELD THAT: - Applying the legal conclusions to the petitioner, the Court noted that no condonation application had been filed prior to the writ. The Court directed the petitioner to file an application for condoning the delay in filing the returns within 15 days from service of the order. The Court further directed the second respondent to consider that application on merits, take into account the reasons for nonfiling within the sixtyday period after service of the bestjudgment assessment order, and thereafter, if satisfied, permit the petitioner to file revised returns after ensuring payment of interest, late fee and other applicable charges. The Court thereby remitted the factual appraisal of sufficiency of reasons and any consequent relief to the assessing authority for fresh consideration. [Paras 15, 16]
Petitioner to file condonation application within 15 days; assessing authority to consider it on merits and, if satisfied, condone delay and permit filing of revised returns subject to applicable interest and late fee.
Final Conclusion: Writ petition disposed of at admission stage with directions: petitioner to file an application for condonation of delay within 15 days; assessing authority to consider the application on merits, and if satisfied, condone the delay and permit filing of revised returns subject to payment of interest and late fee. No order as to costs.
The core legal questions considered in this judgment are:
ISSUE-WISE DETAILED ANALYSIS
1. Withholding Refund under Section 54(11) of the CGST Act, 2017
2. Absence of Appellate Tribunal or Pending Appeal
3. Interest on Refund as per Section 56 of the CGST Act, 2017
SIGNIFICANT HOLDINGS
Refund claim - rejection on the ground that the L1 and L2 suppliers’ licences as mentioned in the show cause were cancelled - mandatory conditions prescribed under Section 16(2) of the CGST Act, 2017 satisfied or not - HELD THAT:- In the opinion of this Court the Department’s opinion under Section 54 (11) cannot be relied upon on a standalone basis. In the absence of an appeal or any other proceeding pending, challenging the order of the Appellate Authority, the opinion under Section 54 (11) cannot result in holding back the refund. The refund having been permitted by the Appellate Authority and no order in review having been passed, the Department cannot hold back the refund.
In G.S. Industries [2023 (4) TMI 404 - DELHI HIGH COURT] the Coordinate Bench has observed that 'Concededly, the respondent has not filed any appeal against the order-in-appeal dated 03.01.2022, and there is no order of any Court or Tribunal staying the said order. Indisputably, the order-in-appeal dated 03.01.2022 cannot be ignored by the respondents solely because according to the revenue, the said order is erroneous and is required to be set aside.'
In view of this position, the refund in favour of the Petitioner would be liable to be allowed in terms of the order passed by the Appellate Authority - In the opinion of this Court, considering the fact that refund amounts are payable with interest for the delayed period for paying the refund, it would in fact be contrary to the interest of the Department itself to hold back the refund inasmuch as if any appeal is filed and the order of the Appellate Authority is reversed, then the same would also bind the Petitioner.
Conclusion - In the absence of an appeal or any other proceeding pending, challenging the order of the Appellate Authority, the opinion under Section 54 (11) cannot result in holding back the refund.
Petition disposed off.
Issues: Whether the challenge to the audit report and show cause notice required adjudication on merits, and whether the petitioner should be permitted to respond to the show cause notice.
Analysis: The reply to the draft audit report had not been filed before the draft was prepared, but the petitioner was not held to have lost the opportunity to respond to the subsequent show cause notice. The petitioner was permitted to place all grievances before the adjudicating authority, which was directed to consider the reply independently on merits and in accordance with law after giving sufficient opportunity.
Outcome: The writ petitions were disposed of with liberty to file a reply to the show cause notice and with a direction for fresh consideration of that reply on merits.
Violation of principles of natural justice - Audit Report in Form GST ADT-02 - Show Cause Notice - Opportunity to reply / right to be heard - Independent consideration of reply by authority
Violation of principles of natural justice - Opportunity to reply / right to be heard - Whether the petitioner's earlier replies were considered before finalizing the draft Audit Report and what remedial direction should follow - HELD THAT: - The Court found on the material that the Audit Memo dated 09.11.2022 required a reply within two working days but the draft Audit Report had been finalized on 14.11.2022, and therefore the petitioner's replies were not considered while preparing the draft Audit Report. The Court did not set aside the Audit Report or the subsequent show cause notice on merits. Instead, noting that the petitioner had not thereby lost the opportunity to be heard, the Court granted the petitioner liberty to file a reply to the impugned show cause notice and directed the respondent to consider that reply independently on its merits, to provide sufficient opportunities to the petitioner, and to pass orders in accordance with law as expeditiously as possible. [Paras 5, 6]
Liberty granted to the petitioner to file a reply to the show cause notice within four weeks; respondent directed to independently consider the reply, afford sufficient opportunities, and pass orders in accordance with law.
Final Conclusion: Writ petitions disposed by granting liberty to the petitioner to file a reply to the impugned show cause notice within four weeks and directing the respondent to consider the reply independently and decide the matter after providing sufficient opportunities; no costs.
Issues: Whether the recovery of budgetary support granted to the unit on the ground of change in ownership could be sustained when a Division Bench decision covering the same issue had set aside the earlier contrary view.
Analysis: The challenge to the recovery order was examined in the light of the later Division Bench judgment, which had already dealt with the identical controversy concerning entitlement under the Budgetary Support Scheme after change of ownership. Once that decision was in force, it bound the Court. The respondents' submission that a proposed special leave petition might be filed did not dilute the binding effect of the existing appellate judgment.
Conclusion: The recovery demand was not sustained and the writ petition was allowed.
Final Conclusion: The impugned recovery order stood set aside and the petitioner remained entitled to relief in accordance with the binding appellate ruling, with other questions left open.
Ratio Decidendi: A subsisting appellate judgment on an identical issue is binding on the High Court and must be followed unless and until it is stayed or reversed.
Recovery of refund along with interest in terms of Budgetary Support Scheme read with affidavit-cum-indemnity bond dated 23.01.2018 - change in ownership of a business unit - disqualifies from receiving benefits under the Budgetary Support Scheme or not - HELD THAT:- The facts of the case in Zydus Wellness Products Limited Versus Union of India and Others And Alkem Laboratories Limited Versus Union of India and Others [2024 (12) TMI 873 - SIKKIM HIGH COURT] is similar to the present case, where it was held that the appellants were indeed eligible for the BSS benefits.
The writ petition is accordingly disposed along with the interim application.
Issues: Whether the petitioner's grievance regarding non-consideration of written submissions and non-communication of the personal hearing notice required consideration in the GST proceedings, and whether departmental coordination was needed to address such procedural difficulties.
Analysis: The petition raised procedural concerns in GST matters, including non-communication of replies, hearing notices and other departmental communications. The Court noted that such matters were being filed in large numbers and observed that they could be dealt with at the first instance if the concerned department gave timely instructions to its counsel. The petitioner was directed to place on record the screenshot of the GST portal showing upload of written submissions, and the respondents were directed to place on record the portal proof showing the mode of communication of the personal hearing notice. The Court also impressed upon the Principal Chief Commissioner to consider deputing officials from the litigation section to coordinate with the Commissionerates and furnish instructions expeditiously.
Outcome: No final adjudication was made on the merits of the challenged orders; the matter was listed for further hearing and administrative directions were issued for filing of records and coordination.
Non-communication of personal hearing notices - non-consideration of written submissions - procedural disposal of GST matters on first date - administrative coordination by GST litigation section
Exemption application - Application for exemption (CM APPL.19041/2025) was allowed. - HELD THAT: - The Court allowed the interim/exemption application filed by the petitioner and disposed of that application subject to all just exceptions. The order records the allowance without further interim conditions. [Paras 2]
CM APPL.19041/2025 allowed and disposed of.
Non-consideration of written submissions - non-communication of personal hearing notices - Allegation that the Department did not consider written submissions and did not issue a personal hearing notice was directed to be verified on record by both parties. - HELD THAT: - The Court observed the petitioner's contention that written submissions were uploaded but not considered and that no personal hearing notice was issued. The petitioner was directed to place on record a screenshot from the GST portal showing upload of written submissions; the Department was directed to place on record proof from the GST portal showing how the personal hearing notice was communicated to the petitioner. The direction aims at verification of the facts on the portal so that the procedural grievance can be addressed. [Paras 4, 5]
Petitioner to place GST-portal screenshot of uploaded submissions; Department to place proof of communication of personal hearing notice.
Procedural disposal of GST matters on first date - Court observed that many GST petitions raise procedural issues which can be disposed of on the first date if the Department provides instructions to its counsel. - HELD THAT: - The Court noted a large number of GST matters before it involving mainly procedural grievances (non-communication of replies, notices, personal hearing communications, refund processing). It held that such matters can, in the Court's opinion, be disposed of on the first date itself provided the Department ensures timely instructions to its counsels, thereby facilitating expedited resolution of routine procedural disputes. [Paras 6, 7, 8]
Procedural GST matters should be capable of first-date disposal if the Department furnishes prompt instructions to its counsels.
Administrative coordination by GST litigation section - Direction issued to the Principal Chief Commissioner of CGST & Central Excise, Delhi Zone to deputise officials from the litigation section to coordinate and give instructions to departmental counsels. - HELD THAT: - To operationalise first-date disposal and better address procedural grievances, the Court impressed upon the Principal Chief Commissioner of CGST & Central Excise, Delhi Zone to consider deputing at least two officials from the litigation section. Those officials are to coordinate with the various Commissionerates of the GST department and give instructions to the Department's counsels in an expedited manner. The Court also directed that a copy of the order be communicated to the Chief Commissioner, GST through the legal section. [Paras 9, 10]
Principal Chief Commissioner to consider deputing at least two litigation-section officials to coordinate with Commissionerates and provide expedited instructions to counsels; order to be communicated to Chief Commissioner, GST legal section.
Final Conclusion: Interim exemption application allowed; petitioner and Department directed to place GST-portal proofs concerning written submissions and personal hearing communication; Court directed administrative steps to ensure prompt coordination by GST litigation officials for expedited disposal of procedural GST matters; matter listed for further consideration on 21st April, 2025.
Issues: Whether the appellate order rejecting the assessee's appeal on the ground that the memorandum of appeal was not signed by an authorised signatory, without putting the assessee to notice, was liable to be set aside and the appeal restored for fresh consideration.
Analysis: The appeal had been dismissed solely on a technical objection regarding the signatory's authority. The Court found that material was available to show that the signatory was authorised to sign the appeal memo. It also held that if the authority had any objection to the evidence or submissions relied upon, the assessee ought to have been given notice and an opportunity to meet that objection. Denial of such opportunity offended the principles of natural justice and fair play.
Conclusion: The impugned appellate order was set aside and the appeal was restored to the appellate authority for fresh consideration on merits after granting hearing to all parties.
Dismissal of petitioner's appeal on the ground that the authorized signatory of the Petitioner did not sign the same - HELD THAT:- Proper material has been produced to show that the signatory on the Appeal memo was indeed authorized to sign the same. Similarly, if Respondent No.2 had any objections on entertaining any evidence or submissions, he should have put the Petitioner to notice. Denial of such opportunity violates the principles of natural justice and fair play.
The impugned Order dated 30th July 2024 is set aside and the Petitioner’s Appeal restored to the file of Respondent No.2 for fresh consideration on its own merits and as per law.
The judgment primarily addresses two core legal issues:
2. ISSUE-WISE DETAILED ANALYSIS
First Issue: Dismissal of the Rectification Application
Second Issue: Justification of the Order under Section 73(9) of the CGST Act
3. SIGNIFICANT HOLDINGS
Rectification of order for mistake apparent from record - power to rectify under Section 161 of the CGST/SGST Act - DRC-03 intimation and Form DRC-04 acknowledgment - interpretation of "record" for purposes of rectification - Rule 142(2) - DRC-03 as mode of intimation - bonafide error and non-penalisation - right to self-correct prior to issuance of notice under Section 73 - obligation on proper officer to examine portal records/returns - taxation only by law - Article 265
Rectification of order for mistake apparent from record - DRC-03 intimation and Form DRC-04 acknowledgment - interpretation of "record" for purposes of rectification - Rule 142(2) - DRC-03 as mode of intimation - bonafide error and non-penalisation - obligation on proper officer to examine portal records/returns - power to rectify under Section 161 of the CGST/SGST Act - Validity of the order dismissing the rectification application and whether the proper officer must reconsider the payment intimated by DRC-03 as relating to the financial year 2018-19. - HELD THAT: - The petitioner filed DRC-03 intimating payment after voluntarily reversing excess ITC; the intimation mistakenly described the period as 2019-20 though the payment, on the portal records, corresponded to the excess ITC for 2018-19. Under Rule 142(2) DRC-03 is a mode of intimation and the proper officer is bound to record/acknowledge the payment in Form DRC-04. The term "record" for rectification purposes encompasses the proceedings and documents on which the order is based, including returns and portal data, and an obvious, self-evident error apparent from those records can be corrected. The proper officer, having access to portal records and no asserted liability for 2019-20, ought to have identified the apparent mistake or rejected the intimation so the assessee could have resubmitted with the correct period. Bonafide mistakes that are immediately rectified by the taxpayer should not attract penal consequences inconsistent with the constitutional principle that tax can be imposed only by law. The impugned order dismissing the rectification petition was passed without adequate consideration of these factors and therefore required reconsideration. The court did not adjudicate the substantive validity of the determination under Section 73(9) on merits but directed reexamination of the rectification application and the appropriation of the payment in light of the records available on the portal. [Paras 8, 9, 10, 11, 12]
Ext.P15 dismissing the rectification application is set aside and the third respondent is directed to reconsider the rectification application after granting an opportunity of hearing and in the light of portal records, within three months.
Final Conclusion: Writ petition allowed to the extent that the order dismissing the rectification petition is set aside; the designated officer is directed to reconsider the rectification application (including the DRC-03 payment and its appropriation to 2018-19) after hearing the petitioner and to do so expeditiously, in any event within three months.
The core legal questions considered in this judgment include:
- Whether the transaction involving the sale of an incomplete building is subject to GST under the CGST/KGST Act.
- Whether the transaction falls under Entry 5(b) of Schedule II, which treats certain construction activities as a supply of services subject to GST.
- Whether the transaction is covered by Entry 5 of Schedule III, which treats the sale of land and buildings as neither a supply of goods nor services, thus exempting it from GST.
- Whether the petitioner is entitled to a refund of the GST paid under protest.
2. ISSUE-WISE DETAILED ANALYSIS
Relevant legal framework and precedents:
The legal framework primarily revolves around the CGST Act, 2017, specifically Section 7, which defines the scope of supply, and the relevant entries in Schedule II and Schedule III. The court also considered precedents from the Supreme Court and various High Courts, including the cases of Larsen & Toubro Ltd. v. State of Karnataka and Munjaal Manishbhai Bhat Vs. Union of India, which clarify the applicability of GST to construction activities and the sale of immovable property.
Court's interpretation and reasoning:
The Court interpreted that for a transaction to fall under Entry 5(b) of Schedule II, there must be a contract for construction services between the parties, and consideration must be received before the completion certificate is issued. In the absence of such a contract, the transaction would fall under Entry 5 of Schedule III, exempting it from GST.
Key evidence and findings:
The Court found that the sale transaction was conducted on an 'as is where is' basis without any further construction obligations by the liquidator. The sale was of an incomplete building, and no construction services were provided post-agreement, which is crucial to determining the applicability of GST.
Application of law to facts:
The Court applied the legal principles to the facts and concluded that the transaction was a sale of immovable property without any service component. Therefore, it was not subject to GST under Schedule II and was covered by Schedule III, exempting it from GST.
Treatment of competing arguments:
The respondents argued that the transaction was taxable under Entry 5(b) of Schedule II due to the absence of a completion certificate. The Court rejected this argument, emphasizing that the absence of a construction contract and the nature of the sale as a transfer of immovable property placed it under Schedule III.
Conclusions:
The Court concluded that the impugned order rejecting the refund claim was illegal and without jurisdiction. It directed the respondents to refund the GST amount paid by the petitioner with applicable interest.
3. SIGNIFICANT HOLDINGS
Preserve verbatim quotes of crucial legal reasoning:
"The impugned order petitioner is illegal, arbitrary and without jurisdiction or authority of law apart from being contrary to the provisions of the CGST/KGST Act and the same deserves to be quashed and consequent directions are to be issued to the respondents to sanction/grant and pay refund in favour of the petitioner together with applicable interest."
Core principles established:
- A transaction involving the sale of an incomplete building without a construction contract does not attract GST under Schedule II.
- Such transactions fall under Schedule III, exempting them from GST, as they are considered sales of immovable property.
Final determinations on each issue:
- The transaction in question was not subject to GST, and the petitioner was entitled to a refund of the GST paid under protest.
- The Court quashed the impugned order and directed the refund of Rs. 14,32,64,614/- with applicable interest to the petitioner.
Scope of supply - supply of goods or services - Entry 5(b) of Schedule II (construction of a complex, building, civil structure) - Entry 5 of Schedule III (sale of land and sale of building) - works contract - composite supply - agreement/consensus ad idem for construction services - refund of tax including interest under Section 54/Section 56 and Rule 89 - zero rated supply / refund of unutilised input-tax credit - abundans cautela (statutory reiteration does not alter underlying legislative intent)
Entry 5(b) of Schedule II (construction of a complex, building, civil structure) - Entry 5 of Schedule III (sale of land and sale of building) - agreement/consensus ad idem for construction services - Whether the subject transaction (sale of a partially completed mall by the liquidator on 'as is where is' basis) attracts GST as a construction service under Entry 5(b) of Schedule II or is excluded from levy under Entry 5 of Schedule III. - HELD THAT: - The Court held that Schedule II is a classification schedule and Section 7(1A) requires that an activity must first constitute a 'supply' under Section 7(1) before classification applies. Entry 5(b) applies to construction services where there is a contract for construction (i.e., a service provider and a service recipient, payments received before completion, and a consensus ad idem to provide construction services). A mere sale of an immovable property, even if partially completed, executed on an 'as is where is' basis by the liquidator with no obligation to perform further construction does not satisfy these requisites. Such a transaction is a sale of immovable property covered by Entry 5 of Schedule III and is therefore neither a supply of goods nor a supply of services under Section 7(2). Reliance on absence of completion certificate alone is not sufficient to convert a pure sale into a construction service where no construction contract exists between the parties. The Court applied precedents (including Larsen & Toubro and Munjaal Manishbhai Bhat) and legislative history (GST Council minutes and related amendments) to conclude that taxing the present sale as a construction service would be contrary to the statutory scheme and intent. [Paras 10, 11, 12]
The subject sale of the partially completed mall by the liquidator on 'as is where is' basis does not attract GST under Entry 5(b) of Schedule II and is excluded from levy by Entry 5 of Schedule III.
Refund of tax including interest under Section 54/Section 56 and Rule 89 - quashing of the impugned refund rejection order - Whether the impugned order rejecting the petitioner's refund claim should be quashed and the refund (with interest) directed to be paid to the petitioner. - HELD THAT: - Having held that the subject transaction was not exigible to GST, the Court found the rejection order unlawful and without jurisdiction. On that basis the Court quashed the order rejecting the refund claim and allowed the petitioner's refund application. The Court directed respondents to refund the tax amount claimed together with applicable interest in terms of the CGST/KGST Act within six weeks from receipt of the order, applying the statutory refund provisions and rules governing refunds. [Paras 13, 14]
Impugned rejection order is quashed; the petitioner's refund claim is allowed and respondents are directed to refund the tax with applicable interest within six weeks.
Final Conclusion: Writ petition allowed. The High Court quashed the order rejecting the petitioner's refund claim, held that the sale of the partially completed mall on 'as is where is' basis was a sale of immovable property excluded from GST under Schedule III (and not liable under Schedule II Entry 5(b)), and directed payment of the claimed refund with applicable interest within six weeks.
Issues: (i) Whether compensation paid towards acquisition of land under the head of solatium is exigible to GST under the CGST/KGST regime; (ii) Whether the impugned notices and orders demanding GST on such amount are liable to be quashed.
Issue (i): Whether compensation paid towards acquisition of land under the head of solatium is exigible to GST under the CGST/KGST regime.
Analysis: The compensation was paid in the context of compulsory acquisition of immovable property and not pursuant to an independent agreement by which the landowners undertook an obligation to refrain from an act, tolerate an act, or do an act for consideration. The Court treated the so-called solatium component as part of compensation for acquisition and not as consideration for a taxable service. It held that Schedule II entry 5(e) applies only where there is a contractual supply with a direct nexus between the agreed obligation and consideration. It further held that acquisition and transfer of land fall outside GST in view of the statutory treatment of sale of land under Schedule III, and that the mere labeling of a component as solatium does not convert the transaction into a taxable supply.
Conclusion: The compensation paid towards acquisition of land under the head of solatium is not exigible to GST.
Issue (ii): Whether the impugned notices and orders demanding GST on such amount are liable to be quashed.
Analysis: Once the underlying levy itself was held unsustainable, the consequential notices and orders demanding GST on the solatium component could not survive. The Court accordingly treated the impugned proceedings as without jurisdiction and liable to be set aside.
Conclusion: The impugned notices and orders are liable to be quashed.
Final Conclusion: The petitions succeed, and the GST demands raised on the solatium component of land acquisition compensation cannot stand in law.
Ratio Decidendi: Compensation paid as part of compulsory acquisition of land, even if described as solatium, is not consideration for a taxable supply unless it arises from an independent contractual obligation to do, refrain from, or tolerate an act for consideration.
Solatium not exigible to GST - Entry 5(e) of Schedule II - agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - Entry 5 of Schedule III - sale of land and completed building neither supply of goods nor supply of services - Section 7(1A) - Schedule II as classification, not automatic deeming of supply - necessary nexus between consideration and taxable supply (consideration test) - consent award / agreement-based acquisition under Section 11(2) L.A. Act not amenable to GST
Solatium not exigible to GST - Entry 5 of Schedule III - sale of land and completed building neither supply of goods nor supply of services - Section 7(1A) - Schedule II as classification, not automatic deeming of supply - necessary nexus between consideration and taxable supply (consideration test) - Compensation paid to petitioners under the head 'solatium' in the package compensation for compulsory acquisition is not exigible to GST. - HELD THAT: - The Court found that the package compensation resulted from agreements under Section 29(2) of the KIAD Act whereby petitioners transferred and relinquished their rights in land to KIADB; the component described as 'solatium' in the package cannot be treated in substance as an independent contractual obligation to tolerate or refrain from an act. Section 7(1A) renders Schedule II a classificatory schedule and a transaction is liable to GST only if it constitutes a 'supply' under Section 7(1). Entry 5 of Schedule III excludes sale of land (and completed building) from supply; compulsory acquisition/transfer of all rights in land is akin to sale and falls within that exclusion. The CBIC circulars and jurisprudence require an express or implied agreement, two parties, an obligation to do/tolerate/refrain and a direct nexus between the consideration and that obligation for Entry 5(e) of Schedule II to apply; the documents here show conditions to finality of acquisition but not an independent obligation-for-consideration of the kind taxable under Entry 5(e). Consent-based compensation (analogous to consent awards under Section 11(2) L.A. Act) is also not amenable to service tax/GST. Applying the consideration nexus test and the statutory scheme, the Court held solatium is not chargeable to GST. [Paras 9, 10]
Compensation paid as 'solatium' upon acquisition of petitioners' lands is not exigible/amenable to levy of GST.
Impugned assessment notices and orders quashed - consent award / agreement-based acquisition under Section 11(2) L.A. Act not amenable to GST - Validity of the impugned show cause notices, orders and consequential proceedings issuing GST demands on solatium. - HELD THAT: - Because the Court concluded that the solatium component of the package compensation is not liable to GST for the reasons stated - (i) the transaction in substance effecting transfer of rights in land falls under Entry 5 of Schedule III; (ii) no independent agreement to tolerate/refrain/do an act for consideration exists as required by Entry 5(e) of Schedule II; and (iii) the necessity of a nexus between consideration and a taxable supply is not satisfied - the impugned show cause notices and orders served on the petitioners were held to be illegal, arbitrary and without jurisdiction. The Court therefore set aside the notices and orders and all consequential proceedings in the listed petitions. [Paras 9, 10, 11]
The impugned notices, orders and all consequential proceedings quashed.
Final Conclusion: Writ petitions allowed; it is declared that compensation paid to the petitioners under the head 'solatium' in respect of acquisition of their lands by the State/KIADB is not exigible to GST, and the impugned GST show cause notices, orders and consequential proceedings in the listed petitions are quashed.
TP Adjustment - MAM selection - RPM v/s TNMM - as per HC [2023 (11) TMI 289 - DELHI HIGH COURT] once the ITAT, on considering the relevant facts as well as the order of the TPO, had concluded that the business of the assessee was merely that of a pure trader, and there was no value addition made before re-selling the particular products (i.e. the SIM cards), its consequent finding that RPM is the Most Appropriate Method, is irreproachable.
HELD THAT:- There is a gross delay of 434 days in filing the Special Leave Petition which has not been satisfactorily explained by the petitioner.
Special Leave Petition is, accordingly, dismissed on the ground of delay.
Reopening of assessment u/s 147 - Disallowance of CSR amount u/s 37(2) - reason to believe or suspect - tangible material to reopen - amount being 50% of the aggregate donation was deducted and claimed u/s 80G - as decide by HC [2024 (3) TMI 665 - BOMBAY HIGH COURT] notice of reopening assessment does not by any measure disclose any material leave aside any information leading to formation of cogent and requisite belief. AO was infact in the knowledge of and in possession of all the relevant details regarding the deductions on account of CSR. The computation sheets, the tax audit report, the receipts from the donees and the other relevant documents were all provided and disclosed by Petitioner. It is thus a clear case of ‘change of opinion’ by the AO.
HELD THAT:- There is a gross delay of 268 days in filing the Special Leave Petition which has not been satisfactorily explained by the petitioners.
Special Leave Petition is, accordingly, dismissed on the ground of delay.
The core legal issue considered in this judgment was whether Section 50C of the Income Tax Act, 1961 (IT Act) applies to a property held under a leasehold right. Specifically, the question was whether the transfer of leasehold rights in certain plots of land would attract the provisions of Section 50C, which pertains to the deemed full value of consideration for the purpose of calculating capital gains tax.
ISSUE-WISE DETAILED ANALYSIS
Relevant Legal Framework and Precedents
Section 50C of the IT Act is central to this case. It stipulates that if the consideration received from the transfer of a capital asset, being land or building, is less than the value assessed by the stamp valuation authority for stamp duty purposes, the latter value is deemed the full value of consideration for computing capital gains. The definition of 'Capital Asset' under Section 2(14) of the IT Act includes "property of any kind held by an assessee," emphasizing the term "held" rather than "owned."
The appellant relied on the precedent set in Atul G. Puranik v. Income Tax Officer, which suggested that leasehold rights do not equate to ownership of land or building and thus should not attract Section 50C. The respondent countered that the manner of holding the property is immaterial for Section 50C's applicability.
Court's Interpretation and Reasoning
The Court interpreted the term "held by an assessee" in Section 2(14) to encompass various forms of holding rights, including leasehold, sub-lease, allottee, tenant, or licensee. The Court emphasized that the expression "held by an assessee" does not restrict the manner of holding and includes all legally permissible methods. Therefore, the transfer of leasehold rights falls within the ambit of Section 50C.
The Court also addressed the appellant's reliance on Atul Puranik, stating that the case did not adequately consider the conjunction of Section 2(14) and Section 50C. The Court found that Atul Puranik did not address the statutory language or the broader interpretation of "property" and "transfer" under the IT Act.
Key Evidence and Findings
The appellant's argument was based on the lease agreement and subsequent deed of assignment, which transferred leasehold rights. The Court found that these documents indicate a transfer of rights in the property, thereby falling within the scope of Section 50C. The Court dismissed the appellant's argument that the leasehold nature of the property exempts it from Section 50C.
Application of Law to Facts
The Court applied the statutory definitions and interpretations to the facts, concluding that the transfer of leasehold rights in the plots constitutes a transfer of a capital asset under Section 50C. The Court held that the method of holding the property, whether leasehold or otherwise, does not affect the applicability of Section 50C.
Treatment of Competing Arguments
The Court considered the appellant's reliance on Atul Puranik and Greenfield Hotels and Estates Pvt. Ltd. but found these precedents unpersuasive. The Court noted that these cases did not fully address the statutory language or the comprehensive interpretation required by the IT Act. The Court favored a broader interpretation that includes leasehold rights within the scope of Section 50C.
Conclusions
The Court concluded that Section 50C applies to the transfer of leasehold rights in the property in question. The appeal was dismissed, affirming the Tribunal's decision that the leasehold nature of the property does not exempt it from the provisions of Section 50C.
SIGNIFICANT HOLDINGS
The Court established that the term "held by an assessee" in Section 2(14) includes various forms of property holding, such as leasehold rights. This interpretation broadens the scope of Section 50C to encompass transfers of leasehold interests.
The Court held that the transfer of leasehold rights is a "transfer of a capital asset" under Section 50C, and thus subject to capital gains tax based on the stamp valuation authority's assessment.
The Court rejected the applicability of Atul Puranik as a precedent, emphasizing the need for a comprehensive interpretation of the statutory language that considers both Sections 2(14) and 50C of the IT Act.
The final determination was that the appeal lacked merit, and the Court upheld the Tribunal's decision, dismissing the appeal with no order as to costs.
Applicability of Section 50C to a property held under a leasehold right - HELD THAT:- What is material to note is, that the expression is “held by an assessee” and not owned by an assessee. Insofar as the immovable property, i.e. land or building is concerned, there are number of ways, in which it can be held. The holding can be either as an owner, lessee, sub-lessee, allottee, tenant, licensee, gratuitous licensee or any other mode, permissible or recognized by law. The expression “held by an assessee” therefore does not restrict the manner in which the land or building can be held. The holding of land, is merely a method in which rights to the land, can be held or acquired, by a person. That cannot be in any manner equated with land or building, but rather, would be a species of the right to hold it, which as indicated above, are of multiple nature.
We, therefore, find that merely because the land was originally allotted by the MIDC by way of a lease to the predecessor of the appellant, who in turn has received the same by way of an assignment, that being one of the modes of transfer, of land or building, the mere use of a particular mode of transfer, cannot create any exception vis-a-vis the holding of the land or building by the Assesee.
The word ‘transfer’ as used in Section 50C (1) of the IT Act, also cannot be used in a restricted sense and will have to be given widest amplitude, considering the nature and purpose of the section and thus would include all modes and methods of transfer as are permissible and recognizable in law. Appeal dismissed.
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS
Validity of Reopening Notices
Provision of Material to the Petitioner
Mechanical Approval for Reopening
SIGNIFICANT HOLDINGS
Reopening of assessment u/s 147 - reasons to believe - AO has not provided any documents, statements or any material to the petitioner as relied upon - HELD THAT:- AO has recorded the reasons in mechanical manner, referring on the basis of the information provided by the DCIT, Central Circle-1, Rajkot, which relied on the survey and the search operation carried out in case of M/s. National Shroff & Company on 19th September, 2014.
There is no reference to the transaction carried out by the petitioner. The details of the transactions carried out by the petitioner appear to pertain to the reliefs from the seized material or from any other source. It is also pertinent that AO has not provided any documents, statements or any material to the petitioner but, on the contrary, in the affidavit-in-reply it is averred that such information cannot be provided to the assessee because it is a confidential matter of the department. Such a stand taken by the respondent-Assessing Officer is contrary to the provision of the Act, inasmuch as, unless and until the petitioner is provided the material upon which the reasons are recorded the action of the respondent is illegal.
Non disposal of objections - AO has failed to consider the objections of the petitioner in the true perspective and in absence of any material from M/s. National Shroff, Rajkot pertaining to the details relating to the petitioner, so as to prove that income has escaped assessment, we are of the opinion that there is no link between the material and the reasons recorded, resulting into dis-satisfaction on the part of the AO and in such circumstances, the AO could not have assumed jurisdiction to issue impugned notice for reopening. Decided in favour of assessee.
The core legal questions considered in this judgment were:
1. Whether the Ld. CIT(A) erred in deleting the addition of Rs. 9,64,13,991/- made on account of bogus purchases under Section 69A of the Income Tax Act, 1961.
2. Whether the Ld. CIT(A) was justified in restricting the addition to 6% of the total bogus purchases instead of the 100% addition made by the Assessing Officer (AO).
3. Whether the Ld. CIT(A) erred in deleting the penalty levied by the AO under Section 271(1)(c) of the Income Tax Act, 1961, for claiming bogus purchases to suppress taxable income.
ISSUE-WISE DETAILED ANALYSIS
1. Addition of Bogus Purchases under Section 69A
Relevant Legal Framework and Precedents
The legal framework involves Section 69A of the Income Tax Act, which pertains to unexplained money, investments, etc. The Department relied on precedents from the Gujarat High Court and the Calcutta High Court, which upheld the addition of 100% of purchases from bogus parties.
Court's Interpretation and Reasoning
The Tribunal noted that the Ld. CIT(A) had consistently applied a 5% addition to similar cases in previous years, aligning with the ITAT's decisions. The Tribunal found no reason to deviate from this consistent approach.
Key Evidence and Findings
The AO's findings were based on a search and seizure operation on the Rajendra Jain Group, revealing that the group provided accommodation entries for bogus purchases. The Ld. CIT(A) reduced the addition to 5% based on past Tribunal orders.
Application of Law to Facts
The Tribunal applied the principle of consistency, as the Ld. CIT(A) followed the ITAT's earlier orders, which restricted similar additions to 5% of purchases.
Treatment of Competing Arguments
The Department argued for a 100% addition based on the non-genuineness of transactions. However, the Tribunal upheld the Ld. CIT(A)'s decision, emphasizing the consistent application of a 5% addition in similar cases.
Conclusions
The Tribunal found no infirmity in the Ld. CIT(A)'s order restricting the addition to 5% of the purchases and dismissed the Department's appeal.
2. Deletion of Penalty under Section 271(1)(c)
Relevant Legal Framework and Precedents
Section 271(1)(c) of the Income Tax Act deals with penalties for concealment of income or furnishing inaccurate particulars. The Tribunal referenced various judgments where penalties were not imposed on estimated additions.
Court's Interpretation and Reasoning
The Tribunal agreed with the Ld. CIT(A) that penalties under Section 271(1)(c) are not applicable when additions are made on an estimated basis.
Key Evidence and Findings
The Ld. CIT(A) observed that penalties cannot be imposed on estimated additions, referencing the jurisdictional ITAT's decision in the appellant's own case for a previous year.
Application of Law to Facts
The Tribunal applied the principle that penalties are not applicable on estimated additions, as established in various court decisions.
Treatment of Competing Arguments
The Department argued for the imposition of penalties due to the alleged bogus purchases. However, the Tribunal upheld the Ld. CIT(A)'s decision to delete the penalty, emphasizing the precedent that penalties are not applicable on estimated additions.
Conclusions
The Tribunal found no infirmity in the Ld. CIT(A)'s order deleting the penalty under Section 271(1)(c), as the additions were based on estimates.
SIGNIFICANT HOLDINGS
Core Principles Established
The Tribunal reinforced the principle of consistency in applying a 5% addition for bogus purchases, as previously decided by the ITAT. It also upheld the principle that penalties under Section 271(1)(c) are not applicable for estimated additions.
Final Determinations on Each Issue
The Tribunal dismissed both appeals filed by the Department, upholding the Ld. CIT(A)'s decisions to restrict the addition to 5% of purchases and to delete the penalty under Section 271(1)(c).
Levy of penalty u/s 271(1)(c) - additions made by AO u/s 68 - HELD THAT:- We are of the considered view that Ld. CIT(A) has correctly held that penalty cannot be imposed in case additions have been made on estimated basis. We further observe that in the following cases, various courts have held that when income of the assessee is determined on an estimated basis, no penalty under Section 271(1)(c) isa liable to be imposed for concealment of income or for furnishing inaccurate particular of income.
We find no infirmity in the order of Ld. CIT(A) deleting the imposition of penalty u/s 271(1)(c) looking into the instant facts.
Estimation of income - bogus purchases u/s 69A - HELD THAT:-We note that CIT(A) has taken a consistent approach by following orders passed by his predecessor and as well as ITAT in which similar additions for other years were restricted to 5% of purchases.
1. The legality of issuing notice under Section 153C of the Income Tax Act and the validity of the assessment order passed under Section 153C read with Section 143(3) for the assessment year 2016-17.
2. The addition of Rs. 6,62,686/- under Section 56(2)(vii)(b) concerning the difference between the stamp duty value and the actual purchase value of properties for the assessment year 2016-17.
3. The addition of Rs. 1,00,000/- under Section 69A as unexplained money for the assessment year 2018-19.
4. The addition of Rs. 72,325/- under Section 50C concerning the difference between the market value and document value of property sold and the set-off of long-term capital loss for the assessment year 2018-19.
ISSUE-WISE DETAILED ANALYSIS
1. Legality of Notice under Section 153C and Validity of Assessment Order (A.Y. 2016-17)
- Relevant Legal Framework and Precedents: Section 153C of the Income Tax Act allows the issuance of notice to assess or reassess income of any other person if documents or assets seized during a search pertain to them.
- Court's Interpretation and Reasoning: The Tribunal noted that the satisfaction note recorded by the Assessing Officer contained all necessary facts for assuming jurisdiction under Section 153C, and the issuance of notice followed due legal procedure.
- Key Evidence and Findings: Satisfaction notes and the procedural adherence by the Income Tax Officer were pivotal.
- Application of Law to Facts: The Tribunal found no merit in the appellant's contention that the Income Tax Officer was not competent to issue the notice.
- Treatment of Competing Arguments: The appellant's argument that the Income Tax Officer lacked jurisdiction was dismissed.
- Conclusions: The Tribunal upheld the legality of the notice and the assessment order.
2. Addition under Section 56(2)(vii)(b) (A.Y. 2016-17)
- Relevant Legal Framework and Precedents: Section 56(2)(vii)(b) deals with taxation of the difference between the stamp duty value and actual consideration paid for property as income from other sources.
- Court's Interpretation and Reasoning: The Tribunal noted that the appellant did not provide valid reasons to refer the valuation to the Departmental Valuation Officer.
- Key Evidence and Findings: The purchase value of properties was less than the stamp duty value by Rs. 6,62,686/-.
- Application of Law to Facts: The Tribunal deemed the provisions of Section 56(2)(vii)(b) applicable as the consideration was less than the stamp duty value.
- Treatment of Competing Arguments: The appellant's argument regarding the valuation was rejected due to lack of substantiation.
- Conclusions: The addition was upheld, and the appeal was dismissed on this ground.
3. Addition under Section 69A as Unexplained Money (A.Y. 2018-19)
- Relevant Legal Framework and Precedents: Section 69A pertains to unexplained money found in possession of the assessee.
- Court's Interpretation and Reasoning: The Tribunal found that the amount was duly reflected in the books of accounts, and the Department did not challenge the veracity of the accounts.
- Key Evidence and Findings: Ledger accounts showing the advance and its subsequent return were critical.
- Application of Law to Facts: The Tribunal concluded that the addition was unjustified as the transaction was adequately documented.
- Treatment of Competing Arguments: The Department's lack of evidence to counter the appellant's documentation led to the decision in favor of the appellant.
- Conclusions: The addition was deleted, and the appeal was allowed on this ground.
4. Addition under Section 50C and Set-off of Long-Term Capital Loss (A.Y. 2018-19)
- Relevant Legal Framework and Precedents: Section 50C deals with the adoption of stamp duty value as the sale consideration for capital gains computation.
- Court's Interpretation and Reasoning: The Tribunal noted the contradictory observations by the CIT(A) regarding the set-off of long-term capital loss.
- Key Evidence and Findings: The operative part of the CIT(A)'s order allowed the set-off, but the concluding part dismissed the appeal.
- Application of Law to Facts: The Tribunal directed the Assessing Officer to consider the set-off in accordance with law.
- Treatment of Competing Arguments: The Tribunal focused on resolving the contradiction in the CIT(A)'s order.
- Conclusions: The matter was remanded to the Assessing Officer for proper adjudication.
SIGNIFICANT HOLDINGS
- Core Principles Established: The Tribunal emphasized the importance of procedural adherence in issuing notices under Section 153C and the necessity of substantiating claims for valuation disputes under Section 56(2)(vii)(b).
- Final Determinations on Each Issue: The Tribunal upheld the legality of the notice and the assessment order for A.Y. 2016-17, confirmed the addition under Section 56(2)(vii)(b), deleted the addition under Section 69A for A.Y. 2018-19, and remanded the issue of set-off under Section 50C to the Assessing Officer.
Assessment u/s 153C - Admission of additional ground - HELD THAT:- Additions were not made on the basis of incriminating material found during the course of search have been raised for the first time before us and this aspect, whether additions have been made on the basis of incriminating materials found during the course of search, in our considered view, would require further investigation into the facts of the case to assess whether there is any factual force in this ground sought to be taken by the assessee.
In our view, this additional legal argument would require further investigation into the documents found during the course of search and whether the additions have been made on the basis of such incriminating documents found during the course of search at third party premises. Since this additional ground has been taken before us for the first time and as pointed by us the preceding part of the order that this additional ground would require further enquiry took into the facts, the matter is hereby restored to the file of Ld. CIT(A).
Addition u/s 69A - addition was confirmed in the hands of the assessee was on the ground that the assessee was unable to show details showing execution of contract with the said party - HELD THAT:- It is a fit case where the addition is liable to be deleted. This is for the reason that this amount was advanced to Shri Punabhai Babarbhai was duly reflecting in the books of accounts maintained by the assessee and the fact of refund of such amount back to the assessee was also duly reflecting in the books of account maintained by the assessee. Even as per the cash book available with the assessee, the assessee had adequate cash in hand to advance the aforesaid amount to Shri Punabhai Babarbhai. Accordingly, even before us during the course of hearing as well, the Department has not been able to bring anything on record to controvert these facts, we are of the considered view that the addition is liable to be deleted.
Credit of set off of Long Term Capital Loss against the additions made under Section 50C - The alternate claim of the assessee with regards to set off of Long Term Capital Loss against the additions made under Section 50C of the Act may be considered and decided by the Assessing Officer, in accordance with law.
The core legal issues considered in this judgment were:
1. The validity of the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, for the Assessment Year 2014-15.
2. The correctness of the addition made under Section 56(2)(viib) of the Income Tax Act, 1961, concerning the excess share premium charged by the assessee.
3. The appropriateness of the valuation method used for determining the fair market value (FMV) of the shares, whether the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method should be applied.
ISSUE-WISE DETAILED ANALYSIS
1. Validity of Reassessment Proceedings
Relevant Legal Framework and Precedents: The reassessment proceedings were initiated under Section 147 of the Income Tax Act, 1961, which allows reopening of assessment if the Assessing Officer (AO) has reason to believe that income has escaped assessment. The assessee contended that the reassessment was based on a mere change of opinion, which is not permissible.
Court's Interpretation and Reasoning: The Tribunal found that the AO had sufficient reason to reopen the assessment as the assessee failed to disclose material facts during the original assessment proceedings. The AO's suspicion was justified due to the lack of disclosure and the use of an unauthorized valuation report.
Conclusions: The Tribunal upheld the validity of the reassessment proceedings, dismissing the assessee's challenge on this ground.
2. Addition under Section 56(2)(viib)
Relevant Legal Framework and Precedents: Section 56(2)(viib) of the Income Tax Act, 1961, deals with the taxation of share premium received by a company in excess of the fair market value of the shares. The valuation methods prescribed under Rule 11UA of the Income Tax Rules, 1962, include the NAV method and the DCF method.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee had opted for the DCF method but failed to procure a valuation report from a Merchant Banker as required by law. The report was instead prepared by the company's auditor, which was not permissible. The AO rejected the DCF method due to exaggerated projections and used the NAV method to determine FMV.
Key Evidence and Findings: The Tribunal found that the projections used in the DCF method were unrealistic and not achieved. The valuation report lacked credibility as it was not prepared by an authorized person.
Application of Law to Facts: The Tribunal held that the assessee should have been given an opportunity to procure a proper valuation report from a Merchant Banker. The AO's reliance on the NAV method was due to the deficiencies in the DCF method used by the assessee.
Treatment of Competing Arguments: The Tribunal acknowledged the assessee's right to choose a valuation method but emphasized the need for compliance with legal requirements, including obtaining a report from a qualified Merchant Banker.
Conclusions: The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, allowing the assessee to obtain a new valuation report from a Merchant Banker.
SIGNIFICANT HOLDINGS
Core Principles Established: The Tribunal reinforced the principle that while the assessee has the option to choose a valuation method under Rule 11UA, compliance with procedural requirements, such as obtaining a valuation report from a Merchant Banker, is mandatory.
Final Determinations on Each Issue: The reassessment proceedings were upheld as valid. The addition under Section 56(2)(viib) was set aside, and the matter was remanded to the CIT(A) to allow the assessee to submit a proper valuation report.
The Tribunal's decision emphasized the importance of adhering to statutory requirements in valuation processes and provided the assessee with an opportunity to rectify procedural lapses in the valuation of share premiums.
Reopening of assessment u/s 147 -addition on account of excess share premium charged by the assessee u/s. 56(2)(viib) - HELD THAT:- We find that since material information was not disclosed properly in the regular scrutiny proceedings as well as in the income-tax return, AO was very well within his jurisdiction to issue notice u/s. 148 and carry out the re-assessment proceedings u/s. 147 of the Act.
Addition made u/s. 56(2)(viib) for the excess share premium charged by the assessee -assessee adopted DCF method and the Valuation Report was to be procured from the Merchant Banker - We find merit in the contention of assessee that if the AO was not satisfied with the DCF method and the Valuation Report being prepared by the auditor of the assessee company, then he ought to have given an opportunity to the assessee to furnish another report under DCF method from Merchant Banker. AO rather concluded the FMV on the basis of NAV method and made the impugned addition.
On finding given by the ld.CIT(A), we find that the order is cryptic. Ld.CIT(A) has only harped on the technical aspect of the Valuation Report given by the auditor of the assessee company with regard to issue of Equity Shares and merely confirmed the action of the AO. It is the contention of assessee that the assessee company submitted the Valuation Report before ld.CIT(A) as an additional evidence which was obtained from M/s. Pantomath, a Class-I Merchant Banker on 24.04.2019 but ld.CIT(A) has ignored the same.
There is no discussion on merits on the issue. We therefore, considering the facts and circumstances of the case, deem it proper to give one more opportunity to the assessee and direct the assessee company to procure the Valuation Report from the merchant banker as contemplated in Rule 11UA of the Income Tax Rules, 1962 and provide such report to ld.CIT(A) before whom the issues raised on merit are being restored for necessary re-adjudication.
CIT(A) shall sent a copy of the report under DCF method to the AO to get the remand report and thereafter shall carry out the proceedings as per law after allowing reasonable opportunity of hearing to the assessee. Effective grounds of appeal No. 3 to 13 raised on merits are allowed for statistical purposes.
The core legal question considered in this judgment was whether the rejection of the books of accounts by the Assessing Officer (AO) and the subsequent estimation of profit at 6% of the gross contract receipts were justified. The Tribunal also considered whether the assessee had sufficiently substantiated the loss claimed at the Hyderabad Branch and whether the estimation of profit should align with the financial results of previous years.
ISSUE-WISE DETAILED ANALYSIS
Rejection of Books of Accounts and Estimation of Profit at 6%
Relevant Legal Framework and Precedents: The Income Tax Act allows for the rejection of books of accounts if they are not credible or if there is a failure to substantiate claims. In such cases, the AO may estimate income based on a reasonable percentage of gross receipts.
Court's Interpretation and Reasoning: The Tribunal found that the AO rejected the books of accounts primarily because the assessee failed to substantiate the loss claimed at the Hyderabad Branch. However, the Tribunal noted that the AO did not provide any observation regarding the incorrectness of the books or the financial results declared by the assessee. The Tribunal emphasized that rejection of books should not be based merely on the inability to substantiate a specific claim if the overall books are verifiable and audited without adverse comments.
Key Evidence and Findings: The assessee provided evidence of compliance with the notice issued under Section 142(1) of the Act, including bills and vouchers related to the Hyderabad Branch. The Tribunal observed that the AO did not make any adverse comments on the overall books of accounts or the audit report.
Application of Law to Facts: The Tribunal concluded that the AO's rejection of the books was not justified as the assessee had complied with the requirements to the extent possible and maintained verifiable books. The Tribunal also found that the AO's estimation of profit at 6% lacked a basis or comparison with similar businesses.
Treatment of Competing Arguments: The assessee argued that the estimation should align with previous years' financial results, which showed a profit range of 4.1% to 5%. The Revenue supported the AO's estimation, citing the lack of complete information from the assessee. The Tribunal sided with the assessee, emphasizing the need for a justified basis for any estimation.
Conclusions: The Tribunal directed the AO to estimate the profit at 5% of the total contract receipts, reflecting the profit declared by the assessee in previous years, rather than the arbitrary 6% initially determined by the AO.
SIGNIFICANT HOLDINGS
Preserve verbatim quotes of crucial legal reasoning: The Tribunal stated, "In our considered view, the Assessing Officer cannot reject the books of accounts merely for the reason of un-substantiating the claim of loss on works contract at Hyderabad Branch when all other evidences filed by the assessee goes to prove that the books of accounts maintained by the assessee are verifiable."
Core principles established: The rejection of books of accounts must be based on substantial evidence of incorrectness or lack of credibility. Estimation of profit should be grounded in comparable data or historical financial results of the assessee.
Final determinations on each issue: The Tribunal concluded that the AO's rejection of the books was unwarranted and that the estimation of profit should be revised to 5%, aligning with the assessee's historical financial performance. The appeal was partly allowed, providing relief to the assessee by adjusting the profit estimation to a more reasonable figure based on past financial data.
Estimation of income @ 6% by rejecting the books of accounts of the assessee - HELD THAT:- AO cannot reject the books of accounts merely for the reason of un-substantiating the claim of loss on works contract at Hyderabad Branch when all other evidences filed by the assessee goes to prove that the books of accounts maintained by the assessee are verifiable and there is no adverse comments in the books of accounts maintained by the assessee either from the AO or from the Auditor. To this extent, we cannot uphold the reasons given by the AO for rejection of books of accounts.
Estimation of profit - AO without any valid reasons, simply estimated 6% profit on total contract receipts even though the assessee’s financial results shows the profit in this line of business ranging from 4.1% to 5%. Since the assessee’s own financial results is acceptable and in fact the AO has accepted the financial results of assessee for earlier assessment year, in our considered view, the AO should have adopted the assessee’s financial results for earlier years to estimate the profit for the impugned assessment year.
Thus, we direct the AO to estimate 5% profit on total contract receipts, including other receipts and interest income which is equal or similar to the profit declared by the assessee for earlier assessment years. Accordingly, the appeal of the assessee is allowed.
The primary issues considered in the judgment include:
ISSUE-WISE DETAILED ANALYSIS
1. Issuance of Notice under Section 148 vs. Section 153C
The legal framework revolves around the proper procedure for issuing notices under Sections 148 and 153C of the Income Tax Act. Section 153C is applicable when documents or information pertain to a person other than the one searched, requiring the Assessing Officer (AO) to record satisfaction and transmit materials to the AO of the concerned person.
The Court noted that post-amendment in 2015, Section 153C mandates action when documents pertain to another person. The AO failed to follow this procedure, instead issuing a notice under Section 148. The Court concluded that the assessment order was unsustainable due to non-compliance with the mandatory procedure under Section 153C, as the document pertained to the assessee and should have triggered action under Section 153C.
2. Addition of Rs. 13 Crore as Undisclosed Income
The AO added Rs. 13 crore to the assessee's income based on a document found during a search, purportedly indicating payment from a third party. The Court evaluated the evidence, noting the document was neither in the assessee's handwriting nor found at his premises. The statement of the accountant, who allegedly wrote the document, was not recorded under Section 132(4), and the assessee was denied cross-examination rights.
Relying on precedents, the Court emphasized that a person cannot be held accountable for third-party writings. The lack of cross-examination and the context of the accountant's statement, given under duress due to a pending FIR, further weakened the evidence. Consequently, the Court found the addition unsustainable and deleted it.
3. Absence of Notice under Section 143(2)
Section 143(2) requires issuance of a notice to provide the assessee an opportunity to support their return. The assessee argued that no such notice was issued after the original return was treated as filed in response to the Section 148 notice.
The Court observed that the absence of a physical notice under Section 143(2), despite the AO's claim, rendered the reassessment proceedings invalid. Citing Supreme Court and High Court judgments, the Court held that the absence of this notice invalidated the assessment.
4. Penalty under Section 271D
The AO imposed a penalty under Section 271D for allegedly accepting Rs. 13 crore in cash, violating Section 269SS. The Court noted two key points: the deletion of the addition of Rs. 13 crore and the nature of the transaction, which did not constitute a loan or deposit under Section 269SS.
Consequently, the Court found the penalty unsustainable and set aside the orders imposing it.
SIGNIFICANT HOLDINGS
The appeals were allowed, quashing the assessment and penalty orders. The Court's findings underscore the importance of adhering to procedural requirements and the evidentiary standards necessary to substantiate additions in tax assessments.
Reopening of assessment u/s 147 v/s assessment 153C - loose paper/documents pertaining to a third party found in search - HELD THAT:- We have taken cognizance of the alleged seized material (loose paper) as well as the belief formed by the AO while recording the reasons for re-opening of the assessment. According to the Revenue, this paper pertains to the assessee. The information contained in this paper is regarding payment of Rs.13 Cr to the assessee. Thus, this also pertains to the assessee. In such situation, to our mind, the AO ought to have initiated the proceedings under Section 153C.
AO of the searched person i.e. AO of Shri Sanjay Bansal or of the Trust should have recorded satisfaction that information contained in this loose paper pertains to the assessee and action against the assessee deserves to be taken under Section 153C because income has escaped assessment in the hands of the assessee. Such satisfaction ought to have been transmitted to the AO of the assessee and only thereafter, assessment could have been made. No action under Section 147/148 could be taken against the assessee because Section 153C starts with a non obstante clause namely, notwithstanding anything contained in Section 139/147. Thus, Section 147/148 has no bearing if proceeding required to be taken against the assessee u/s 153C - AO has failed to follow the mandatory procedure required to be followed, hence, assessment order is not sustainable and accordingly, is quashed. The Act contemplated a procedure which is required to be followed mandatorily and which has not been followed by the AO.
Addition on account of undisclosed income - loose paper was found - AO harboured the belief that Shri Sanjay Bansal has paid a sum of Rs.13 Cr to the assessee and hence, this amount deserves to be assessed in the hands of the assessee - AO was not in possession of any material which can authorize him to firmly reach at a conclusion that Shri Sanjay Bansal has made payment of Rs.13 Cr in cash to the assessee. The AO is simply harping upon the statement of Accountant of Shri Sanjay Bansal against whom a FIR has been lodged by his employer. If we exclude that statement from the evidence on the basis of the judgement of Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] as well as DSG Papers (P) Ltd. [2023 (11) TMI 762 - PUNJAB AND HARYANA HIGH COURT] then nothing will remain with the AO to draw such a conclusion. Therefore, this addition is not sustainable. We allow this ground of appeal and delete the addition.
Whether re-assessment is not sustainable because no notice was issued to the assessee u/s 143(2)? - There is no dispute with regard to the fact that assessee has filed two applications pleading therein that original return filed u/s 139(1) be treated as filed in response to notice received u/s 148. If Section 143(2) is being perused, then it will reveal that this Section provides first opportunity to an assessee what he wants to say in support of his return. Only thereafter AO would carry out investigation. In the present case, physical copy of the notice has not been brought before us by the Revenue. In the judgement of Hotel Blue Moon [2010 (2) TMI 1 - SUPREME COURT] cited by the assessee as well as Shri Shiv Shankar Traders [2015 (10) TMI 1765 - DELHI HIGH COURT] it has unanimously been propounded that before taking a return for scrutiny, a notice u/s 143(2) is the prerequisite condition and if such notice was not issued, then assessment is not sustainable. Therefore, on this ground also, assessment is not sustainable and accordingly quashed.
Penalty u/s 271D - acceptance of loan in cash in violation of Section 269SS of the Income Tax Act - HELD THAT:- This penalty is not sustainable for two reasons as we have already deleted the addition made to the total income of the assessee, therefore, it cannot be construed that assessee has accepted a sum of Rs.13 Cr in cash. This was neither loan nor deposits. This amount does not fall within the ambit of Section 269SS of the Income Tax Act. Therefore, no penalty is imposable on the assessee.
The core legal questions considered in this judgment are:
1. Whether the compensation received by the assessee in the form of a flat valued at Rs. 2.59 crores, for vacating a property occupied illegally, is taxable under Section 56(2)(vii)(b) of the Income Tax Act, 1961.
2. Whether the assessee is entitled to claim a deduction under Section 54F of the Income Tax Act, 1961, for the compensation received in the form of a new flat.
ISSUE-WISE DETAILED ANALYSIS
1. Taxability of Compensation Received
Relevant legal framework and precedents: The primary legal provision under consideration is Section 56(2)(vii)(b) of the Income Tax Act, which deals with the taxation of income from other sources, specifically addressing the receipt of property without consideration or for inadequate consideration. The case also references precedents such as the decision in Shri Kishre D.P. vs. Income Tax Officer, which held that compensation received for creating a nuisance is a capital receipt and not taxable.
Court's interpretation and reasoning: The Tribunal considered whether the compensation received by the assessee, in the form of a flat, constituted a capital receipt or income taxable under Section 56. The Tribunal referred to the precedent set in Shri Kishre D.P. vs. Income Tax Officer, where it was determined that compensation for nuisance is a capital receipt, thus not taxable as income.
Key evidence and findings: The key evidence included the fact that the assessee was not listed as a certified tenant by government authorities, indicating illegal occupation. The compensation was received as a result of a court settlement for vacating the property, which the Tribunal interpreted as compensation for removing a nuisance.
Application of law to facts: The Tribunal applied the legal principles from the precedent case, determining that the compensation received by the assessee was a capital receipt. As such, it was not taxable under Section 56(2)(vii)(b) of the Income Tax Act.
Treatment of competing arguments: The Revenue argued that the compensation should be taxed as income from other sources. However, the Tribunal favored the assessee's argument, supported by precedent, that the compensation was a capital receipt and not taxable.
Conclusions: The Tribunal concluded that the compensation received by the assessee, in the form of a flat, was a capital receipt for removing a nuisance and, therefore, not taxable under Section 56(2)(vii)(b).
2. Deduction under Section 54F
Relevant legal framework and precedents: Section 54F of the Income Tax Act provides for a deduction in respect of capital gains arising from the transfer of a long-term capital asset, subject to certain conditions.
Court's interpretation and reasoning: The Tribunal did not need to delve deeply into the issue of deduction under Section 54F, as it concluded that the compensation was a capital receipt and not taxable. Thus, the question of claiming a deduction under Section 54F became moot.
Key evidence and findings: The Tribunal noted that the assessee had not claimed the deduction in the return of income and that the compensation was not taxable as income.
Application of law to facts: Given the Tribunal's conclusion that the compensation was a capital receipt, the issue of deduction under Section 54F did not require further consideration.
Treatment of competing arguments: The Tribunal's decision on the non-taxability of the compensation precluded the need to address the competing arguments regarding the deduction under Section 54F.
Conclusions: The Tribunal did not make a determination on the deduction under Section 54F, as it was unnecessary given the conclusion on the non-taxability of the compensation.
SIGNIFICANT HOLDINGS
The Tribunal held that the value of the flat received by the assessee as compensation for removing a nuisance constituted a capital receipt and was not taxable. This decision was based on the precedent that compensation for nuisance is a capital receipt and not income. The Tribunal directed the Assessing Officer to delete the cost of the new flat amounting to Rs. 2.59 crores from the assessee's taxable income.
The Tribunal's decision reinforces the principle that compensation received for nuisance is a capital receipt and not taxable as income. The final determination on the primary issue resulted in the appeal being allowed in favor of the assessee.
Addition u/s. 56(2)(vii)(b) - value of new flat allotted as compensation received by the assessee in the form of a flat for vacating a property occupied illegally - disallowance of deduction claimed u/s. 54F - whether compensation received by the assessee from the builder for clearing the nuisance shall constitute capital asset in the hands of the assessee? - HELD THAT:- The assessee has created nuisance to the developer/builder and the said flat was allotted to the assessee as compensation for removing nuisance created by the assessee. We notice that an identical issue has been considered in the case of Shri Kishre D.P. [2017 (2) TMI 1567 - ITAT MUMBAI] wherein it was held that the compensation received for creating a nuisance is a capital receipt in the hands of the assessee and the same is not taxable - Decided in favour of assessee.
The core legal questions considered in this judgment include:
I. Whether the disallowance of deduction under section 80G of the Income Tax Act, 1961, in respect of Corporate Social Responsibility (CSR) expenditure amounting to Rs. 1,57,55,750/- was justified.
II. Whether the addition under section 41(1) of the Act of Rs. 6,66,765/- due to unilateral write-off by vendors was appropriate.
III. Whether the Dispute Resolution Panel (DRP) erred in not addressing the variations incorporated in the recomputed total income in the draft assessment order.
IV. Whether the non-allowance of credit of taxes adjusted against the interest charged under section 115P of Rs. 1,97,07,060/- was correct.
ISSUE-WISE DETAILED ANALYSIS
I. Disallowance of Deduction under Section 80G
- Legal Framework and Precedents: The relevant legal framework involves section 80G of the Income Tax Act, which allows deductions for donations to certain funds and institutions. The Tribunal referenced decisions from other cases, such as Advik Hi Tech (P.) Ltd. vs. DCIT and Credit Suisse Services (India) Private Limited, which supported the allowance of deductions for CSR expenses under section 80G.
- Court's Interpretation and Reasoning: The Tribunal found that the deduction claimed by the assessee under section 80G for CSR expenses should be allowed. It referenced previous decisions that established the principle that CSR expenses, if eligible under section 80G, should not be disallowed merely because they are CSR-related.
- Application of Law to Facts: The Tribunal applied the principle from the cited precedents and directed the Assessing Officer to allow the deduction under section 80G, provided the conditions for the deduction are met.
- Conclusion: The Tribunal allowed the appeal on this issue, directing the allowance of the deduction under section 80G.
II. Addition under Section 41(1)
- Legal Framework and Precedents: Section 41(1) of the Act pertains to the remission or cessation of trading liabilities, which can be taxed as income. The Tribunal considered the unilateral write-off by vendors and the subsequent addition by the Assessing Officer.
- Court's Interpretation and Reasoning: The Tribunal admitted additional evidence provided by the assessee, which included confirmations from vendors explaining the reasons for the write-off. The Tribunal found that this evidence was crucial for a fair decision.
- Application of Law to Facts: The Tribunal restored the matter to the Assessing Officer for verification of the additional evidence and to pass an appropriate order based on the facts and law.
- Conclusion: The issue was allowed for statistical purposes, with instructions for further verification by the Assessing Officer.
III. DRP's Non-Adjudication on Variations
- Legal Framework and Precedents: The jurisdiction of the DRP under section 144C(8) was considered, which allows it to address variations in the draft assessment order.
- Court's Interpretation and Reasoning: The Tribunal noted that the assessee had already received due relief from the Assessing Officer, rendering this issue academic.
- Conclusion: The issue was dismissed as "not pressed" since it was academic in nature.
IV. Non-Allowance of Credit of Taxes under Section 115P
- Legal Framework and Precedents: The issue involved the adjustment of taxes against interest charged under section 115P. The Tribunal considered the directions given by the DRP and the subsequent actions of the Assessing Officer.
- Court's Interpretation and Reasoning: The Tribunal directed the Assessing Officer to verify the records and rectify the demand of tax, providing a fair opportunity for the assessee to be heard.
- Conclusion: The issue was allowed for statistical purposes, with instructions for the Assessing Officer to verify and rectify the tax demand.
SIGNIFICANT HOLDINGS
- The Tribunal upheld the principle that CSR expenses, if eligible under section 80G, should be allowed as deductions, following the precedent set by previous Tribunal decisions.
- The Tribunal emphasized the importance of admitting additional evidence when it goes to the root of the matter, ensuring a fair decision-making process.
- The Tribunal reinforced the necessity for the Assessing Officer to verify claims and rectify errors, ensuring compliance with the law and fairness to the assessee.
- The appeal was partly allowed for statistical purposes, with specific directions for further actions by the Assessing Officer on certain issues.
Disallowance of Deduction w/s 80G qua the CSR expenditure - HELD THAT:- We find the Pune Bench of the Tribunal in the case of Advik Hi Tech (P.) Ltd. [2024 (10) TMI 1648 - ITAT PUNE] has held that the deduction claimed by the assessee u/s 80G on account of Corporate Social Responsibility (CSR) deserves to be allowed. Thus, we hold that the AO is not justified in denying the claim of deduction u/s 80G - Decided in favour of assessee.
Addition u/s 41(1) - unilaterally written off by the vendors - HELD THAT:- As we find the additional evidences filed by the assessee go to the root of the matter. We, therefore, admit the same and restore the matter to the file of the AO with a direction to verify the same and pass an appropriate order as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The second issue raised by the assessee is accordingly allowed for statistical purposes.
Disallowing credit of taxes adjusted against the interest charged u/s 115P - since the interest charged allegedly for non-payment of DDT has not been deleted and raised the demand of tax erroneously in the final order, the Ld. Counsel for the assessee submitted that the same may be deleted - HELD THAT:- We deem it proper to restore this issue to the file of the Assessing Officer with a direction to verify the record and rectify the demand of tax after providing due opportunity of being heard to the assessee. The fourth issue raised by the assessee is accordingly allowed for statistical purposes.
The core legal issue considered in this judgment is whether the National Faceless Assessment Centre (NFAC) had the jurisdiction to issue a notice under Section 142(1) of the Income Tax Act, 1961, prior to the notification of the faceless assessment scheme on 29.03.2022. This involves examining the validity of the assessment order passed under Sections 147, 144, and 144B of the Act, given the timing of the relevant notifications and the jurisdictional authority of the NFAC.
ISSUE-WISE DETAILED ANALYSIS
Jurisdiction of NFAC to Issue Notice under Section 142(1)
Relevant Legal Framework and Precedents:
The legal framework revolves around the provisions of Sections 142(1), 144B, 147, and 151A of the Income Tax Act, 1961. Specifically, Section 142(1) pertains to the power to issue notices for assessment, Section 144B deals with the faceless assessment scheme, Section 147 pertains to income escaping assessment, and Section 151A relates to the jurisdiction for faceless assessments.
The Tribunal references a precedent from the coordinate bench in the case of Nabiul Industrial Metal Pvt. Ltd. Vs. ITO, which held that the NFAC lacked jurisdiction to issue notices under Section 142(1) prior to the relevant notification dates.
Court's Interpretation and Reasoning:
The Tribunal analyzed the sequence of notifications and the statutory provisions. It noted that the NFAC issued a notice under Section 142(1) on 16.12.2021, at a time when it did not possess the jurisdiction to do so. The relevant notification granting such jurisdiction was only issued on 30.03.2022 (Notification No. 19/2022), with the faceless assessment scheme under Section 151A being notified on 29.03.2022 (Notification No. 18/2022). Therefore, the Tribunal concluded that the NFAC acted without jurisdiction.
Key Evidence and Findings:
The Tribunal found that the NFAC issued notices and conducted assessments without the requisite jurisdictional authority, as the legal framework empowering such actions was not in effect at the time the notices were issued. The Tribunal relied on the specific dates of the notifications and the statutory amendments to support its findings.
Application of Law to Facts:
The Tribunal applied the statutory provisions to the facts, determining that the NFAC's actions were premature and beyond its jurisdiction. The assessment order dated 27.03.2022 was deemed invalid as the jurisdictional authority was only conferred after the relevant notifications were issued.
Treatment of Competing Arguments:
The Tribunal considered the submissions of the Departmental Representative, which attempted to justify the NFAC's actions. However, it found these arguments unpersuasive and lacking in merit, as they did not align with the statutory requirements and the timing of the notifications.
Conclusions:
The Tribunal concluded that the NFAC lacked the jurisdiction to issue the notice under Section 142(1) and complete the assessment under Section 147 prior to the notification dates. Consequently, the appeal of the assessee was allowed, and the assessment order was set aside.
SIGNIFICANT HOLDINGS
The Tribunal established a core principle that jurisdictional authority must be strictly adhered to, particularly in the context of faceless assessments. It held that the NFAC's actions were invalid due to the lack of jurisdiction at the time of issuing the notice under Section 142(1).
Preserve Verbatim Quotes of Crucial Legal Reasoning:
"Therefore, it is apparent from the above that the NFeAC had no jurisdiction to issue notice u/s 142(1) of the Act prior to 30.03.2022, because the scheme of faceless enquiry u/s 142B of the Act for issuance of notice u/s 142(1) of the Act by NFeAC was notified on 30.03.2022 vide Notification no. 19/2022."
Core Principles Established:
The Tribunal reinforced the principle that statutory authority and jurisdiction are prerequisites for valid assessment actions. Notifications conferring jurisdiction must be in effect before any actions are taken under the relevant provisions.
Final Determinations on Each Issue:
The Tribunal determined that the NFAC's issuance of the notice under Section 142(1) and the subsequent assessment order were without jurisdiction and, therefore, invalid. The appeal was allowed, and the assessment order was set aside.
Validity of order passed u/s 147 r.w.s.144B by National Faceless Assessment Centre - whether it is without jurisdiction as provisions of Section 151A as the the e-assessment of Income escaping assessment scheme, 2022 was notified on 29.03.2022 vide notification No.18/2022/F.No.370142/16/2022-TPL for assessment?
HELD THAT:- The case of the assessee find support from the decision of Nabiul Industrial Metal Pvt. Ltd [2024 (10) TMI 1649 - ITAT KOLKATA] wherein allowed the appeal of the assessee by holding that the assumption of jurisdiction by the NFAC is invalid as there is no power with NFAC to issue notice u/s 142(1) of the Act prior to 29.03.2022 because the scheme of faceless enquiry u/s 142B for issuance of notice u/s 142(1) of the Act by NFAC was notified on 30.03.2022 vide Notification no. 19/2022 though it was inserted on the statute book w.e.f. 1.11.2020 for faceless enquiry and valuation.
Further u/s 151A e-assessment of income escaping assessment scheme, 2022 was duly notified on 29.03.2022 vide notification no. 18/2022/F.No/370142/16/2022-TPL for assessment, reassessment or re-computation under section 147 of the Act through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in Section 148 for issuance of notice and in a faceless manner to the extent provided in Section 144B.
Therefore prior to 29.3.2022, the NFeAC has no jurisdiction to make assessment u/s 147 or to issue notice 142(1) vide notification no. 18/2022, dated 29.03.2022 u/s 151A. Accordingly appeal of the assessee is allowed.
The core legal issues considered in this judgment are:
ISSUE-WISE DETAILED ANALYSIS
1. Disallowance of Short-Term Capital Loss on Share Warrants
Relevant Legal Framework and Precedents
The issue revolves around the scope of limited scrutiny as defined by the Central Board of Direct Taxes (CBDT) Instruction No. 20/2015. The instruction delineates the boundaries within which an Assessing Officer (AO) can operate during limited scrutiny assessments.
Court's Interpretation and Reasoning
The Tribunal noted that the case was selected for limited scrutiny with the reason being "large other expenses claimed in the Profit & Loss account." The Tribunal found that the assessee had already added back the loss on share warrants to the total income, effectively not claiming it as an expense under the head "Income from Business or Profession." Therefore, the AO exceeded the scope of limited scrutiny by disallowing the short-term capital loss on share warrants.
Key Evidence and Findings
The Tribunal examined the Profit & Loss account and noted that the loss on share warrants was already accounted for in the total income. The remaining expenses were minimal and did not justify the AO's scrutiny under the limited scope.
Application of Law to Facts
The Tribunal applied the principles of limited scrutiny as outlined in the CBDT instructions, concluding that the AO's actions were beyond the permissible scope. The Tribunal emphasized that the AO did not have the jurisdiction to examine the loss on share warrants as it was not part of the limited scrutiny reasons.
Treatment of Competing Arguments
The Tribunal considered the arguments from both sides. The appellant argued that the AO's actions were beyond the scope of limited scrutiny, while the respondent maintained that the disallowance was justified. The Tribunal sided with the appellant, emphasizing the procedural limitations of limited scrutiny.
Conclusions
The Tribunal concluded that the disallowance of the short-term capital loss on share warrants was beyond the scope of limited scrutiny and thus not permissible.
2. Disallowance of Expenses under Section 14A
Relevant Legal Framework and Precedents
Section 14A of the Income Tax Act, 1961, deals with the disallowance of expenses incurred in relation to income not includible in total income. Rule 8D provides the method for determining the amount of disallowance.
Court's Interpretation and Reasoning
The Tribunal observed that the AO invoked Section 14A for disallowing expenses related to exempt income, despite the limited scrutiny scope being "large other expenses claimed." The Tribunal found that the AO's actions were not aligned with the limited scrutiny reasons.
Key Evidence and Findings
The Tribunal noted that the assessee did not claim any large expenses in the Profit & Loss account that would justify the invocation of Section 14A. The Tribunal found that the AO's actions were not supported by the evidence presented.
Application of Law to Facts
The Tribunal applied the principles of limited scrutiny and Section 14A, concluding that the AO's actions were beyond the permissible scope. The Tribunal emphasized that the AO did not have the jurisdiction to disallow expenses under Section 14A as it was not part of the limited scrutiny reasons.
Treatment of Competing Arguments
The Tribunal considered the arguments from both sides. The appellant argued that the AO's actions were beyond the scope of limited scrutiny, while the respondent maintained that the disallowance was justified. The Tribunal sided with the appellant, emphasizing the procedural limitations of limited scrutiny.
Conclusions
The Tribunal concluded that the disallowance of expenses under Section 14A was beyond the scope of limited scrutiny and thus not permissible.
SIGNIFICANT HOLDINGS
The Tribunal held that the AO exceeded the jurisdiction of limited scrutiny by disallowing the short-term capital loss on share warrants and expenses under Section 14A. The Tribunal emphasized the procedural limitations of limited scrutiny as outlined in the CBDT instructions.
Preserve Verbatim Quotes of Crucial Legal Reasoning
"It is well settled law that if a case is taken for limited scrutiny by the A.O., he cannot exceed the jurisdiction beyond the one which he has carved out himself in the notice issued for limited scrutiny."
Core Principles Established
Final Determinations on Each Issue
The appeal of the assessee is allowed, and the additions sustained by the CIT(A) are deleted.
Scope of limited scrutiny - Disallowance of short term capital loss on account of forfeiture of share warrant - HELD THAT:- In the present case, the AO has travelled beyond his jurisdiction and made additions on the issues which are not part of the reasons for limited scrutiny. Therefore, both the AO and CIT(A) has committed an error in making the addition and sustaining the same which requires to be set aside.
This view of our is supported by the decision of Padmavathi reported [2020 (10) TMI 425 - MADRAS HIGH COURT].
As the facts of the present case are squarely covered by the decision of the Hon'ble Madras High Court in the case of Padmavathi (supra) in our opinion no addition could be made in the hands of the assessee beyond the scope of limited scrutiny without following the procedure laid down for converting the limited scrutiny into complete scrutiny by recording satisfaction and further by taking necessary approval from the higher authorities as prescribed. Appeal of the assessee is allowed.
Issues: Whether the reassessment could be sustained when the additions ultimately made did not relate to the recorded reason for reopening and the Assessing Officer had not taxed the income that formed the basis of the notice.
Analysis: The notice for reassessment was founded on cash deposits in a bank account. In the assessment, however, no addition was made on that very basis; instead, additions were made on different items arising from the balance sheet and profit and loss account. The binding jurisdictional principle applied was that once the income for which reassessment was initiated is found to be explained or is not brought to tax, the Assessing Officer cannot continue to assess other items of income in the same reassessment proceedings.
Conclusion: The reassessment on the challenged jurisdictional ground was unsustainable and the assessee succeeded.
Assessment order passed u/s 148 r.w.s. 144 - addition made on the issue of cash deposits - Reasons for opening of the assessment are different than reasons for making additions - HELD THAT:- Revenue was in possession of the information that the assessee has deposited a sum of Rs 42,46,000/- during the F.Y. 2011-12 in his saving bank account held with ICICI Bank Ltd. The assessee has not filed his return of income for the year under consideration. In absence of return of income the above transactions considered was considered as not verifiable and accordingly, reasons for reopening of the case were recorded, and notice u/s 148 of the Act was issued on 19.03.2019, which was duly served upon the assessee through registered post.
The assessee made part compliance and submitted the copy of balance Sheet and Profit & loss account. Thereafter despite various opportunities provided assessee remained non-compliant and ld. AO went on making the addition which were based on the profit and loss account and Balance Sheet filed by the assessee and the has abstained from making any addition on account of cash deposited to the Saving Bank account as alleged in the reasons recorded for re-opening of the case.
Thus, once the Assessing Officer is satisfied with the reasons recorded for reopening the case, they no longer have the jurisdiction to tax any other income.
We get strength of this view from a decision serviced by the ld. AR of the assessee in the case Shri Ram Singh [2008 (5) TMI 200 - RAJASTHAN HIGH COURT] as held AO was justified in initiating the proceedings under section 147/148, but then, once he came to the conclusion, that the income, with respect to which he had entertained "reason to believe" to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of the proceedings, which were found by him, to have escaped assessment.
Thus once the ld. AO abstained from making any addition on the reasons recorded his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of the proceedings, which were found by him, to have escaped assessment. Based on these observations ground no. 1 raised by the assessee is allowed.
The core issues considered in this judgment were:
ISSUE-WISE DETAILED ANALYSIS
1. Assessment of Long-Term Capital Gain (LTCG) as Exempt
2. Source of Investment in Immovable Properties
SIGNIFICANT HOLDINGS
Revisionary jurisdiction under section 263 - Explanation 2 to section 263 - clauses (a) and (b) - reopening under section 147 - checking and verification by the Assessing Officer - onus of proof on the assessee to establish genuineness of claim - requirement of minimum inquiry by superior officer before invoking section 263
Revisionary jurisdiction under section 263 - Explanation 2 to section 263 - clauses (a) and (b) - checking and verification by the Assessing Officer - requirement of minimum inquiry by superior officer before invoking section 263 - Legality of invoking section 263 to set aside the assessment insofar as it accepted the assessee's claim of longterm capital gain on sale of IndusInd Bank shares. - HELD THAT: - The Tribunal examined whether the Principal Commissioner was justified in treating the assessment order as erroneous and prejudicial to the revenue under Explanation 2(a) and (b) to section 263. The record shows that the Assessing Officer issued successive notices under section 142(1)/143(2), called for documents and replies, and the assessee produced purchase and sale contract notes, bank entries and related material which the AO checked and verified before accepting the return. Although the investigation wing's verification report alleged bogus contract notes and listed the assessee as a beneficiary, the Tribunal emphasised that once the assessee placed documentary evidence on file the primary responsibility to contradict that evidence lay on the Department/AO. The PCIT, before invoking section 263, ought to have made at least a prima facie independent inquiry into the allegation of forgery (for example from the exchange or other records) instead of concluding that there was no inquiry by the AO. Since the AO had conducted checking and verification and taken a plausible view accepting the assessee's material, the PCIT failed to demonstrate the necessary error in the assessment order or the prejudice to revenue as required to sustain revisionary jurisdiction under section 263. Consequently the impugned revision was held unsustainable. [Paras 4]
Impugned order under section 263 insofar as it set aside the assessment on the ground of alleged bogus LTCG is quashed; the Tribunal finds that AO had made checking and verification and PCIT failed to make the requisite minimum inquiry before invoking section 263.
Revisionary jurisdiction under section 263 - Explanation 2 to section 263 - clauses (a) and (b) - reopening under section 147 - checking and verification by the Assessing Officer - Validity of the PCIT's invocation of section 263 in relation to alleged failure by the AO to verify source of funds for purchase of immovable properties. - HELD THAT: - The Tribunal reviewed the AO's proceedings and the material placed on record regarding the purchase of two immovable properties. Although the AO initially misread entries in Form 26AS, he had issued queries under section 142(1), the assessee explained the transactions as purchases (not sales) and produced registered sale deeds, bank debit entries and loan statements showing payments from her bank account and loan disbursement. The PCIT criticised the AO for not calling for further source verification and treated the assessment as one of 'no inquiry'. The Tribunal found that the assessee had furnished documentary evidence during assessment which the AO had on file and that PCIT ought to have made at least a bare minimum independent inquiry instead of setting aside the assessment. In absence of a demonstration of an erroneous view that was prejudicial to revenue, the exercise of revisionary power was not warranted. [Paras 4]
Impugned order under section 263 insofar as it set aside the assessment for failure to verify sources for immovable property purchases is quashed; the AO had sought and had on record explanations and documents and PCIT did not conduct the minimal verification required before exercising revisionary power.
Final Conclusion: The Tribunal set aside the impugned order passed by the PCIT under section 263 and allowed the assessee's appeal, holding that the AO had made requisite checking and verification and that the PCIT failed to conduct the minimum independent inquiry necessary to justify exercise of revisionary jurisdiction under Explanation 2 to section 263.
The primary issues considered in this judgment involve the adherence to the timelines prescribed under the Customs Brokers Licensing Regulations, 2018 (CBLR, 2018) for the issuance of a show cause notice and the submission of an inquiry report. Specifically, the court examined whether the timelines set forth in Regulation 17 (5) and Regulation 17 (7) of the CBLR, 2018 are mandatory or directory in nature. The petitioner challenged the delay in proceedings, arguing that the non-compliance with these timelines should result in the quashing of the impugned show cause notice and inquiry report.
ISSUE-WISE DETAILED ANALYSIS
1. Adherence to Timelines under CBLR, 2018
Relevant legal framework and precedents:
The relevant regulations under scrutiny are Regulation 17 (5) and Regulation 17 (7) of the CBLR, 2018. Regulation 17 (5) mandates that an inquiry report must be submitted within 90 days from the issuance of a show cause notice. Regulation 17 (7) requires that final orders be passed within 90 days from the date of submission of the inquiry report. The petitioner relied on prior judgments, notably a Division Bench Judgment of the Madras High Court in the case of Santon Shipping Services Vs. The Commissioner of Customs, which held similar timelines under the Customs House Agents Licensing Regulations, 2004 (CHALR, 2004) as mandatory.
Court's interpretation and reasoning:
The Court adhered to the precedent set by the Division Bench in Santon Shipping Services, affirming that the timelines under the CBLR, 2018 are mandatory. The Court emphasized that the decision in Santon Shipping Services had attained finality and was binding. It also noted that a learned Single Judge had previously followed this precedent in KTR Logistics Solutions Pvt. Ltd. Vs. Commissioner of Cus., Chennai, further reinforcing the mandatory nature of the timelines.
Key evidence and findings:
The Court acknowledged that the respondents did not dispute the delay in complying with the timelines prescribed by the CBLR, 2018. The show cause notice was issued on 28.03.2022, and the inquiry report was submitted on 17.06.2022, exceeding the 90-day period mandated by Regulation 17 (5). Furthermore, no final orders were passed within the 90 days from the inquiry report submission, as required by Regulation 17 (7).
Application of law to facts:
The Court applied the legal framework established in prior judgments to the facts of the case, concluding that the failure to adhere to the mandatory timelines warranted the quashing of the impugned show cause notice and inquiry report.
Treatment of competing arguments:
The respondents argued that the timelines under the CBLR, 2018 are directory rather than mandatory, citing a decision from the Bombay High Court. However, the Court dismissed this argument, reiterating its obligation to follow the binding precedent set by the Division Bench of the Madras High Court, which held the timelines as mandatory.
Conclusions:
The Court concluded that the failure to comply with the mandatory timelines under Regulation 17 (5) and Regulation 17 (7) of the CBLR, 2018 necessitated the quashing of the impugned show cause notice and inquiry report.
SIGNIFICANT HOLDINGS
The Court held that the timelines specified in the CBLR, 2018 are mandatory and must be strictly adhered to. This holding aligns with the precedent established in the Santon Shipping Services case, which has been consistently followed by the Madras High Court.
Core principles established:
The judgment reinforces the principle that regulatory timelines, when deemed mandatory by precedent, must be strictly followed to ensure procedural fairness and accountability in administrative proceedings.
Final determinations on each issue:
The Court determined that the impugned show cause notice dated 28.03.2022 and the impugned Inquiry Report dated 17.06.2022 should be quashed due to non-compliance with the mandatory timelines under the CBLR, 2018. Consequently, the writ petitions were allowed.
Time limitation for issuance of SCN - Failure to follow 90 days time limit prescribed under Regulation 17 (5) of the Customs Brokers Licensing Regulations, 2018 - HELD THAT:- The respondents have not disputed that there was a delay on their part in complying with the timelines fixed in the CBLR, 2018 under regulation 17. However, the only contention before this Court is that those timelines are only directory in nature and therefore, for non compliance of timelines, the petitioner cannot seek for quashing of the impugned show cause notice dated 28.03.2022 as well as the impugned Inquiry Report dated 17.06.2022.
This Court is bound by the decision of the Division Bench of this Court in the case of Santon Shipping Services Vs. The Commissioner of Customs [2017 (10) TMI 621 - MADRAS HIGH COURT], wherein the Division Bench has categorically held that similar regulations applicable to Customs House Agents, viz., CHALR, 2004 are mandatory and strict timelines will have to be necessarily followed as per the said regulations.
Conclusion - This Court is of the considered view that the impugned show cause notice as well as the impugned inquiry report have to be quashed on the ground of non adherence to the timelines fixed under regulation 17 (5) and (7) of CBLR, 2018, which are mandatory in nature.
The impugned show cause notice dated 28.03.2022 and the impugned Inquiry Report dated 17.06.2022 are hereby quashed and these writ petitions are allowed.
The core legal questions considered in this judgment are:
(i) Whether the customs officers have the authority to re-determine the Free on Board (FOB) value of export goods under the Customs Act and the Customs Valuation (Determination of Export Goods) Rules, 2007.
(ii) Whether the confiscation of goods and imposition of penalties under Sections 113, 114, and 114AA of the Customs Act, 1962, were justified.
(iii) Whether the principles of natural justice were violated due to the lack of a show cause notice and personal hearing.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Authority to Re-determine FOB Value
- Relevant Legal Framework and Precedents: Section 14 of the Customs Act, 1962, and the Customs Valuation (Determination of Export Goods) Rules, 2007, particularly Rules 6 and 8, govern the valuation of export goods. The FOB value is the transaction value agreed upon by the buyer and seller.
- Court's Interpretation and Reasoning: The Court emphasized that the FOB value is the transaction value, which customs officers cannot re-determine. Section 14 and the Valuation Rules empower officers to determine the assessable value for duty purposes, not to alter the transaction value.
- Key Evidence and Findings: The appellant declared an FOB value based on transaction terms, while the customs officer re-determined it using market opinions, which the Court found inappropriate.
- Application of Law to Facts: The Court held that the customs officers overstepped their authority by re-determining the FOB value, as the transaction value is a matter between the buyer and seller.
- Treatment of Competing Arguments: The appellant argued that the re-determination was based on insufficient evidence, while the Revenue claimed it was necessary due to overvaluation. The Court sided with the appellant, emphasizing the sanctity of the transaction value.
- Conclusions: The re-determination of the FOB value was without legal authority and was set aside.
Issue (ii): Confiscation and Penalties
- Relevant Legal Framework and Precedents: Sections 113, 114, and 114AA of the Customs Act, 1962, deal with confiscation and penalties for mis-declaration of goods.
- Court's Interpretation and Reasoning: The Court found that confiscation under Section 113(i) requires a mis-declaration of the transaction value, not a re-determined value by customs officers. Penalties under Sections 114 and 114AA depend on valid confiscation.
- Key Evidence and Findings: The appellant declared the transaction value, which was not proven incorrect by documentary evidence. The re-determined value was not a valid basis for confiscation.
- Application of Law to Facts: The Court concluded that since the transaction value was correctly declared, confiscation and penalties were unjustified.
- Treatment of Competing Arguments: The Revenue argued for confiscation based on re-determined value, while the appellant maintained the transaction value's correctness. The Court ruled in favor of the appellant.
- Conclusions: Confiscation and penalties were set aside as they were based on an incorrect premise.
Issue (iii): Principles of Natural Justice
- Relevant Legal Framework and Precedents: Section 124 of the Customs Act mandates a show cause notice and personal hearing unless waived.
- Court's Interpretation and Reasoning: The Court noted that the appellant waived the show cause notice and hearing, thus no violation of natural justice occurred.
- Key Evidence and Findings: The appellant's waiver was documented, and the Court found no procedural impropriety.
- Application of Law to Facts: The waiver was valid, and the process followed was legally sound.
- Treatment of Competing Arguments: The appellant's claim of involuntary waiver was dismissed due to lack of evidence.
- Conclusions: No violation of natural justice principles was found.
3. SIGNIFICANT HOLDINGS
- The Court held that the FOB value is the transaction value agreed between the buyer and seller, and customs officers have no authority to re-determine it.
- Confiscation and penalties under Sections 113, 114, and 114AA are contingent on mis-declaration of the transaction value, not on a re-determined value.
- The appeal was allowed, and the impugned order was set aside, providing consequential relief to the appellant.
FOB value as transaction value - Customs re-determination of transaction value - Assessable value for customs duty - Customs Valuation Rules - Rule 6 and Rule 8 - Section 14 - valuation and rule-making - Confiscation under Section 113(i) - Redemption fine under Section 125 - Penalty under Section 114 - Penalty under Section 114AA for false or incorrect material
FOB value as transaction value - Customs re-determination of transaction value - Section 14 - valuation and rule-making - Customs Valuation Rules - Rule 6 and Rule 8 - Whether the Customs authorities were entitled to re-determine the FOB value declared in the Shipping Bill under the Valuation Rules. - HELD THAT: - The Tribunal holds that the FOB value is the transaction value agreed between buyer and seller and is not subject to re-determination by a stranger to the contract. While Section 14 and the Valuation Rules empower the proper officer to determine an assessable value for levy of duty, those provisions relate to determination of value for customs assessment (assessable value) and do not authorize changing the transaction price agreed by parties. Rules 4-6 provide methods to determine value where transaction value is rejected under Rule 8, but such re-determination affects assessable value for duty purposes and does not alter the contractual transaction value (FOB). Absent documentary evidence showing that the declared FOB itself is not the true transaction price, the declared FOB must be accepted. Consequently, the Additional Commissioner's reduction of the FOB (transaction) value under Rule 6 and the Commissioner (Appeals)'s upholding of that reduction are contrary to law and set aside. (See reasoning at paras 13-17, 20, 25.) [Paras 13, 15, 16, 20, 25]
The re-determination of the FOB (transaction) value by the customs authorities under the Valuation Rules is without authority; the declared FOB value must be accepted unless documentary evidence shows it is not the true transaction value.
Confiscation under Section 113(i) - Redemption fine under Section 125 - Assessable value for customs duty - Whether confiscation of the exported goods under Section 113(i) and imposition of redemption fine under Section 125 are sustainable when the customs officer re-determined a lower value under the Valuation Rules. - HELD THAT: - Section 113(i) makes liable to confiscation goods entered for exportation which do not correspond in respect of value with the entry made. The Tribunal reasons that the exporter's obligation is to declare the transaction value in the Shipping Bill; he cannot be required to anticipate or declare the value that a proper officer might re-determine for assessment purposes. If the declared value truly reflects the transaction price between buyer and seller, rejection by the officer and re-determination for assessable value does not convert the declared transaction value into a false declaration under Section 113(i). Therefore, confiscation and consequent redemption fine predicated solely on an officer's re-determination of assessable value cannot be sustained where the declared FOB is the transaction value. The Additional Commissioner's confiscation and imposition of redemption fine are set aside. (See reasoning at paras 18-21, 25.) [Paras 18, 19, 20, 21, 25]
Confiscation under Section 113(i) and the redemption fine under Section 125 are not sustainable where they rest only on the customs officer's re-determination of assessable value while the declared FOB represents the transaction value.
Penalty under Section 114 - Penalty under Section 114AA for false or incorrect material - Whether penalties under Section 114 and Section 114AA can be imposed where confiscation and re-determination of value have been set aside because the declared FOB was the transaction value. - HELD THAT: - Penalty under Section 114 arises when export goods are confiscated; since confiscation under Section 113(i) is not sustainable for the reasons above, the corresponding penalty under Section 114 cannot stand. As to Section 114AA, which penalises knowingly or intentionally making or using false or incorrect declarations, the Tribunal finds no basis to conclude that the exporter knowingly mis-declared the transaction value. The exporter's duty is to declare the transaction price; he had furnished supporting purchase documents and could not be required to predict an officer's reassessed value. In the absence of documentary evidence showing that the declared FOB was false or incorrect in a material particular, penalty under Section 114AA is not imposable. Accordingly, penalties under both sections are set aside. (See paras 22-24, 25.) [Paras 22, 23, 24, 25]
Penalties under Section 114 and Section 114AA are not sustainable and are set aside where confiscation is unsustainable and there is no evidence of a knowingly false or incorrect declaration of the transaction (FOB) value.
Final Conclusion: The appeal is allowed; the Tribunal sets aside the re-determination of the FOB (transaction) value, the confiscation and redemption fine, and the penalties under Sections 114 and 114AA, and grants consequential relief to the appellant.
The primary issue in this case was the correct classification of the 'Carbon and Sulphur Analyzer CS-800' imported by the appellant. The central question was whether the apparatus should be classified under CTH 90271000 as a 'Gas or Smoke analysis apparatus' or under a different classification, potentially a residuary heading within CTH 9027.
ISSUE-WISE DETAILED ANALYSIS
Relevant Legal Framework and Precedents
The classification of goods under the Customs Tariff is governed by the Harmonized System of Nomenclature (HSN). CTH 9027 covers instruments and apparatus for physical or chemical analysis, including gas or smoke analysis apparatus. CTH 90271000 specifically pertains to 'Gas or smoke analysis apparatus'. The HSN explanatory notes describe these as apparatus used to analyze combustible gases or combustion by-products in various industrial settings.
In the case of Dunlop India Ltd & Madras Rubber Factory Ltd Vs Union of India and others, the Supreme Court held that when a specific heading is available, reliance on a residuary heading is not tenable.
Court's Interpretation and Reasoning
The Tribunal examined whether the apparatus in question was primarily a gas analyzer as classified by the Commissioner (Appeals). The apparatus was used to determine the content of carbon and sulphur in metal samples, not to analyze gases like carbon dioxide or sulphur dioxide. The Tribunal noted that the apparatus created fumes or gases as a by-product of testing but was not intended to measure the content of these gases.
Key Evidence and Findings
The Tribunal considered the nature of the apparatus and its intended use. The apparatus was designed to measure the presence of carbon and sulphur in solid metal samples, not to analyze combustible gases or combustion by-products. The Tribunal also noted that similar apparatuses had been classified under different headings, such as CTH 90279090 and 90278090, depending on their specific use and the gases they analyzed.
Application of Law to Facts
The Tribunal applied the HSN explanatory notes to determine that the apparatus did not fall under CTH 90271000. The apparatus was not used to analyze gases in the manner described under that heading. Instead, it was used to determine the element content in metal samples, which did not align with the description of gas or smoke analysis apparatus.
Treatment of Competing Arguments
The appellant argued that the apparatus should not be classified under CTH 90271000 because it did not analyze gases as described in the HSN notes. The respondent relied on the Dunlop India Ltd case to argue that the specific heading should apply. The Tribunal found the appellant's argument more persuasive, noting that the apparatus's primary function was not gas analysis.
Conclusions
The Tribunal concluded that the apparatus should not be classified under CTH 90271000. The apparatus's primary function was to measure carbon and sulphur content in metal samples, not to analyze combustible gases or combustion by-products.
SIGNIFICANT HOLDINGS
The Tribunal held that the apparatus did not fall under CTH 90271000. The Tribunal emphasized that the apparatus's primary function was to measure element content in solid samples, not to analyze gases. The Tribunal also noted that the appellant was not estopped from challenging the classification, even if they had previously classified the apparatus under CTH 90271000.
Core Principles Established
The Tribunal established that the classification of goods should align with their primary function and use. Apparatuses that do not primarily analyze gases should not be classified under headings specific to gas analysis.
Final Determinations on Each Issue
The Tribunal set aside the order of the Commissioner (Appeals) and allowed the appeal, determining that the apparatus should not be classified under CTH 90271000.
Classification of goods imported by the appellant - Carbon and Sulphur Analyzer CS-800 - to be classified under CTH 90271000 by treating it as ‘Gas or Smoke analysis apparatus’ or not - HELD THAT:- Clearly, CTH 9027 is the heading which covers ‘Instruments and apparatus for physical or chemical analysis (for example, polarimeters, refractometers, spectrometers, gas or smoke analysis apparatus); Instruments and apparatus for measuring or checking viscosity, porosity, expansion, surface tension or the like; instruments and apparatus for measuring or checking quantities of heat, sound or light (including exposure meters); microtomes’.
A plain reading of the coverage, as per HSN, would indicate that the kind of gas or smoke analysis apparatus, which is specifically covered under CTH 90271000, are the one where the apparatus is used to analyze combustible gases or combustion by-products (burnt gases) and especially in coke ovens, gas producers, blast furnaces, etc., for determining their content of carbon dioxide, carbon monoxide, oxygen, hydrogen, nitrogen or hydrocarbons - The technology it is using requires creation of fume or gas only with intent to ultimately test the presence of carbon or sulphur element in the metal and not the presence of carbon dioxide or sulphur dioxide gas in the metal. Therefore, this particular equipment is not classifiable under CTH 90271000. It is also noted that different types of analysers have been imported through different ports and they have been classified under many headings including CTH 90279090 & 90278090. From perusal of the same, it is also noticed that those equipments, which are specifically meant for analysing gases like SOX/NOX i.e., sulphur dioxide and nitrous oxide, etc., are getting classified under CTH 90271000, whereas, other kinds of analysers are getting classified under CTH 90278090.
As far as the argument that appellants themselves have started classifying the product under CTH 90271000 and therefore, now they cannot go back and claim that it is not classifiable is concerned, it is found that there is no estoppel on the appellant to challenge the classification even if they have started paying the duty under different heading during subsequent period. As far as the issue of payment under protest is concerned, it has got no relevance for the present appeal as during the material period, they had contested the classification and the said classification is being examined and not for the future classification practice adopted by them.
Conclusion - The apparatus's primary function was to measure element content in solid samples, not to analyze gases. The appellant was not estopped from challenging the classification, even if they had previously classified the apparatus under CTH 90271000.
The order of the Commissioner (Appeals) is not tenable and therefore, liable to be set aside - Appeal allowed.
The core legal questions considered in this judgment include:
1. Whether the timelines prescribed under the Customs Broker Licensing Regulations, 2018 for issuing notices, completing inquiries, and issuing revocation orders are mandatory or directory.
2. Whether the customs broker, M/s M D Ruparel & Son, was responsible for any delay in the proceedings and if the revocation of their license was justified.
3. Whether the Principal Commissioner of Customs (General) was justified in revoking the customs broker's license and imposing penalties despite the inquiry officer's report indicating that none of the charges were proven.
ISSUE-WISE DETAILED ANALYSIS
1. Timelines under the Customs Broker Licensing Regulations, 2018
The relevant legal framework involves the Customs Broker Licensing Regulations, 2018, particularly Regulation 14 concerning license revocation and Regulation 10 outlining the obligations of customs brokers. The timeline for various procedural steps is detailed in these regulations.
The Tribunal examined whether the timelines stipulated in the regulations are mandatory or directory. The Court referenced the judgment of the Bombay High Court in Principal Commissioner of Customs (General), Mumbai v. Unison Clearing P Ltd, which discussed the use of the word "shall" in regulations and whether it should be interpreted as mandatory or directory. The Court noted that the purpose of the timelines is to ensure timely proceedings and to protect the rights of customs brokers.
In the present case, the Tribunal found that the notice, inquiry report, and revocation order were all issued beyond the prescribed timelines, indicating a breach at every stage of the proceedings. The Tribunal concluded that the timelines should be considered directory, allowing for some flexibility, especially when delays are justified and not caused by the customs broker.
2. Responsibility for Delay and Justification for Revocation
The Court examined whether the customs broker was responsible for any delays in the proceedings. The Tribunal found no evidence that the customs broker contributed to the delays. The impugned order lacked any findings attributing the delays to the customs broker.
The Tribunal also considered whether the Principal Commissioner of Customs (General) provided any justification for the delays. The Court found no explanation in the impugned order that the delays were unavoidable or beyond human control. The absence of such justification was deemed an irresponsible discharge of responsibilities by the licensing authority.
3. Justification of Revocation and Penalties
The Tribunal assessed whether the revocation of the customs broker's license and the imposition of penalties were justified. The inquiry officer's report had concluded that none of the charges against the customs broker were proven. Despite this, the Principal Commissioner issued a disagreement memo and proceeded with revocation and penalties.
The Tribunal noted that without a valid justification for the delay and without evidence of misconduct by the customs broker, the revocation and penalties were not tenable. The Tribunal emphasized that procedural fairness requires that any deviation from timelines must be justified, and the customs broker's rights must be protected.
SIGNIFICANT HOLDINGS
The Tribunal held that the timelines specified in the Customs Broker Licensing Regulations, 2018, are directory and not mandatory. This interpretation allows for flexibility in procedural timelines, provided that any delays are justified and not caused by the customs broker.
The Tribunal set aside the impugned order, finding that the licensing authority failed to justify the delays and that the customs broker was not responsible for any procedural delays. The revocation of the license and the imposition of penalties were deemed unjustified.
The Tribunal reiterated the principle that procedural timelines must be adhered to, but fairness demands that deviations be justified with reasons. The decision underscores the importance of protecting the rights of customs brokers and ensuring that licensing authorities are held accountable for unjustified delays.
In conclusion, the Tribunal allowed the appeal, setting aside the order of revocation and penalties against the customs broker, M/s M D Ruparel & Son.
Revocation of Customs Broker License - forefeiture of security deposit - levy of penalty - alleged breach of timelines, obligations enumerated in regulation 10 of Customs Broker Licensing Regulations, 2018 - HELD THAT:- In the instant case, notice was issued on 22nd May 2023 well beyond the 90 days from receipt of offence report stipulated for initiating action. Furthermore, the report dated 28th November 2023 was also submitted beyond the 90 days from the date of show cause notice prescribed for completion of inquiry. It is also seen that the revocation order dated 12th June 2024 exceeded the 90 days from the date of enquiry report mandated for completion of the process. There was, thus, patent breach of timelines at every stage of the proceedings.
On perusal of the impugned order, there is no finding that the acts, omission or commission on the part of the customs broker was cause of one or more of the delays. The Hon'ble High Court of Bombay in Principal Commissioner of Customs (General), Mumbai v. Unison Clearing P Ltd [2018 (4) TMI 1053 - BOMBAY HIGH COURT] held that 'the timelimit contained in Regulation 20 cannot be construed to be mandatory and is held to be directory. As it is already observed above that though the time line framed in the Regulation need to be rigidly applied, fairness would demand that when such time limit is crossed, the period subsequently consumed for completing the inquiry should be justified by giving reasons and the causes on account of which the timelimit was not adhered to.'
In addition to the circumstances failing to portray any delay occasioned by dereliction on the part of the customs broker, there is no explanation whatsoever in the impugned order justifying the delay as unavoidable and beyond human control.
Conclusion - The timelines specified in the Customs Broker Licensing Regulations, 2018, are directory and not mandatory. The licensing authority failed to justify the delays and that the customs broker was not responsible for any procedural delays.
The impugned order is set aside - appeal allowed.
Issues: Whether the bail granted to the respondent was liable to be cancelled under Section 439(2) of the Code of Criminal Procedure, 1973 on the ground of alleged non-compliance with bail conditions, non-cooperation in investigation, and other alleged supervening circumstances.
Analysis: Cancellation of bail requires very cogent and overwhelming circumstances, and is not to be ordered mechanically. The material showed that the respondent had attended the DRI office after being released on bail and that the alleged grievance was essentially that he chose to remain silent in response to certain questions. The right to remain silent is protected by Article 20(3) of the Constitution of India and cannot, by itself, be treated as breach of a bail condition when the accused has appeared for interrogation. No breach of any other bail condition was established. The respondent had also remained under preventive detention for a substantial period during pendency of the application, and no new supervening circumstance justifying cancellation was shown.
Conclusion: The application for cancellation of bail was not made out and the bail granted to the respondent was not liable to be cancelled.
Applicatiion for cancellation of bail granted to the respondent - smuggling of gold into India and selling it in the Grey market - HELD THAT:- This application is filed on 03.05.2024. Thereafter on 16.05.2024, the respondent came to be detained under COFEPOSA Act and he was under detention till 06.03.3025 for a period of almost 10 months. Record shows that this application is not pursued, though reply by the respondent is filed on 07.05.2024. The Hon'ble Apex Court in Joyi Kitty Joseph V/s. Union of India and Ors. also noted submission of both the sides that this application for cancellation of bail was not pursued by both the sides. The respondent having undergone preventive detention for almost 10 months during pendency of this application is a circumstance weighing in favour of the respondent.
It is submitted during the course of oral submissions that complaint in the Court is still not filed by the DRI. The period of more than one year from the date of first remand is elapsed. As per the provisions of the Criminal Procedure Code, 1973, accused becomes entitled to statutory bail if investigation is not completed within the stipulated period, depending on the punishment provided for the offence - The respondent was already in custody from 06.03.2024 to 16.04.2024 and even otherwise he would have been entitled to statutory bail after the period of 60 days was over. In this view of the matter, the prayer for cancellation of bail coupled with continuation of investigation without filing complaint is not permissible under the law.
The Ld. trial Court while deciding the plea of respondent's bail, has considered all the relevant material in detail and released the respondent on bail by imposing certain conditions, which even the Hon'ble Apex Court, while dealing with the petition challenging preventive detention of the respondent, was pleased to consider. No supervening circumstances are brought on record which warrant interference under Section 439(2) of Cr.P.C. in the bail order passed in favour of the respondent. Therefore, after going through the principles laid down in the judgments relied upon by both the parties and the facts and circumstances of the case, no case is made out by the applicant for cancellation of the bail granted to the respondent and the application is liable to be rejected.
Conclusion - The application for bail cancellation rejected, as no supervening circumstances or breaches of bail conditions were established.
Application dismissed.
Issues: (i) Whether the advances received by the companies towards sale of immovable property fell within the definition of deposits under the Companies (Acceptance of Deposits) Rules, 2014. (ii) Whether the criminal proceedings were liable to be quashed in exercise of inherent powers under Section 482 of the Code of Criminal Procedure, 1973.
Issue (i): Whether the advances received by the companies towards sale of immovable property fell within the definition of deposits under the Companies (Acceptance of Deposits) Rules, 2014.
Analysis: Rule 2(1)(c)(xii)(b) excludes from the definition of deposit any amount received as advance in connection with consideration for property under an agreement or arrangement, provided the advance is adjusted against the property in accordance with the terms of the agreement or arrangement. The proviso deems such amounts to be deposits only where they become refundable because the company lacks the necessary permission or approval to deal in the property. On the material before it, the advances were received pursuant to agreements for sale of immovable property and were linked to adjustment against the property transaction.
Conclusion: The advances were held not to be deposits within the meaning of the Rules, and the petitioners succeeded on this issue.
Issue (ii): Whether the criminal proceedings were liable to be quashed in exercise of inherent powers under Section 482 of the Code of Criminal Procedure, 1973.
Analysis: The inherent power under Section 482 is to be exercised sparingly to prevent abuse of process and secure the ends of justice. Applying the principles stated in the Bhajan Lal guidelines, the proceedings were found to be attended with mala fide and an ulterior motive, since the complainant was not directly connected with the transactions and the complaint was treated as part of repeated and vexatious litigation. Continuation of the prosecution was considered an abuse of process.
Conclusion: The proceedings were liable to be quashed, and the petitioners succeeded on this issue.
Final Conclusion: The common order terminated the criminal prosecutions in both cases, holding that the alleged advances were excluded from deposits and that the continuance of the proceedings amounted to abuse of process.
Ratio Decidendi: Advances received towards sale of immovable property under an agreement or arrangement do not constitute deposits when they are covered by the statutory exclusion in the acceptance of deposits rules, and criminal proceedings based on such allegations may be quashed under Section 482 where they are malicious or constitute abuse of process.
Exercise of jurisdiction under Section 482 of Cr.P.C. - amounts collected by the petitioners as advances for the sale of immovable property - 'deposits' under Section 73 of the Companies Act, 2013 - exemption under Rule 2 (1) (c) (xii) (b) of the Companies (Acceptance of Deposit) Rules, 2014.
HELD THAT:-Section 482 of the Code of Criminal Procedure empowers the High Court to exercise its inherent power to prevent abuse of the process of Court. In proceedings instituted on complaint exercise of the inherent power to quash the proceedings is called for only in cases where the complaint does not disclose any offence or is frivolous, vexatious or oppressive. If the allegations set out in the complaint do not constitute the offence of which cognizance is taken by the Magistrate it is open to the High Court to quash the same in exercise of the inherent powers under Section 482.
There are considerable force in the contention of the petitioners that the said Guruzala Venkateswara Rao foisted many false complaints against the petitioners in order to settle his personal scores with petitioners herein and the other group of companies. Further, the said Guruzala Venkateswara Rao is neither allottee nor he is in any way directly involved or linked with the business transactions of the petitioners.
Whether the amounts collected by the petitioners for sale of immovable property as advance would come under the purview of ‘deposits’ or could be exempted from the purview of ‘deposits’ by virtue of Rule 2 (1) (c) (xii) (b) of the Companies (Acceptance of Deposits) Rules, 2014? - HELD THAT:- Admittedly, petitioners - companies had purchased the agricultural land and after obtaining the permission from the competent authorities for conversion of agricultural land into non-agricultural land, have obtained permission for development of the said land duly converting into layout of plots for residential/commercial housing. To unlock the funds invested in development of the lay outs etc., petitioners had offered to sell the land in its possession and for this purpose entered into written agreement/arrangement. By virtue of proviso to Rule 2 (1) (c) (xii) (b) of the Companies (Acceptance of Deposits) Rules, 2014, the advances received by the petitioners for sale of immovable property are exempted from the purview of the deposits.
The respondent No. 3 is neither allottee nor he is in any way directly involved or linked with the business transactions of the petitioners, however, he lodged complaint against the petitioners with some ulterior motive to wreck vengeance on the accused.
This Court is of the considered view that continuation of proceedings against the petitioners in both cases/accused would amount to abuse of process of the Court.
Conclusion - The proceedings against the petitioners in both criminal cases are to be quashed, as the allegations did not meet the criteria for deposits under the Companies Act, and the proceedings appeared to be maliciously motivated.
Petition allowed.
Issues: Whether a non-party to the company petition had locus standi to seek recall of an earlier order, and whether Section 44 of the Indian Evidence Act, 1872 or Order 1 Rule 8A of the Code of Civil Procedure, 1908 conferred any such right.
Analysis: Section 44 of the Indian Evidence Act, 1872 is a rule of evidence which enables a party to a suit or other proceeding to challenge the competency of the court or allege fraud or collusion when a judgment is relied on as evidence. It does not create an independent right in a stranger to the proceeding to reopen or recall an order passed in the same proceeding. Order 1 Rule 8A of the Code of Civil Procedure, 1908 is only an enabling provision permitting participation of a person or body of persons interested in a question of law in appropriate cases; it does not confer a substantive right on a non-party to seek recall of an order. The appellant was neither a party nor a permitted intervener in the company petition, and the affected party had already unsuccessfully challenged the order. The challenge to the imposition of costs also could not be maintained by the appellant.
Conclusion: The application seeking recall was not maintainable at the instance of the appellant, and the objection based on Section 44 of the Indian Evidence Act, 1872 and Order 1 Rule 8A of the Code of Civil Procedure, 1908 failed.
Ratio Decidendi: A non-party cannot invoke Section 44 of the Indian Evidence Act, 1872 or an enabling participation provision to acquire locus standi to recall an order passed in proceedings to which she was not a party.
Seeking recall of the order passed by the NCLT, which application has been rejected - locus standi of appellant, who was not a party to the original proceedings, to file an application seeking the recall of an order - Sections 241 & 242 of Companies Act - HELD THAT:- Section 44 of the Evidence Act, 1872 provides that any party to a suit or other proceeding may show that any judgment, order or decree which is relevant under Sections 40, 41 & 42 and which has been proved by the adverse party was delivered by a Court, not competent to deliver it or was obtained by a fraud of the collusion. The purpose of the above provision is to give right to other party to prove that judgment of the Court which is relied as evidence was delivered by a Court nor competent to deliver it or was obtained by fraud of collusion - Section 44 cannot be used or utilised by the appellant since appellant was never party to the proceeding under Sections 241 & 242 of the Act and the order dated 15.12.2023 is not an order which was relied as evidence by any party in the proceeding under Sections 241 & 242, in fact the order dated 15.12.2023 is an order passed in the same very proceeding. The submission of the appellant that by virtue of Section 44 appellant can very well impeach the order dated 15.12.2023 on the ground that it was delivered by a Court, not competent to deliver it cannot be accepted.
The submission of the appellant on basis of Section 44 of the Evidence Act is misplaced and has no applicability to give any locus to the appellant to file an application to recall the order dated 15.12.2023 before the NCLT.
Order 1 Rule 8A of the CPC empowers a Court while trying a suit to allow a person or body of person to present case or his opinion on the question of law and to take parts in proceedings of the suit. If the Court is satisfied that person or body or person is interested in any question of law which is directly and substantially issued in the suit. The provisions of Rule 8A is enabling power which empowers the Court to permit person or body person interested in any question of law to present such opinion and to take part - When Col. Ashish Khanna, who was party to the proceeding and has filed various application, including the application CA 40/2022, which was rejected on 15.12.2023, NCLT has not committed any error in holding that appellant the wife of Col. Ashish Khanna has no locus to file the application to recall order 15.12.2023.
The order dated 15.12.2023, which was sought to be challenged by Col. Ashish Khanna which challenge having not been entertained the order 15.12.2023 and the cost imposed by the order dated 15.12.2023 could not be allowed to be challenged by the appellant. Cost was imposed on Col. Ashish Khanna for the reasons as was noticed in the said order dated 15.12.2023. Col. Ashish Khanna having unsuccessfully challenged the said order, Appellant has no locus to question the imposition of cost on Col. Ashish Khanna.
Conclusion - The NCLT's decision to reject the appellant's application for recall rejected, due to lack of locus standi and there are no grounds to interfere with the order dated 15.12.2023.
NCLT (Principal Bench, New Delhi) did not commit any error in holding that appellant/applicant has no locus to file CA 90/2024 praying for recall of the order dated 15.12.2023 - appeal dismissed.
Issues: (i) Whether the reduction of capital and selective extinguishment of the identified shareholders' shares complied with Section 66 of the Companies Act, 2013 and could be approved despite opposition from the minority shareholders; (ii) Whether the valuation fixed at Rs. 196.80 per share was lawful, independent and properly arrived at, including the applicability of ICDR Regulations, 2009; (iii) Whether a 25% discount for lack of marketability was justified and whether a control premium was required; (iv) Whether the explanatory statement and notice complied with Section 102 of the Companies Act, 2013 by disclosing and making available the relevant valuation documents; (v) Whether the use of postal ballot and e-voting, instead of a physical meeting, invalidated the resolution.
Issue (i): Whether the reduction of capital and selective extinguishment of the identified shareholders' shares complied with Section 66 of the Companies Act, 2013 and could be approved despite opposition from the minority shareholders.
Analysis: Section 66 permits reduction of share capital in any manner, including payment off of paid-up share capital in excess of the company's wants, subject to special resolution, notice to stakeholders and confirmation by the Tribunal. The majority of shareholders approved the proposal overwhelmingly, the creditors had no objection, and the regulatory requirements were complied with. The power to reduce capital is treated as a matter of corporate or domestic concern, and selective reduction is permissible if it is fair and not illegal.
Conclusion: The selective reduction of capital was lawful and the minority shareholders could be ousted by the special resolution passed by the requisite majority.
Issue (ii): Whether the valuation fixed at Rs. 196.80 per share was lawful, independent and properly arrived at, including the applicability of ICDR Regulations, 2009.
Analysis: The valuation was prepared by independent valuers and supported by a fairness opinion. Valuation is a technical exercise, and the Tribunal does not sit in appeal over the valuer's judgment unless the valuation is ex facie unreasonable or infected by fraud or illegality. The preferential allotment price to SingTel arose in a different commercial setting and at a different time, and could not be treated as a controlling benchmark for the exit price in a capital reduction. The ICDR Regulations, 2009 were held inapplicable because the company was unlisted and the transaction was not a preferential allotment of listed securities.
Conclusion: The valuation at Rs. 196.80 per share was upheld, the valuer's independence was accepted, and the ICDR Regulations, 2009 were held not applicable.
Issue (iii): Whether a 25% discount for lack of marketability was justified and whether a control premium was required.
Analysis: The shares were of an unlisted company with no active trading platform after delisting, so lack of marketability was a relevant valuation adjustment. The valuer considered accepted valuation models and industry factors, and the 25% discount fell within the range discussed in the material before the Tribunal. A control premium was unnecessary because the minority shareholders were not acquiring control, and the capital reduction did not involve any change in control of the company.
Conclusion: The 25% DLOM was justified and no control premium was payable.
Issue (iv): Whether the explanatory statement and notice complied with Section 102 of the Companies Act, 2013 by disclosing and making available the relevant valuation documents.
Analysis: The notice stated that the valuation report, fairness opinion, memorandum, articles and creditors' list were available for inspection at the registered and corporate offices during specified hours. Section 102 requires material facts and, where a document is referred to, specification of the place, time and manner of inspection. There is no requirement in a reduction of capital under Section 66 that the valuation report must be annexed to the notice, and inspection was in fact afforded.
Conclusion: There was no breach of Section 102 and the notice was valid.
Issue (v): Whether the use of postal ballot and e-voting, instead of a physical meeting, invalidated the resolution.
Analysis: The Companies Act, 2013 permits transaction of business through postal ballot and electronic voting. No provision mandates a physical meeting for the kind of special business involved, and the procedure adopted enhanced participation rather than curtailed it. The absence of an in-person meeting did not render the resolution unlawful or void.
Conclusion: The postal ballot and e-voting procedure was valid.
Final Conclusion: The statutory and procedural challenges failed, the valuation and reduction process were upheld, and the sanctioned capital reduction was sustained.
Reduction of capital under Section 66 of the Companies Act, 2013 - shares got extinguished after passing special resolution by the Respondent No. 1 - selective capital reduction in terms of Section 66(1)(b)(ii) of the Code - Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders - valuation of shares -valuation done by E&Y Merchant banking division was really "Independent" or was biased - applicability of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 - 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable or not - minority shareholder who supported the Respondent company right from inception were entitled to receive "Control Premium" instead of "DLOM" - failure to disclose and attach the required documents in the explanatory statement, enclosed along with the notice for acquisition of shares from minority shareholders was issued - violation of Section 102 of the Companies Act, 2013 making the resolution passed for the approval of the scheme of reduction of share capital void and illegal or not.
Whether reduction of capital by the Respondent No. 1/ BTL was in accordance with Section 66 of Companies Act, 2013? - Whether selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Code? - Whether the Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders? - HELD THAT:- In Punjab Distilling Industries Ltd. v. CIT [1965 (2) TMI 6 - SUPREME COURT], the Hon'ble Supreme Court of India outlined the process of capital reduction i.e. the company's general body must pass a resolution approving the reduction of capital, often involving the distribution of accumulated profits to shareholders. An application for court (now NCLT) approval must be submitted. Once the court (now NCLT) confirms the reduction, it must be registered with the Registrar of Companies. Notices are issued to shareholders inviting applications for refunds of share capital and finally, upon receiving these applications, the company distributes the refunded amount.
Just like CoC in Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016, the Shareholder of the company are true owners and understand what is in interest of the company as well as owners (shareholders) and therefore shareholders have exclusive jurisdiction to decide on the issue of capital reduction in any manner including selective capital reduction and if so, in what manner. There are no conditions attached to the terms "in any manner" as stipulated under Section 66 of the Companies Act, 2013.
There is no vested right of minority shareholders to continue as shareholders in case of reduction of share capital and therefore, they can be ousted from shareholding if a special resolution is passed by the majority of the equity shareholder, which happened precisely in the present case where special resolution was passed by 99.92% of voting shares.
The reduction of capital by the Respondent No. 1/ BTL was in accordance with the Section 66 of the Companies Act, 2013. We also held that the selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act, 2013. We further hold that Section 66 is applicable in case of any capital reduction, be it listed company or non listed company and therefore, the Respondent No. 1 was supposed to comply with Section 66 of the Companies Act, 2013 - there are no error in the Impugned Order on this account.
Whether valuation of the shares carried out by E&Y @ Rs. 196.80 was correct and in accordance with law along with established valuation practices done keeping in view the valuation of the same company done @ Rs. 310 few months back while allotting preferential shares to SingTel? - Whether the valuation done by E&Y Merchant banking division was really "Independent" or was biased? - Whether SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations, 2009) were applicable in the present case? - HELD THAT:- Share valuation under the Companies Act, 2013, involves the process of determining the value of shares, which is crucial in various corporate transactions. This process is governed by several provisions of the Act, particularly emphasizing the role of registered valuers. Valuation is essential in ensuring that shares are issued at a fair price, preventing undervaluation or overvaluation that could impact shareholder rights. The valuation of shares involves determining the fair value of a company's shares, which is significant for both listed and unlisted companies. This valuation can be used and becomes desirable in cases like selling a business, securing loans using shares as collateral, mergers and acquisitions, converting share types and compensating shareholders in case of capital reduction like the present case.
The contentions of the Appellants that, share valuation as done by the E&Y Merchant Banking Division in the present case, was not appropriate and this Appellate Tribunal should reject the same. In this connection, reference made to ratio laid down in the case of Cadbury India Ltd. [2014 (5) TMI 1189 - BOMBAY HIGH COURT] which noted that before a court can decline sanction to a scheme on account of valuation, an objector to the scheme must first show that the valuation is ex-facie unreasonable i. e. so unreasonable that it cannot be accepted. It was also held that plausible rationale provided by a valuer is not be readily discarded merely because an objector has a different view. It was held that valuation is not an exact science and all valuations proceed on assumptions and to dislodge a valuation, it must be shown that those assumptions as such as could never have been made, and that they are so patently erroneous that the end result itself could not, but be wrong unfair and unreasonable - the ratio laid down in case of Cadbury India Ltd. is quite explicit and hardly leaves any scope for interference by this Appellate Tribunal on the issue of valuation.
Noting that ICDR Regulations 2009 do not apply to the Capital Reduction in question, the current position with respect to period to be considered for the purpose of pricing has changed from 26/2 weeks to 90/10 days under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (as amended in 2022) further shortening the period to examine the days for the purpose of valuation, wherein 26 weeks was noted to be too long a period to value shares especially as price can be very volatile over a period of 26 weeks. Therefore, it is the judgement of a valuer on the historic price to be considered of a volatile listed share, that would represent the value of such shares correctly. This seems quite logical.
The allegation that Ernst & Young LLP on account of being the internal auditor of BAL and therefore amenable to influence by Respondent No. 1 is found to be untenable - the Tribunal has correctly complied the same, in the present appeal and there are no merit in the pleading of the Appellants on this ground.
Whether 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable in determining the valuation for the purpose of offering the minority shareholders? - Whether the minority shareholder who supported the Respondent company right from inception were entitled to receive "Control Premium" instead of "DLOM"? - HELD THAT:- The valuation of shares is rather intricate and subjective matter for experts who has got domain knowledge of not only the valuation methodology but also have fair knowledge about relevant industry for which valuation is being done with the help of the relevant financial facts and figures. While doing these valuations there may be more challenges in case of valuation of unlisted companies like the Respondent No. 1/ BTL as the relevant market shares dates is not available - By no stretch of imagination, someone can expect that the court/ tribunal shall have such expertise to go into the correctness or otherwise of the valuation done by the independent valuers. The only duty of the court/ tribunal is to ensure that the whole process has been fair and unbiased and has not caused any prejudice to the rights of shareholders including and especially the minority shareholders.
In the present case, there are no such reason to come to the conclusion that whole process has been biased or unfair.
It is the case of the Appellants that instead of DLOM, the valuation should have provided Control Premium since promoters acquired shares from the minority shareholders forcefully. Hence it would be desirable to understand the concept of Control Premium and its applicability in the present case - Equity Shares may be subject to premium or discounts, depending upon the context of valuation including whether they represent controlling or minority interests.
The contention of the Appellants that Ernst & Young Merchant Banking Services Pvt. Ltd. submitted flawed Valuation Report as it failed to include a control premium, is not found convincing. The majority shareholders in the Respondent No. 1/ BTL already had control over majority of the shares and the remaining of 1.09% of shareholders were not in any significant position or say in the dealing with the company matters. Further, this percentage of minority shareholders did not have the ability to influence any major decision of the Respondent No. 1. Thus, the question of a control premium does not arise as there is no change in control of the Respondent No. 1 pursuant to the capital reduction.
There is no error in the Impugned Order which allowed scheme based on Independent Valuer report which provided 25% discount for DLOM in arriving at fair value of Rs. 196.80 per shares. It is already noted that in the present case, there seems to be no case of control premium which the Appellants have claimed, simply as majority of shareholder has brute majority of 98.91%.
Whether the Respondent company failed to disclose and attach the required documents in the explanatory statement, enclosed along with the notice for acquisition of shares from minority shareholders was issued? - Whether the Respondent company BTL violated Section 102 of the Companies Act, 2013 making the resolution passed for the approval of the scheme of reduction of share capital void and illegal? - HELD THAT:- Uder the Companies Act, 2013 Section 62 allows for a Preferential Allotment of shares like in the case of SingTel. Under Section 62(1)(c) read with Companies (Share Capital and Debentures) Rules, 2014, Rule 13, it is mandatory for a company to (a) obtain a valuation report and (b) send the valuation report along with the notice under Section 102 of the Companies Act, 2013. This requirement of law was duly complied for the SingTel Preferential Allotment.
In contrast to the provision relating to Preferential Allotment, in the case of Capital Reduction under Section 66 of the Companies Act, 2013 there is no such stipulated requirement to send the valuation report along with the notice. The only requirement is to permit an inspection by virtue of Section 102 (3) of the Companies Act, 2013 which was duly complied by the Respondent No. 1 company. Thus, it is not convinced with the arguments of the Appellants that failure to send the valuation report together with the notice has caused legal infirmity or any prejudice to the interest of the Appellants. In fact, the right to inspect was availed from by some of the Appellants as is evident from the email dated 12.07.2018, where an inspection was provided to the counsel of the Appellant.
Conclusion - i) Reduction of capital by the Respondent No. 1/ BTL was in accordance Section 66 Companies Act, 2013. ii) Selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act, 2013. iii) The Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders. iv) The valuation of the shares carried out by E&Y @ Rs. 196.80 was correct and in accordance with law along with establish valuation practices. v) The valuation done by E&Y Merchant banking division was Independent. vi) The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations, 2009”) were not applicable in the present case. vii) 25% Discount for Liquidity of Marketability (DLOM) was permitted and justifiable in determining the valuation for the purpose of offering the minority shareholders. viii) The minority shareholder who supported the Respondent company right from inception were not entitled to receive “Control Premium” instead of “DLOM”. ix) The Respondent No. 1/ BTL did not fail to disclose and attach the required documents in the explanatory statement enclosed along with the notice for acquisition of shares from minority shareholders was issued. x) The Respondent No. 1/ BTL did not violate Section 102 of the Companies Act, 2013 and therefore making the special resolution passed for the approval of the scheme of reduction of share capital was valid.
Appeal dismissed.
The core legal issue considered in this judgment was whether there existed a pre-existing dispute between the parties, which would justify the dismissal of the Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC). This involved examining whether the communications and interactions between the parties before the issuance of the demand notice constituted a valid and genuine dispute regarding the outstanding debt claimed by the Operational Creditor.
2. ISSUE-WISE DETAILED ANALYSIS
Relevant legal framework and precedents:
The case primarily revolved around the interpretation of Section 9 of the IBC, which allows an operational creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor in the event of a default. The legal framework also involved Section 8 of the IBC, which requires the operational creditor to deliver a demand notice to the corporate debtor before filing an application under Section 9. The Supreme Court's decision in Mobilox Innovations Pvt Ltd vs Kirusa Software Pvt Ltd. was a significant precedent that guided the Tribunal's decision. The Mobilox decision established that a Section 9 application must be rejected if there is a notice of dispute or a record of dispute, which is not spurious, hypothetical, or illusory.
Court's interpretation and reasoning:
The Tribunal examined whether the communications between the parties before the issuance of the demand notice constituted a pre-existing dispute. The Tribunal emphasized that the existence of a genuine dispute regarding the quantum of the debt or the quality of goods/services provided could be grounds for dismissing a Section 9 application. The Tribunal relied on the Mobilox decision, which requires that the dispute must be plausible and not a mere bluster or unsupported assertion.
Key evidence and findings:
The evidence consisted of various communications between the parties, including letters and emails exchanged before the demand notice was issued. The Respondent had consistently disputed the quantum of the debt claimed by the Appellant, and these disputes were documented in communications dated March 2, 2020, and June 20, 2020. The Respondent also raised issues regarding the quality of goods supplied and the absence of a provision for interest in the work order or invoices.
Application of law to facts:
The Tribunal applied the legal principles from the Mobilox decision to the facts of the case. It found that the Respondent had raised a genuine dispute regarding the quantum of the debt and other related issues before the issuance of the demand notice. This dispute was not spurious, hypothetical, or illusory, and therefore, the Section 9 application was rightly dismissed by the Adjudicating Authority.
Treatment of competing arguments:
The Appellant argued that the Respondent's communications were mere bluster and did not constitute a genuine dispute. However, the Tribunal found that the Respondent's objections were supported by evidence and were not patently feeble. The Tribunal also noted that the Appellant's claim included amounts that were disputed by the Respondent, and the Respondent had made payments towards the debt, which further indicated the existence of a dispute.
Conclusions:
The Tribunal concluded that there was a pre-existing dispute between the parties regarding the quantum of the debt and other related issues. As per the legal framework and the Mobilox decision, this warranted the dismissal of the Section 9 application.
3. SIGNIFICANT HOLDINGS
Preserve verbatim quotes of crucial legal reasoning:
The Tribunal quoted the Mobilox decision: "Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the 'dispute' is not a patently feeble legal argument or an assertion of fact unsupported by evidence."
Core principles established:
The judgment reinforced the principle that a Section 9 application under the IBC must be dismissed if there is a genuine pre-existing dispute regarding the debt claimed. The dispute must be plausible and supported by evidence, rather than being a mere assertion or bluster.
Final determinations on each issue:
The Tribunal determined that the communications and evidence presented by the Respondent demonstrated a genuine dispute regarding the quantum of the debt and other issues. Consequently, the Tribunal upheld the Adjudicating Authority's decision to dismiss the Section 9 application, finding no infirmity in the order. The appeal was dismissed, and all related interim applications were closed with no order as to costs.
Maintainability of section 9 application - initiation of CIRP - Existence of pre-existing dispute between the parties or not - HELD THAT:- From the exchange of correspondence between the Appellant and the Respondent, it is found that there is a dispute with respect to quantum of the amount payable by the Respondent. It is also found that this issue has been raised multiple times prior to the issuance of the demand notice dated 31.12.2021 by the Appellant. This has not been satisfactorily resolved.
The submissions of the Respondent is agreed upon, that UCIL is a Govt. body and all work done is to be certified by a third-party independent agency and the invoices have to be backed by the logbook maintained by the Appellant duly signed by the respondent and certified by an independent agency otherwise these are mere one-sided statements. Furthermore, the contention of the respondent also agreed that mere stamping of the tax/proforma invoices done at the site office by lower functionaries of the respondent is indicative of mere receipt of the same; it does not mean that the same has been accepted by the respondent company.
There is a dispute with respect to the quantum of amount which is much prior to the issuance of the demand notice dated 31.12.2021 by the Appellant. As per Section 8(2)(a) of the Code, the respondent has brought on record the existence of a dispute. The AA as per the provisions of Section 9(5) on finding a notice of a pre-existing dispute has not admitted the Section 9 Application.
Conclusion - The communications and evidence presented by the Respondent demonstrated a genuine dispute regarding the quantum of the debt and other issues. The Adjudicating Authority's decision to dismiss the Section 9 application upheld.
Appeal dismissed.
The primary issue considered by the Appellate Tribunal was whether the delay of 154 days in refiling the appeal should be condoned. The Tribunal examined the reasons provided by the appellants for the delay and evaluated whether these reasons constituted "sufficient cause" under the relevant legal framework.
ISSUE-WISE DETAILED ANALYSIS
Relevant Legal Framework and Precedents
The Tribunal considered the application for condonation of delay under Rule 31 read with Rules 11, 14, and 26 of the National Company Law Appellate Tribunal Rules, 2016. The legal framework requires that sufficient cause must be shown for condoning delays. The Tribunal referred to precedents, including the Supreme Court judgment in 'Perymon Bhagbathy' Vs. 'Bhargavi Amma (Dead) by Lrs. & Ors.', which emphasized a more lenient approach to condonation of refiling delays compared to initial filing delays.
Court's Interpretation and Reasoning
The Tribunal interpreted the rules to require a liberal approach towards condoning refiling delays, provided there is a reasonable and justifiable cause. The Tribunal emphasized that the objective of the Insolvency and Bankruptcy Code (IBC) is time-bound resolution, and delays should not prejudice the interests of the parties involved.
Key Evidence and Findings
The appellants argued that the delay was due to logistical challenges faced by eight appellants operating businesses across the country. They cited difficulties in obtaining necessary documents, the death of an authorized translator, and additional defects notified by the registry after initial submissions. The respondents contested these claims, arguing that the reasons provided were insufficient and that the appellants had not demonstrated due diligence.
Application of Law to Facts
The Tribunal applied the legal principles of leniency in refiling delays to the facts presented. It considered the appellants' logistical challenges and the steps they took to rectify defects. The Tribunal found that the appellants had made efforts to comply with the procedural requirements, and the reasons provided were credible and reasonable under the circumstances.
Treatment of Competing Arguments
The Tribunal addressed the respondents' objections, including the claim that the appellants' reasons were fabricated and that the affidavit was inadmissible due to being filed by counsel. The Tribunal rejected these objections, finding no incompetency in the counsel swearing the affidavit and acknowledging the appellants' efforts to cure defects.
Conclusions
The Tribunal concluded that the appellants had shown sufficient cause for the delay in refiling the appeal. It found the reasons provided by the appellants to be credible and justified under the circumstances, warranting the condonation of the refiling delay.
SIGNIFICANT HOLDINGS
The Tribunal held that a liberal approach should be taken in condoning refiling delays, provided there is sufficient cause. The Tribunal emphasized that procedural delays should not undermine the objectives of the IBC, which aims for time-bound resolution of insolvency matters.
Core Principles Established
The Tribunal reaffirmed the principle that refiling delays should be condoned if the applicant demonstrates reasonable and justifiable cause. It highlighted the importance of balancing procedural compliance with the substantive objectives of the IBC.
Final Determinations on Each Issue
The Tribunal determined that the appellants had demonstrated sufficient cause for the delay in refiling the appeal. Consequently, the Tribunal condoned the refiling delay and scheduled the appeal for admission on 14th April 2025.
Condonation of delay of 154 days in refiling the appeal - sufficient cause for delay or not - HELD THAT:- The law with regard to condonation of refiling delay is well settled, although the Courts have adopted a liberal approach while condoning the refiling delay, but there has to be sufficient cause shown by the applicant for condoning the refiling delay.
There are no incompetency of learned advocate on record in filing the additional affidavit in support of application for condonation of refiling delay. From the facts which has been noticed, it is clear that present is a case where steps were taken by applicant for curing the defect. The fact that 8 appellants who have filed the appeal are not from one place. Two of the appellants are from Thane West, State of Maharashtra and others are from Beawar, State of Rajasthan.
Conclusion - Sufficient cause has been shown in the application, additional affidavit and rejoinder affidavit filed by the applicant in support of the refiling delay application.
Refiling delay is condoned.
Issues: Whether the sale of the secured assets under the SARFAESI Act, 2002 could be avoided on the ground that the corporate insolvency resolution process commenced before the balance sale consideration was paid and the sale certificate was registered, and whether the secured creditor's purchase of the second property by adjustment was invalid in view of the moratorium under the Insolvency and Bankruptcy Code, 2016.
Analysis: The determination turned on the effect of the amended Section 13(8) of the SARFAESI Act, 2002, under which the borrower's right of redemption stands extinguished on publication of the auction notice if the dues are not tendered before that stage. The first property had already been put to auction, sold, and confirmed before the insolvency commencement date, and the later payment of balance consideration and registration of the sale certificate did not revive any right in the corporate debtor. As regards the second property, the secured creditor's self-purchase in a subsequent sale was permissible under Section 13(5A) and Section 13(5B) of the SARFAESI Act, 2002, and the relevant sale steps had also occurred before commencement of CIRP. The moratorium under Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 did not invalidate transactions whose decisive steps had already culminated before the insolvency commencement date. The sanctity of the auction process and the settled effect of the amended redemption provision were treated as controlling.
Conclusion: The challenge to the sale transactions was rejected. The sale of both properties was upheld and the appellant was denied relief.
Ratio Decidendi: Under the amended Section 13(8) of the SARFAESI Act, 2002, the borrower's right of redemption ends on publication of the auction notice if the secured debt is not tendered before that stage, and a subsequent insolvency moratorium does not undo a valid auction sale already crystallised before the insolvency commencement date.
Reversal of sale transactions of the properties - Section 60(5) of the Insolvency and Bankruptcy Code, 2016 - whether the relationship in respect of first property between the CD and the R1 came to end on the day when the notice for e-auction was issued in terms of amended provision of Section 13(8) of the Act? - HELD THAT:- Hon’ble Supreme Court in the case of Celir LLP [2023 (10) TMI 48 - SUPREME COURT] has held that “in view of the aforesaid discussion, we hold that as per the amended section 13(8) of the Act, once the borrower fails to tender the entire amount of dues with all costs and charges to the secured creditor before the publication of auction notice, his right of redemption of mortgage shall stand extinguished / waived on the date of publication of the auction notice in the newspaper in accordance with Rule 8 of the 2002 Rules.”
In the presence of direct decision of the Hon’ble Supreme Court interpreting Section 13(8) of the Act, the decision relied upon by the Appellant in the case of Indian Overseas Bank [2022 (5) TMI 926 - SUPREME COURT] which has only interpreted Section 14(1) of the Code does not apply because Section 13(8) was not brought to the notice of the Hon’ble Court.
In respect of the second property, the first public notice was issued on 03.01.2019. By that time the Appellant did not move to redeem the property by making the payment of the Bank. However, the first sale could not take place, therefore, the public notice was again published scheduling the sale of the properties on 28.01.2019. In that sale, the Bank itself purchased the property which is permitted under Section 13(5A) & 13(5B) of the Act and adjusted the amount which it had to recover from the CD.
The jural relationship between the parties in respect of second property also came to an end on 03.01.2019 or 28.01.2019 which was much earlier than the date of commencement of CIRP on 01.02.2019. In this case, even the letter of confirmation was issued on 28.01.2019 and sale certificate was issued on 30.01.2019 much before the date of commencement of the CIRP on 01.02.2019. The Hon’ble Supreme Court has held in the case if Celir LLP while interpreting Section 13(8) that the relationship between the parties i.e. mortgager and mortgagee, for the purpose of redemption exists till the date of issuance of notice of sale, if the property is being sold under Section 13(8) of the Act then in that situation also the Appellant has no right to the property for the purpose of raising the dispute.
The contention of the Appellant that non-deposit of the sale consideration in the estate of the CD effects the right of the secured creditor is of no avail.
Conclusion - The right of redemption is extinguished upon the issuance of the e-auction notice as per the amended Section 13(8) of the SARFAESI Act. The validity of the sales conducted under the SARFAESI Act upheld.
Appeal dismissed.
Issues: (i) whether the Committee of Creditors' abstention from voting on the resolution plans could be treated as an improper non-decision or rejection warranting interference; (ii) whether the liquidation application could validly be moved and allowed after expiry of the CIRP period.
Issue (i): whether the Committee of Creditors' abstention from voting on the resolution plans could be treated as an improper non-decision or rejection warranting interference.
Analysis: The resolution process permits voting in favour, against, or abstention. Where the sole financial creditor consciously abstained from voting, the matter fell within its commercial domain. The absence of a positive or negative vote did not create a right in the unsuccessful resolution applicant to compel acceptance of its plan or to question the reasons behind the creditor's decision. The creditor's commercial wisdom remained paramount and was not open to judicial reappreciation.
Conclusion: The abstention from voting could not be interfered with, and the challenge to the CoC's decision failed.
Issue (ii): whether the liquidation application could validly be moved and allowed after expiry of the CIRP period.
Analysis: Once the extended CIRP period expired without approval of any resolution plan, the resolution professional was required to move for liquidation under the governing liquidation trigger. The record also showed consent from the sole CoC member for filing the liquidation application and nominating the liquidator. In these circumstances, the filing and allowance of the liquidation application suffered from no legal infirmity.
Conclusion: The liquidation order was valid and did not warrant interference.
Final Conclusion: The impugned order directing liquidation was upheld, and the appeal was dismissed.
Ratio Decidendi: Where no resolution plan is approved before expiry of the CIRP period, liquidation follows under the Code, and the CoC's decision to abstain from voting on a resolution plan lies within its commercial wisdom and is not open to judicial interference.
Liquidation of the Corporate Debtor - Section 33(2) of the Insolvency and Bankruptcy Code, 2016 - HELD THAT:- There is no dispute to the fact that RBL Bank is the sole member of the CoC with 100% voting right. It is also not in dispute that there were three resolution plans before the CoC in which one of the resolution plan was submitted by the Appellant and the sole member of the CoC abstained from voting. The CIRP Regulations provides for different modes of voting. As per the regulations, the members of the CoC may either vote in favour, against or abstain from voting. In the present case, it is alleged that sole member of the CoC abstained from voting, therefore, the resolution plan submitted by the Appellant was not rejected but the very fact that the sole member of the CoC did not vote in favour of the resolution plan submitted by the Appellant, therefore, it had exercised its commercial wisdom and chose to abstain from voting as has been held by the Hon’ble Supreme Court in the case of K. Sashidhar [2019 (2) TMI 1043 - SUPREME COURT] that commercial wisdom of the CoC is paramount, therefore, the reason cannot be questioned by the Appellant.
In so far as, the application for liquidation, having been filed without consent of the CoC is concerned, argument of the Appellant is not tenable because in the 6th CoC meeting, there was discussion regarding the possibility of the liquidation and in the course of said discussion, the CoC sought recommendation for the nomination of liquidator. In this regard, erstwhile RP sent email to the CoC seeking its consent to file the liquidation application and the nomination of liquidator to which the sole member of the CoC gave consent by returning email on the same.
It is also a fact to be noticed that when the case was listed for hearing on 31.05.2024 before this Court, it was brought to the notice of this court that e-auction notice was issued on 23.05.2024 scheduling the e-auction of the CD as a going concern on 21.06.2024 at the reserve price of Rs. 20.61 Cr. Instead of granting stay, this court clearly said that the Appellant shall have the right to participate but it had failed to participate whereas in the auction, Respondent No. 4 to 7 were held to be successful as they gave the bid of Rs. 20.63 Cr. which was over and above the reserve price. The said amount has already been paid by R4 to 7 and the sale certificate has been issued in their favour whereas the Appellant had only offered a sum of Rs. 8 Cr. to take over the CD as a going concern.
Conclusion - The CoC's decision upheld, emphasizing the primacy of its commercial wisdom. The legality of the liquidation process and subsequent auction confirmed.
Appeal dismissed.
The core legal questions considered in this judgment include:
1. Whether the 10-day period provided to the Resolution Professional (RP) for submitting a report under Section 99 of the Insolvency and Bankruptcy Code, 2016 (IBC) is mandatory, and if a report submitted after this period can be taken on record by the adjudicating authority.
2. Whether the adjudicating authority erred in accepting the RP's report that was filed beyond the prescribed 10-day period without an application for condonation of delay.
3. The applicability of the judgment in 'V. Nagarajan' Vs. 'SKS Ispat & Power Ltd. & Ors.' regarding the limitation period and condonation of delay within the IBC framework.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Mandatory Nature of the 10-Day Period for RP's Report
Relevant Legal Framework and Precedents:
Section 99 of the IBC requires the RP to examine the application within ten days of appointment and submit a report recommending approval or rejection. The provision uses the term "shall," which generally indicates a mandatory requirement. However, the subsequent sub-sections provide for seeking additional information, which may extend the timeline.
Court's Interpretation and Reasoning:
The Court interpreted the 10-day period as directory rather than mandatory. The adjudicating authority and the Tribunal have emphasized that the legislative scheme under Section 99 allows for flexibility, given the potential need for additional information from debtors or creditors.
Key Evidence and Findings:
The RP submitted the initial report on 02.02.2024, followed by an amended report on 14.02.2024 due to additional information received. Both reports were accepted by the adjudicating authority, indicating that the authority considered the reports valid despite the timing.
Application of Law to Facts:
The Court applied the interpretation that the 10-day timeline is directory, allowing for the acceptance of reports submitted beyond this period if justified by circumstances such as the need for additional information.
Treatment of Competing Arguments:
The appellant argued that the timeline is mandatory and that any report submitted beyond this period should be rejected. The financial creditor and the RP contended that the timeline is directory, and the adjudicating authority has the discretion to accept reports filed beyond the 10-day period.
Conclusions:
The Court concluded that the 10-day period is directory, allowing the adjudicating authority to accept reports submitted beyond this period if justified.
Issue 2: Acceptance of RP's Report Filed Beyond the Prescribed Period
Relevant Legal Framework and Precedents:
The appellant relied on the judgment in 'V. Nagarajan' regarding the strict interpretation of limitation periods and condonation of delay. However, this case pertained to appeal filings under Section 61 of the IBC, not the RP's report submission under Section 99.
Court's Interpretation and Reasoning:
The Court distinguished the present case from 'V. Nagarajan', noting that the 10-day period for RP's report is not a limitation period but a procedural timeline intended to expedite the resolution process.
Key Evidence and Findings:
The adjudicating authority accepted both the original and amended reports, indicating that it found the RP's actions reasonable under the circumstances.
Application of Law to Facts:
The Court applied the principle that procedural timelines are directory and not subject to the strict limitations applicable to appeal periods.
Treatment of Competing Arguments:
The appellant's argument for mandatory adherence to the timeline was countered by the financial creditor's position that the timeline is directory and the adjudicating authority's acceptance of the reports was appropriate.
Conclusions:
The Court upheld the adjudicating authority's decision to accept the RP's reports, emphasizing the directory nature of the timeline.
SIGNIFICANT HOLDINGS
Preserve Verbatim Quotes of Crucial Legal Reasoning:
"The purpose of a section 99 report is to aid this Tribunal in deciding a petition filed u/s 94 and 95 of the Code. The RP while submitting a report works as an officer of this court and not as an interested party itself. The 10 days timeline provided in section 99(1) is to ensure that the RP submits its report in an expeditious manner, but this tribunal does not feel that if a reasonable delay is caused on the part of the RP to file its report, it adversely affects the adjudication process or for that matter unduly benefit any of the contesting parties."
Core Principles Established:
The timeline for submitting the RP's report under Section 99 is directory, allowing for flexibility in cases where additional information is required. The adjudicating authority has the discretion to accept reports filed beyond the 10-day period if justified by circumstances.
Final Determinations on Each Issue:
The appeal was dismissed, affirming the adjudicating authority's decision to accept the RP's reports and admit the Section 95 application. The Court found no merit in the appellant's arguments regarding the mandatory nature of the 10-day timeline and the need for condonation of delay.
Admission of Section 95(1) application filed by the financial creditor against the personal guarantor - whether 10 days period provided to the RP for submitting a report under Section 99 is mandatory and whether report which is submitted after period of 10 days cannot be taken on record by adjudicating authority or looked into for passing an order under Section 100? - HELD THAT:- The scheme of Section 99 clearly indicates that although Section 99(1) provides that RP shall examine the application referred to Section 94 or Section 95 within 10 days of his appointment and submit his report. But subsequent provisions, i.e., sub-Section (4) of Section 99 empowers the RP to seek such other information or explanation in connection with the application and by virtue of sub-Section (5) of Section 99, the person who has been asked for information is required to submit information within seven days from receipt of the request.
On looking into the scheme as delineated by Section 99(1), (4), (5), (6) & (7) as noticed above, it is clear that submission of report within 10 days from appointment of the RP is only directory and cannot be held to be mandatory. When the RP after examining the application, if come to the conclusion that certain further information or explanation are required, he may ask for the information from the debtor or the creditor or any other person. The person from whom information is asked for is required to give information within seven days of the receipt of the request and under sub- Section (6) the RP has to again examine the information received from under sub-Section (4) and thereafter submit his recommendation and sub-Section (7) of Section 99. The above legislative scheme clearly indicates that legislature never intended that period of 10 days for submitting a report for appointment of RP is mandatory. The use of expression “shall” although generally indicate mandatory nature of provision but use of “shall” is always not conclusive and whether expression “shall” cast a mandatory duty or only directory depends on the scheme of the statute.
The present is a case where necessity of submitting amended report arose because of receipt of the information from financial creditor subsequent to the submission of first report on 02.02.2024. Reports were brought on record by a supplementary affidavit, which were taken on the record. There was no such undue delay in submission of the report on 02.02.2024 or submission of the amended report on 14.02.2024, that the said report were required to be ignored and rejected by the adjudicating authority.
There are no substance in the submission of the appellant that report 02.02.2024 which was filed beyond 10 days from date of appointment of the RP on 16.01.2024 could not have been taken on the record or relied by the adjudicating authority. Adjudicating Authority has rightly relied on the report dated 02.02.2024 as well as amended report dated 14.02.2024. Reason for submitting amended report was also explained by the RP before the adjudicating authority, which has been noticed by adjudicating authority.
Conclusion - There are no merit in the appellant's arguments regarding the mandatory nature of the 10-day timeline and the need for condonation of delay. The adjudicating authority's decision to accept the RP's reports is affirmed and Section 95 application admitted.
There is no merit in the appeal. Appeal dismissed.
The core legal questions considered in this judgment are:
1. Whether the Resolution Professional (RP) can continue with the Corporate Insolvency Resolution Process (CIRP) despite the issuance of a show cause notice by the Insolvency and Bankruptcy Board of India (IBBI) and the subsequent suspension of the Authorization for Assignment (AFA).
2. Whether the Adjudicating Authority's interim order directing the RP not to proceed with decisions on any resolution plan is sustainable, especially in light of the Supreme Court's directive to reconsider the Appellant's Resolution Plan.
3. The impact of the Supreme Court's order dated 29.01.2025 on the ongoing CIRP, particularly regarding the reconsideration of the Appellant's Resolution Plan.
4. The implications of various intervention applications filed by operational creditors and others on the CIRP process.
ISSUE-WISE DETAILED ANALYSIS
1. Continuation of RP in CIRP Post Show Cause Notice
- Relevant Legal Framework and Precedents: The issuance of a show cause notice by IBBI typically results in the automatic suspension of the RP's AFA, as per Regulation 7A of the IBBI (Insolvency Professional) Regulations, 2016. The precedents cited include judgments from the High Courts of Madras and Bombay.
- Court's Interpretation and Reasoning: The Tribunal noted that the issuance of a show cause notice does not prohibit the RP from continuing with existing assignments. The RP is barred from taking new assignments but can continue with the current engagement.
- Application of Law to Facts: The Tribunal found that the RP could continue with the CIRP, as the show cause notice did not affect ongoing assignments.
- Treatment of Competing Arguments: The Tribunal considered arguments from the Respondent, who claimed that the suspension of AFA should prevent the RP from proceeding. However, the Tribunal sided with the Appellant's view that existing assignments could continue.
2. Sustainability of Adjudicating Authority's Interim Order
- Relevant Legal Framework and Precedents: The Tribunal examined the interim order's compatibility with the Supreme Court's directive, which required reconsideration of the Appellant's Resolution Plan.
- Court's Interpretation and Reasoning: The Tribunal determined that the interim order effectively halted the CIRP process, which was contrary to the Supreme Court's directive to reconsider the Appellant's Resolution Plan.
- Application of Law to Facts: The Tribunal concluded that the interim order should be set aside to allow the process to move forward in compliance with the Supreme Court's directive.
- Treatment of Competing Arguments: The Respondent argued that the interim order was necessary due to the RP's suspended AFA. The Tribunal rejected this, emphasizing the need to comply with the Supreme Court's order.
3. Impact of Supreme Court's Order on CIRP
- Relevant Legal Framework: The Supreme Court's order mandated the reconsideration of the Appellant's Resolution Plan and any other plans with requisite CCI approval as of 28.10.2022.
- Court's Interpretation and Reasoning: The Tribunal emphasized the binding nature of the Supreme Court's order and its implications for the CIRP timeline and process.
- Application of Law to Facts: The Tribunal directed that the Adjudicating Authority proceed with considering all pending applications, including the Resolution Plan approval, in light of the Supreme Court's order.
4. Intervention Applications and Their Impact
- Relevant Legal Framework: The Tribunal considered the procedural aspects of intervention applications and their potential to delay the CIRP.
- Court's Interpretation and Reasoning: The Tribunal noted that while intervention applications are a part of the process, they should not impede compliance with higher judicial directives.
- Application of Law to Facts: The Tribunal instructed the Adjudicating Authority to treat all pending applications as objections to the Plan approval and decide them promptly.
SIGNIFICANT HOLDINGS
- The Tribunal held that the RP could continue with the existing CIRP despite the show cause notice and suspension of AFA, as it did not prohibit ongoing assignments.
- The Tribunal set aside the Adjudicating Authority's interim order that restrained the RP from proceeding with decisions on any resolution plan.
- The Tribunal emphasized the need for the Adjudicating Authority to comply with the Supreme Court's directive by considering all pending applications, including the Appellant's Resolution Plan, without unnecessary delay.
- The Tribunal clarified that intervention applications should not obstruct the resolution process and directed their prompt consideration alongside the Resolution Plan approval application.
The appeal was disposed of with directions to the Adjudicating Authority to proceed with the consideration of all pending applications and decide them at the earliest, in accordance with the law.
Continuation of CIRP despite the issuance of a SCN by the Insolvency and Bankruptcy Board of India (IBBI) and the subsequent suspension of the Authorization for Assignment (AFA) - HELD THAT:- The issuance of show cause notice dated 30.01.2025 in no manner prohibit the RP to continue with the assignment. In any view of the matter, the Hon'ble Supreme Court in order dated 29.01.2025 [2025 (2) TMI 19 - SUPREME COURT] has directed for consideration of Resolution Plan of the Appellant by the CoC and RP submitted as on 28.10.2022.
Admittedly, Intervention Petitions and other Applications are still pending and have still not been finally decided. When the Hon'ble Supreme Court had directed the CoC to reconsider the Resolution Plan of the Appellant as on 28.10.2022, the Resolution Plan Application along with all objections regarding continuance of the RP in the CIRP, need to be finally decided by the Adjudicating Authority. Stopping the process will further delay the resolution of the CD. It is already noticed that IA 269/KB/2025 has already been filed by the RP for extension of timeline of the CIRP. The Hon'ble Supreme Court having directed for consideration of Resolution Plan of the Appellant, the Adjudicating Authority has to consider and pass an appropriate order on the said Application, which Application is also now pending for adjudication.
The present is a case where CIRP has commenced as early as on 21.10.2021 and the process has not reached to its culmination. In view of the order of the Hon'ble Supreme Court, the Adjudicating Authority need to proceed with the consideration of all pending Applications, including Plan approval Application and Application.
Conclusion - The RP could continue with the existing CIRP despite the show cause notice and suspension of AFA, as it did not prohibit ongoing assignments.
Appeal disposed off.
Issues: Whether the appellant had crossed the statutory threshold for maintaining an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 by adding interest reflected only in unsigned invoices.
Analysis: The admitted principal debt was below the minimum default amount prescribed for invoking the insolvency remedy. The claimed interest was based on entries in invoices that were not signed or otherwise shown to have been accepted by the corporate debtor, and therefore could not be treated as an enforceable component of default for the purpose of crossing the threshold. Since the principal amount alone did not satisfy the statutory minimum, the application itself was not maintainable. In view of this conclusion, the question of limitation was not required to be decided.
Conclusion: The appellant failed to establish that the default crossed the statutory threshold, and the challenge to dismissal of the Section 9 application fails.
Ratio Decidendi: Interest claimed on the basis of an unsigned unilateral invoice cannot be added to the admitted principal debt for satisfying the minimum default threshold under the insolvency code.
Dismissal of application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 - application filed under Section 9 was beyond the period of limitation and below the threshold of Rs. 1 Cr. excluding the amount of interest - HELD THAT:- The Appellant has been non-suited by the Tribunal on the issue of limitation and that the petition is being hit by Section 4 of the Code.
The Appellant, in order to cross the threshold, has added the component of interest making it an amount of Rs. 1,41,57,817/- alleging that the interest is provided in the invoice which can be charged by the Appellant in case the payment is not made within the required time but the Appellant has failed to show that the said invoice has been signed by the CD.
Thus, the question arises as to whether the interest mentioned in the invoice which is not signed by the CD is a unilateral document and cannot be recovered. In this regard, this Tribunal in the case of S.S Polymers Vs. Kanodia Technoplast Ltd. [2019 (11) TMI 1428 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] has held that 'Admittedly, before the admission of an application under Section 9 of the I&B Code, the ‘Corporate Debtor’ paid the total debt. The application was pursued for realisation of the interest amount, which, according to us is against the principle of the I&B Code, as it should be treated to be an application pursued by the Applicant with malicious intent (to realise only Interest) for any purpose other than for the Resolution of Insolvency, or Liquidation of the ‘Corporate Debtor’ and which is barred in view of Section 65 of the I&B Code.'
Similarly, the Hon’ble Karnataka High Court in the case of Jyothi Limited Vs. Boving Fouress Limited [2000 (12) TMI 817 - HIGH COURT OF KARNATAKA] regarding winding up of company has observed that the invoice having not been signed by the both parties is an unilateral document and interest cannot be claimed.
Thus, in view of the fact that the component interest cannot be added to be principal amount, on the basis of the entry and endorsement in the invoice which is not signed by the CD, the Appellant was entitled only to the principal amount which is less than Rs. 1 Cr., therefore, the Appellant has failed to prove that it has crossed the threshold of Rs. 1 Cr. for maintaining the application under Section 9.
Conclusion - Since the Appellant has failed to cross the threshold for maintaining the petition under Section 9, it is not required to go into the issue of limitation and the present appeal is without any substance and hence, the same is hereby dismissed.
Appeal dismissed.
The core legal questions considered in this judgment are:
1. Whether the National Company Law Tribunal (NCLT) had jurisdiction to direct the restoration of an electricity connection at the auctioned property as part of the liquidation proceedings.
2. Whether the adjudication of disputes arising from the auction purchase in the liquidation proceedings falls within the scope of the Insolvency and Bankruptcy Code (IBC), specifically under Section 60(5)(c).
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Jurisdiction of NCLT to Direct Restoration of Electricity Connection
Relevant legal framework and precedents: The appellant challenged the jurisdiction of the NCLT based on the judgment of the Hon'ble Supreme Court in Gujarat Urja Vikas Nigam Ltd. Vs. Mr. Amit Gupta & Ors. This precedent established that disputes not related to the insolvency resolution process should be adjudicated by the relevant competent authority rather than the NCLT.
Court's interpretation and reasoning: The Tribunal considered the argument that the NCLT lacked jurisdiction to direct the restoration of electricity connection. However, it noted that the issue arose from the auction purchase as part of the liquidation proceedings, thus falling within the scope of the NCLT's jurisdiction under Section 60(5)(c) of the IBC.
Key evidence and findings: The Tribunal found that the respondent was the Successful Auction Purchaser in the liquidation proceedings and that the appellant had already filed a claim, which was addressed in the liquidation process.
Application of law to facts: The Tribunal applied the principles from the Gujarat Urja Vikas Nigam case, emphasizing that the dispute was related to the insolvency of the corporate debtor and thus within the NCLT's jurisdiction. The Tribunal also referenced its own decision in M/s Uttarakhand Power Corporation Limited v/s M/s Shyam Baba Developers & Builders Pvt. Ltd., where similar directions for electricity connection were upheld.
Treatment of competing arguments: The appellant argued that the NCLT lacked jurisdiction, relying on the Gujarat Urja Vikas Nigam case. The respondent countered that the issue was covered by a prior judgment of the Tribunal, which supported the NCLT's jurisdiction in such matters.
Conclusions: The Tribunal concluded that the NCLT had jurisdiction to entertain the application filed by the Successful Purchaser, as the issue was related to the insolvency process and covered by Section 60(5)(c) of the IBC.
Issue 2: Scope of Section 60(5)(c) of the IBC
Relevant legal framework and precedents: Section 60(5)(c) of the IBC empowers the NCLT to adjudicate disputes arising from or related to the insolvency resolution process.
Court's interpretation and reasoning: The Tribunal interpreted Section 60(5)(c) as providing the NCLT with jurisdiction over disputes arising from the liquidation proceedings of the corporate debtor, including those related to auction purchases.
Key evidence and findings: The Tribunal noted that the application for restoring the electricity connection arose directly from the auction purchase during the liquidation proceedings.
Application of law to facts: The Tribunal applied Section 60(5)(c) to the facts, determining that the dispute was sufficiently connected to the insolvency process to fall under the NCLT's jurisdiction.
Treatment of competing arguments: The appellant's reliance on the Gujarat Urja Vikas Nigam case was addressed by distinguishing the nature of the dispute as one arising from the insolvency process, thus falling within the NCLT's jurisdiction under Section 60(5)(c).
Conclusions: The Tribunal concluded that the dispute was within the scope of Section 60(5)(c) of the IBC, affirming the NCLT's jurisdiction to adjudicate the matter.
SIGNIFICANT HOLDINGS
Preserve verbatim quotes of crucial legal reasoning: "There cannot be any dispute to the preposition laid down by the Hon'ble Supreme Court that the 'adjudication of dispute that arise dehors the insolvency of corporate debtor cannot be entertained.' The present is a case where application arose of auction purchase arising out of the liquidation proceeding, hence is fully covered by the Section 60(5)(c) of the Insolvency and Bankruptcy Code."
Core principles established: The Tribunal reaffirmed that disputes arising from the liquidation proceedings, including those related to auction purchases, fall within the jurisdiction of the NCLT under Section 60(5)(c) of the IBC.
Final determinations on each issue: The Tribunal dismissed the appeal, upholding the NCLT's order to restore the electricity connection at the auctioned property, affirming the NCLT's jurisdiction in the matter. The Tribunal found no grounds to challenge the NCLT's decision, as the issues were covered by existing legal precedents and statutory provisions.
Restoration of Electricity Connection at the auctioned property - jurisdiction of National Company Law Tribunal (NCLT) to direct the restoration of an electricity connection at the auctioned property as part of the liquidation proceedings - HELD THAT:- There is no dispute that the respondent became the Successful Auction Purchaser in the liquidation proceeding of the Corporate Debtor. The appellant has already filed a claim in the liquidation proceeding and his claim has been dealt with in the liquidation proceedings. The submission which has been pressed by the Appellant is that the Adjudicating Authority has no jurisdiction to consider the application filed by the Successful Purchaser.
Reliance has been placed in Gujarat Urja Vikas Nigam [2021 (3) TMI 340 - SUPREME COURT]. There cannot be any dispute to the preposition laid down by the Hon’ble Supreme Court that the ‘adjudication of dispute that arise dehors the insolvency of corporate debtor cannot be entertained.’ The present is a case where application arose of auction purchase arising out of the liquidation proceeding, hence is fully covered by the Section 60(5)(c) of the Insolvency and Bankruptcy Code.
Conclusion - The disputes arising from the liquidation proceedings, including those related to auction purchases, fall within the jurisdiction of the NCLT under Section 60(5)(c) of the IBC.
Appeal dismissed.
Issues: Whether the order directing liquidation of the corporate debtor under Section 33(2) of the Insolvency and Bankruptcy Code, 2016 called for interference, particularly when the committee of creditors had resolved to liquidate and the liquidation process had substantially been completed.
Analysis: The resolution to liquidate had emanated from the commercial decision of the committee of creditors, and no illegality or perversity in the decision-making process was shown. The liquidation process had progressed to completion, the assets had been sold, possession had been delivered to the auction purchaser, and an application for closure of liquidation and dissolution was already pending. In these circumstances, interference with the liquidation order would unsettle completed steps and affect third-party interests that had come into existence.
Conclusion: The challenge to the liquidation order was not sustainable and the appeal was liable to be dismissed.
Ratio Decidendi: A liquidation order passed on the commercial wisdom of the committee of creditors will not be interfered with absent illegality or perversity, and once liquidation has substantially culminated in sale and transfer of assets, the appellate forum should decline interference where third-party rights have arisen.
Liquidation of the Corporate Debtor - Section 33(2) of I & B Code - HELD THAT:- The fact of completion of the process of liquidation is not a fact which has been disputed by the Learned Counsel for the Appellant in his notes of submission - in the instant case, the process of liquidation is complete, the sale of assets have been confirmed and the assets have been handed over.
Apart from it, if the impugned order dated 27.01.2021, as rendered by the Learned Adjudicating Authority is taken into consideration, it has been a logical outcome of the resolution which was passed in the 9th CoC meeting which recommended liquidation of the Corporate Debtor and based on such resolution of CoC and the written of consent of the Resolution Professional dated 18.06.2020 to function as liquidator, Learned Adjudicating Authority had ordered the Corporate Debtor to be put to liquidation, which is not established or argued to be in contravention to any of the provisions of law, as contemplated under the I & B Code.
Since now much water has been flown after passing of the order of the appointment of the liquidator, the appeal deserves to be dismissed, as now third-party interest has been created subject to the confirmation of the sale made by the liquidator. The consequential effect would be that the so-called claim of the right of indemnification comes to an end, as over the assets as detailed above, with the Auction Purchaser already been placed in possession.
Conclusion - The liquidation order is valid and in accordance with Section 33(2) of the I & B Code.
Appeal dismissed.
Issues: (i) Whether the allegations of creation of a monopolistic environment and levy of 13% fee disclosed a prima facie contravention of Section 4 of the Competition Act, 2002. (ii) Whether the award of parking and lounge contracts was vitiated by selective favouritism, denial of market access, or exclusionary conduct under Section 4 of the Competition Act, 2002.
Issue (i): Whether the allegations of creation of a monopolistic environment and levy of 13% fee disclosed a prima facie contravention of Section 4 of the Competition Act, 2002.
Analysis: The allegations regarding future monopolistic consequences were general and unsupported by evidence. The 13% fee was found to be a continuation of the charges earlier levied by the statutory airport authority and was applied uniformly to all service providers without any demonstrated increase or discriminatory treatment. On the material placed, no unfair condition, exorbitant charge, or speculative abuse was established at the prima facie stage.
Conclusion: No prima facie contravention was made out on this ground.
Issue (ii): Whether the award of parking and lounge contracts was vitiated by selective favouritism, denial of market access, or exclusionary conduct under Section 4 of the Competition Act, 2002.
Analysis: The relevant contractual framework permitted subcontracting and association with entities created for airport services. The material showed that parking and lounge contracts were awarded through competitive bidding, with multiple participants, and that the selected entities were chosen after evaluation under the applicable concession framework. The allegations of manipulation, related-party favouritism, and denial of market access were found to rest on misplaced facts and were not substantiated.
Conclusion: The allegations concerning parking and lounge contracts did not disclose a prima facie case of abuse of dominance.
Final Conclusion: The information was closed at the prima facie stage and interim relief was declined, with confidentiality granted in respect of specified material for the period indicated in the order.
Ratio Decidendi: A prima facie case of abuse of dominance is not made out where challenged charges are shown to be uniform and continuing from the earlier regime, and where the impugned contracts are awarded through a competitive bidding process under the governing concession framework.
Abuse of dominant position - creation of monopolistic environment, thereby violating Section 4(2)(a)(i) of Competition Act - limiting the provision of services in the Delhi airport market by ousting other prospective contractors, in contravention of Section 4(2)(b)(i) of the Act - selectively awarding contracts to its own formed companies, denying market access, in violation of Section 4(2)(c) of the Act - leveraging its dominant position to engage in exclusionary practices, restricting services in the downstream market, in violation of Section 4(2)(e) of the Act.
Creation of monopolistic environment, thereby violating Section 4(2)(a)(i) of Competition Act - HELD THAT:- The Commission, in relation to the allegation under Section 4(2)(a)(i), is of the view that the imposition of 13% fee on tenders is a continuation of the charges previously levied by AAI, a statutory body, and notes that the same is being levied uniformly on all the service providers, with no further increase. In view of generic and wide nature of allegations related to creation of monopolistic environment which could lead to imposition of exorbitant charges on customers in future, the Commission is of the view that in absence of any evidence, it may not be prudent to deal with the allegation/apprehension at this juncture.
Selectively awarding contracts/tender by OPs to its own entities leading to limiting the provision of services in the airport market of Delhi and denial of market access - HELD THAT:- The Commission is of the view that, as per the OMDA Agreement, OP-3 has the right to sub-contract third party entities for providing services such as parking and lounge services and also have the right to acquire ownership of such entities. It is also noted that OP-3, in its submissions, gave details of the bidding process adopted for both parking and lounge services through which DAPSL and Encalm were awarded their respective contracts. OP-3 has stated that in each of the processes involving award of contract for parking facility and lounge facility, multiple third-parties participated in the bid process and none of the bidders were related parties to OP-3 or OP-4.
Allegation pertaining to parking services - HELD THAT:- The Commission noted the submission of OP-3, wherein it is mentioned that DIAL issued the RFP dated 15.10.2009 and carried out a competitive bidding process, in which ten domestic and international entities participated. Based on a technical and financial evaluation of the bids submitted, a consortium of Greenwich and Tenaga was identified as the highest bidder for the purpose of awarding the concession for parking services - the Commission observes that the entity for parking services was selected through a competitive bidding process, in compliance with the OMDA agreement. Thus, the allegation raised in the Information, under Section 4(2)(b), 4(2)(c) and 4(2)(e) of the Act, in relation to the award of parking services to entities allegedly under significant control of OP-3 is unsubstantiated.
Allegation pertaining to lounge services - HELD THAT:- OP-3 has stated that Encalm is an independent third party and has no relation with DIAL or GIL except being the licensee to provide certain services at IGI Airport. It is also stated that none of the Encalm’s shareholders hold any directorship in DIAL/GIL or vice versa. The contract for operating and managing lounge facility at IGI Airport was awarded to Encalm on 17.11.2021, by way of competitive bidding process. Thus, similar allegations, under the above-mentioned provisions of the Act, raised in relation to Encalm’s selection process are unsubstantiated.
Conclusion - The Commission finds that no prima facie case of contravention of the provisions of Section 4 of the Act is made out against the Opposite Party. Accordingly, the information is ordered to be closed forthwith in terms of the provisions contained in Section 26(2) of the Act. Consequently, no case for grant for relief(s) as sought under Section 33 of the Act arises and the same is also rejected.
The Secretary is directed to communicate to the Informant, accordingly.
Issues: (i) Whether the legal representative of a deceased appellant could continue the appeal under Section 72 of the Prevention of Money Laundering Act, 2002 without being defeated by a limitation period not expressly prescribed for such substitution; (ii) whether the Appellate Tribunal could apply Order XXII of the Code of Civil Procedure, 1908 and Article 120 of the Limitation Act, 1963 to dismiss the legal representative petition and treat the appeal as abated; (iii) whether dismissal of the legal representative petition and the appeal was sustainable in the light of principles of natural justice.
Issue (i): Whether the legal representative of a deceased appellant could continue the appeal under Section 72 of the Prevention of Money Laundering Act, 2002 without being defeated by a limitation period not expressly prescribed for such substitution?
Analysis: Section 72 expressly provides for continuation of proceedings where an appellant dies during the pendency of an appeal, and permits the legal representatives to continue the appeal in the place of the deceased appellant. The provision does not prescribe any period of limitation for filing an application to come on record. The statutory scheme therefore indicates a legislative intent to preserve the appeal and not to terminate it merely because the appellant died during pendency.
Conclusion: The legal representative was entitled to continue the appeal, and the absence of an express limitation period prevented rejection of the application on that ground.
Issue (ii): Whether the Appellate Tribunal could apply Order XXII of the Code of Civil Procedure, 1908 and Article 120 of the Limitation Act, 1963 to dismiss the legal representative petition and treat the appeal as abated?
Analysis: The Appellate Tribunal is not bound by the procedure laid down in the Code of Civil Procedure, 1908, and its powers are confined to regulating its own procedure subject to the Act. In the absence of rules or regulations making Order XXII applicable, and in view of the specific enabling provision under Section 72, importing Article 120 of the Limitation Act, 1963 and treating the application as barred was unwarranted. The general limitation framework applicable to civil court proceedings cannot be superimposed on a special statutory appeal where the statute itself provides for continuation of proceedings.
Conclusion: The Tribunal erred in applying Order XXII of the Code of Civil Procedure, 1908 and Article 120 of the Limitation Act, 1963, and the finding of abatement was unsustainable.
Issue (iii): Whether dismissal of the legal representative petition and the appeal was sustainable in the light of principles of natural justice?
Analysis: Since the statute conferred a right to continue the appeal and no procedural rule or limitation provision barred the application, rejection of the substitution request on technical grounds defeated the statutory remedy. A liberal construction was required so that the appeal could be decided on merits after hearing the legal representative and the respondent. The impugned dismissal, therefore, did not accord with the statutory scheme or fair procedure.
Conclusion: The dismissal of the legal representative petition and the appeal was not sustainable.
Final Conclusion: The appeal succeeded, the order rejecting substitution and declaring the appeal abated was set aside, the legal representative was brought on record, and the matter was remitted for decision on merits after hearing both sides.
Ratio Decidendi: Where a special statute expressly permits the legal representative of a deceased appellant to continue an appeal and does not prescribe a substitution period, a tribunal cannot import civil procedure or general limitation rules to defeat that statutory right.
Money Laundering - dismissal of LR petition, and the appeal on the ground of delay in filing the LR petition - absence of any specific limitation prescribed under Section 72 of PMLA - applicability of provisions of CPC to Section 35 of the PMLA - proper opportunity not provided to the appellant to defend her case - violation of principles of natural justice - HELD THAT:- The Order 22 of C.P.C., deals with death, marriage and insolvency of parties and Order 22, Rule 2 contemplates the procedure where one of the several plaintiffs or defendants dies and right to sue survives. The said provisions which are the basis for the orders under challenge cannot be made applicable to the PMLA, which is a special enactment. In fact, the Code of Civil Procedure had limited application to the Appellate Tribunal in respect of the matters as set out in Section 35. From a plain reading of the said provision, it is clear that the Appellate Tribunal is not bound by the procedure laid down by the Code of Civil Procedure, but it should be guided by the principles of natural justice and it shall have the powers to regulate its own procedure. When the provision i.e., Section 35 contemplates the application of Code of Civil Procedure to the extent indicated therein and that the Appellate Tribunal is not bound by the procedure laid down by the Code of Civil Procedure, provisions of Order 22 C.P.C., though there is no absolute bar, in the opinion of this Court cannot be pressed into service, in the absence of any regulations / rules formulating the procedure or making it applicable to the matters before the Appellate Tribunal, more particularly in view of the Section 72 of the Act, which enables continuation of proceedings in the event of death or insolvency.
A close reading of Section 72, is indicative of the intention of the legislature of continuation of proceedings in the event of death or insolvency and it shall be lawful for the legal representative of an appellant, who dies during the pendency of an appeal to continue the same before the Appellate Tribunal in the place of the deceased-appellant. No time limit was prescribed for making of an application for continuation of proceedings/appeal by the legal representatives of the appellant.
In M.P. Steel Corporation’s case [1998 (6) TMI 322 - CEGAT, MUMBAI], the appellant before the Hon’ble Supreme Court was challenging the order of Customs, Excise & Service Tax Appellate Tribunal (CESTAT). The Commissioner of Customs (Appeals) dismissed the appeal on the ground of delay stating that the same was filed beyond the period of 60 days + 30 days provided for in Section 128 of the Customs Act. On Appeal, CESTAT dismissed the appeal stating that the Commissioner of Customs (Appeals) had no power to condone the delay beyond the period specified in Section 128 of the Act. The Hon’ble Supreme Court inter alia examined the point as to whether the Limitation Act applies to only Courts and not to Tribunals with reference to a series of decisions, wherein it was laid down that the Limitation Act applies only to Courts and does not apply to quasi judicial bodies.
The order of the Tribunal pressing into service the provisions of C.P.C., i.e., Order 22 and thereby dismissing the appeal as abated is also not tenable. Even if the appeal is abated, the right conferred under statute viz., Section 72 cannot be taken away on the ground that no formal application to condone the delay was filed. Section 35 provides for limited application of the provisions of the C.P.C., and no regulations have been framed formulating the procedure / applicability of provisions of C.P.C., under Order 22 etc. - Further, in the present case, the legal heir of the deceased / appellant filed the application to record her as legal representative while the appeal is pending. The Appellate Tribunal, in such circumstances, in the considered opinion of this Court should have allowed the same and decided the matter on merits taking a liberal view rather than rejecting it on technicalities.
Conclusion - i) The dismissal of the LR petition and the appeal on the grounds of delay is not legally sustainable. ii) The Tribunal's use of CPC provisions to abate the appeal is not tenable. iii) The Tribunal's decision violated principles of natural justice by not allowing the legal representative a proper opportunity to be heard.
The impugned order is set aside - appeal allowed.
The core legal issues considered in this judgment were:
ISSUE-WISE DETAILED ANALYSIS
1. Inclusion of Reimbursed Expenses in Taxable Value
2. Reversal of CENVAT Credit for Non-Taxable Services
SIGNIFICANT HOLDINGS
The appeals were allowed with consequential reliefs, if any, as per the law.
Tenability of service tax demand invoking rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules) - inclusion of reimbursed expenditures or costs incurred in the course of providing taxable services - tenability of demand of cenvat credit availed and utilized for payment of tax on non- taxable output service.
Inclusion of reimbursed expenditures or costs incurred in the course of providing taxable services - HELD THAT:- The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, [2018 (3) TMI 357 - SUPREME COURT] which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client, apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax.
The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI, [2012 (12) TMI 150 - DELHI HIGH COURT], wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections.
The findings in the impugned order in appeal confirming the demand on non-inclusion of reimbursable charges cannot sustain and are liable to be set aside.
Cenvat credit availed and utilized for payment of service tax on services that are non-taxable - HELD THAT:- The said issue also stands decided in the appellant’s favour in light of the Hon’ble Apex Court decision in CCE, Vadodara v Narmada Chematur Pharmaceuticals Ltd, [2004 (12) TMI 93 - SUPREME COURT], wherein the wrongly availed cenvat credit was utilized for payment of excise duty, the Hon’ble Apex Court has held that the consequences of payment of excise duty after availing modvat credit was revenue neutral and thus dismissed the appeal filed by the revenue. Thus, the demands made on the appellant on this count too will not sustain.
Conclusion - i) The reimbursed expenses should not be included in the taxable value of services. ii) The reversal of CENVAT credit for non-taxable services is not warranted.
Appeal allowed.
The core legal questions considered in this judgment are:
a) The admissibility of CENVAT credit on each of the disputed services.
b) The invocation of the extended period of limitation for recovery of CENVAT credit.
c) The imposition of a penalty under Section 78 of the Finance Act.
ISSUE-WISE DETAILED ANALYSIS
Admissibility of CENVAT Credit on the Disputed Services
The primary issue is whether the appellant was entitled to CENVAT credit on various services, particularly the training services provided to GAIL employees. The Revenue contended that the appellant wrongly availed CENVAT credit as these services were not "input services" for the appellant's output services, which are commercial coaching and training services.
The legal framework involves Rule 2(l) of the CENVAT Credit Rules, 2004, which defines 'input service.' The definition includes services used by a provider of output service for providing an output service and specifically includes coaching and training. However, the court emphasized that the services must be used by the assessee in providing output services.
The appellant argued that the definition of 'input service' includes coaching and training, and since the appellant is part of GAIL, it should be entitled to the credit. The appellant also suggested that trained GAIL employees could provide training at the appellant's institute.
The court rejected these arguments, clarifying that each service providing entity is an independent assessee for service tax purposes. The services must be used by the appellant to qualify as input services. Merely paying for the services does not suffice if they are not used to provide the appellant's output services. Therefore, the court upheld the Revenue's decision to deny CENVAT credit for training services provided to GAIL employees.
Regarding other services like cable, housekeeping, pest control, courier, insurance, manpower recruitment, photocopying, security, telecommunication, ticket booking, works contract, catering, and vehicle hiring services, the court found no justification in the SCN or the impugned order for denying CENVAT credit. Considering the nature of the appellant's services, the court concluded that these services qualify as input services, and the appellant is entitled to CENVAT credit.
Invocation of Extended Period of Limitation
The court examined whether the extended period of limitation was rightly invoked. Under Section 73 of the Finance Act, the extended period can be invoked if non-payment of service tax is due to fraud, collusion, willful misstatement, suppression of facts, or violation of provisions with intent to evade tax.
The Revenue argued that the appellant suppressed facts regarding CENVAT credit availment, which was discovered only during an audit. However, the court noted that the appellant had recorded and reported the CENVAT credit in its Returns, which do not require invoice-wise details. The court criticized the Range Officer's failure to scrutinize the Returns timely, leading to the late discovery of alleged irregularities. The court concluded that there was no suppression of facts by the appellant, and thus, the extended period of limitation could not be invoked.
Imposition of Penalty under Section 78
The imposition of a penalty under Section 78 requires the same elements as invoking the extended period of limitation. Since the court found no fraud, collusion, willful misstatement, or suppression of facts, the penalty was deemed inappropriate and set aside.
SIGNIFICANT HOLDINGS
The court upheld the denial and recovery of CENVAT credit availed on training services within the normal period of limitation, with appropriate interest. It set aside the rest of the demand and penalties, remanding the matter to the Commissioner for calculating the recoverable CENVAT credit and interest.
"The submission of the appellant that the entire legal entity should be considered to determine eligibility of CENVAT credit and that the appellant was not distinct from GAIL deserves to be rejected."
"Once the Return is filed, it is the responsibility of the Range Officer to scrutinize it and for this purpose, he can call for any records and accounts of the assessee."
The core principles established include the interpretation of 'input service' under the CENVAT Credit Rules and the criteria for invoking the extended period of limitation and penalties under the Finance Act.
CENVAT credit admissibility - input service - commercial training and coaching service - extended period of limitation under Section 73 of the Finance Act, 1994 - fraud, collusion, willful mis-statement or suppression of facts - penalty under Section 78 of the Finance Act, 1994 - interest under Section 75 of the Finance Act, 1994 - remand for computation of CENVAT credit and interest
CENVAT credit admissibility - input service - commercial training and coaching service - Admissibility of CENVAT credit on the disputed services including training services provided to employees of GAIL and various other service inputs. - HELD THAT: - The Court held that the definition of 'input service' requires the service to be used by the service-provider in providing its output service; mere payment of a bill by the appellant does not convert services used by another unit or entity into input services of the appellant. Accordingly, CENVAT credit of service tax paid on training provided to employees of GAIL was correctly denied because those trainings were not 'coaching and training' of the appellant's own employees and therefore were not input services of the appellant. The contention that the appellant should be treated as part of the entire GAIL legal entity was rejected because service tax liability and CENVAT entitlements attach to the individual service-providing assessee/unit. Separately, for the other disputed services (cable, housekeeping, pest control, courier, insurance, manpower recruitment, photocopying, security, telecommunication, ticket booking, works contract/maintenance and repair, catering, hiring of vehicles) the Court found no reasons recorded in the SCN or impugned order to deny credit and, having regard to their nature and their use in providing the appellant's output service of commercial coaching and training, held the appellant entitled to CENVAT credit on those services. [Paras 7]
CENVAT credit on training services provided to GAIL employees was denied; CENVAT credit on the other enumerated input services was allowed.
Extended period of limitation under Section 73 of the Finance Act, 1994 - fraud, collusion, willful mis-statement or suppression of facts - Whether the extended period of limitation could be invoked for recovery of the disputed CENVAT credit. - HELD THAT: - The Tribunal held that invocation of the extended period requires proof that non-payment (or incorrect availment) of tax/credit was by reason of fraud, collusion, willful mis-statement, suppression of facts or violation of the Act or Rules with intent to evade service tax. The departmental case that the appellant 'suppressed' facts was unsupported: the availment of CENVAT credit had been recorded in Returns and was discovered in audit; absence of invoice-wise scrutiny by the Range Officer and late detection by audit does not establish suppression or intent to evade by the appellant. Consequently, the factual basis for invoking the extended period was absent and the extended period of limitation could not be invoked for the disputed amounts beyond the normal limitation period. [Paras 8, 9, 10, 11]
Extended period of limitation under Section 73 cannot be invoked; demands beyond the normal period of limitation are set aside.
Penalty under Section 78 of the Finance Act, 1994 - fraud, collusion, willful mis-statement or suppression of facts - Validity of the penalty imposed under Section 78 of the Finance Act. - HELD THAT: - Section 78 permits imposition of penalty only where non-payment or incorrect availment arises from fraud, collusion, willful mis-statement, suppression of facts or violation of the Act/Rules with intent to evade tax. As the requisite elements for invoking the extended period were absent and there was no finding of fraud, collusion or willful suppression by the appellant, the statutory threshold for levy of penalty under Section 78 was not satisfied. Therefore, the penalty was liable to be set aside. [Paras 13]
Penalty under Section 78 set aside.
Interest under Section 75 of the Finance Act, 1994 - remand for computation of CENVAT credit and interest - Calculation of recoverable CENVAT credit and interest where credit within the normal limitation period is upheld. - HELD THAT: - The Tribunal observed that where CENVAT credit is held recoverable, interest under the appropriate statutory provision is also payable. Having upheld denial of credit only in respect of the training services within the normal period of limitation and allowed credit for other services, the matter was remanded to the Commissioner for the limited purpose of quantifying the CENVAT credit and computing interest payable in accordance with law. [Paras 12, 14]
Matter remanded to the Commissioner for calculation of the CENVAT credit and interest to be recovered; quantification to be completed in accordance with the Tribunal's findings.
Final Conclusion: The appeal is partly allowed: denial and recovery of CENVAT credit on training services to GAIL employees (within the normal limitation period) is upheld with appropriate interest; CENVAT credit on the other disputed input services is allowed; extended period of limitation and the penalty under Section 78 are set aside; the matter is remanded to the Commissioner solely for computation of the amounts and interest to be recovered.
Issues: Whether the High Court was justified in quashing the criminal proceedings and chargesheet against the accused by exercising inherent powers under Section 482 of the Code of Criminal Procedure, 1973.
Analysis: The allegations disclosed a serious financial irregularity involving large payments said to have been made towards GST liability and allegedly misappropriated. The Court reiterated that inherent jurisdiction is to be exercised sparingly and that quashing is warranted only where the case falls within the recognised categories governing such power. At the stage of quashing, the Court does not undertake a mini-trial or test the truthfulness of the accusations. On the material available, the respondent's own statement contained material broadly consistent with the co-accused's version, and the record was not such as to justify termination of the prosecution at the threshold.
Conclusion: The High Court was not justified in quashing the proceedings. The appeal was allowed and the criminal proceedings were restored for trial.
Ratio Decidendi: In proceedings under Section 482 of the Code of Criminal Procedure, 1973, criminal prosecution should not be quashed where the complaint and accompanying material disclose a prima facie case and the allegations require trial for proper adjudication.
Quashing the criminal proceedings against respondent No.1 - prima facie evidence to proceed with the charges against the respondent or not - invocation of inherent powers under Section 482 Cr.P.C. - HELD THAT:- The contours of exercise of the powers under Section 482 Cr.P.C. have been expressed in various judgments. In the well known case of State of Haryana v. Bhajan Lal [1990 (11) TMI 386 - SUPREME COURT] this Court, while recognizing that it would not be possible to account for all possibilities, detailed seven circumstances where the exercise would be justified.
What is, therefore, to be seen is whether, in the present facts, any of the seven circumstances/situations mentioned in Bhajan Lal [1990 (11) TMI 386 - SUPREME COURT] are justifiably met. One of the submissions advanced on behalf of respondent No.1 was that reliance solely on the statement of the co-accused is not justified. It is found that this submission to be incorrect for presently, respondent No.1’s own statement also presents some corroboration for the statement of accused No.1.
When his own statement acknowledges the possibility that he had received money from accused No.1, which the latter has also alluded to, there prima facie appears to be a connection. This, however, is not the only connection between these two persons. It was on accused No.1’s recommendation that respondent No.1 ‘appointed’ one Ritesh Merugu, who is accused No.2, as Accounts Manager. Furthermore, it is surprised by the fact that the CFO of a company and an alleged chartered accountant, both readily agreed to not put ink to paper to formalise this relationship between them, and sans the same found it completely alright to share all financial details and books of accounts.
Conclusion - The inherent powers under Section 482 Cr.P.C. should be exercised with caution, ensuring that prima facie evidence is not disregarded without due trial.
The proceedings are revived and restored to the file of III Additional Chief Metropolitan Magistrate, Bengaluru - application disposed off.
The core issue considered by the Court was whether the recovery of financial benefits extended to the appellants while they were in service is justified after their retirement, particularly when such recovery was ordered without affording any opportunity of hearing to the appellants.
2. ISSUE-WISE DETAILED ANALYSIS
The Court examined the legal framework and precedents concerning the recovery of excess payments made to employees. The relevant legal framework includes established principles from previous judgments, such as Sahib Ram vs. State of Haryana, Shyam Babu Verma vs. Union of India, Union of India vs. M. Bhaskar, V. Gangaram vs. Regional Jt. Director, and Thomas Daniel vs. State of Kerala & Ors.
In these cases, the Court consistently held that recovery of excess payments is not permissible if the payment was not due to any misrepresentation or fraud by the employee and was made due to an erroneous interpretation of rules by the employer. The Court emphasized that relief against such recovery is granted not because of any inherent right of the employee but as an exercise of judicial discretion to alleviate hardship.
Key evidence and findings in the present case indicated that the financial benefits were granted to the appellants without any fraud or misrepresentation on their part. The benefits were extended based on the recommendations of the Shetty Commission and were later deemed erroneous by the respondents. The appellants had retired by the time the recovery was ordered, and no opportunity for a hearing was provided to them before the recovery orders were issued.
The Court applied the established legal principles to the facts of the case, noting that the appellants were low-paid employees who had retired and that the recovery would cause undue hardship. The Court also considered that the appellants were not given a chance to present their case before the recovery orders were made.
Competing arguments were addressed by noting that the respondents argued the appellants were not entitled to the financial benefits and had agreed to refund any excess payments. However, the Court found that the lack of opportunity for a hearing and the principles established in prior judgments outweighed these arguments.
3. SIGNIFICANT HOLDINGS
The Court held that the recovery of excess payments from retired employees, particularly without a hearing, is unsustainable. The Court quoted significant legal reasoning from past judgments, emphasizing that recovery is impermissible when there is no misrepresentation or fraud, and the payment was made due to an erroneous interpretation by the employer.
Core principles established include the prohibition of recovery from retired employees or those nearing retirement, particularly when the excess payment was made over a long period and without the employee's fault. The Court reiterated that such recovery is inequitable and causes undue hardship.
The final determination was to allow the appeal, setting aside the High Court's order and the subsequent orders directing the appellants to deposit the excess drawn arrears.
Recovery of financial benefits - Principles of natural justice - whether recovery of the amount extended to the appellants while they were in service is justified after their retirement and that too without affording any opportunity of hearing? - HELD THAT:- The law in this regard has been settled by this Court in catena of judgments rendered time and again; Sahib Ram vs. State of Haryana [1994 (9) TMI 373 - SUPREME COURT], Shyam Babu Verma vs. Union of India [1994 (2) TMI 329 - SUPREME COURT], Union of India vs. M. Bhaskar [1996 (5) TMI 450 - SUPREME COURT] and V. Gangaram vs. Regional Jt. Director [1997 (4) TMI 550 - SUPREME COURT] and in a recent decision in the matter of Thomas Daniel vs. State of Kerala & Ors. [2022 (5) TMI 1674 - SUPREME COURT].
This Court has consistently taken the view that if the excess amount was not paid on account of any misrepresentation or fraud on the part of the employee or if such excess payment was made by the employer by applying a wrong principle for calculating the pay/allowance or on the basis of a particular interpretation of rule/order, which is subsequently found to be erroneous, such excess payments of emoluments or allowances are not recoverable. It is held that such relief against the recovery is not because of any right of the employee but in equity, exercising judicial discretion to provide relief to the employee from the hardship that will be caused if the recovery is ordered.
In the case at hand, the appellants were working on the post of Stenographers when the subject illegal payment was made to them. It is not reflected in the record that such payment was made to the appellants on account of any fraud or misrepresentation by them. It seems, when the financial benefit was extended to the appellants by the District Judge, Cuttack, the same was subsequently not approved by the High Court which resulted in the subsequent order of recovery. It is also not in dispute that the payment was made in the year 2017 whereas the recovery was directed in the year 2023. However, in the meanwhile, the appellants have retired in the year 2020. It is also an admitted position that the appellants were not afforded any opportunity of hearing before issuing the order of recovery. The appellants having superannuated on a ministerial post of Stenographer were admittedly not holding any gazetted post as such applying the principle enunciated by this Court in the above quoted judgment, the recovery is found unsustainable.
Conclusion - The recovery of excess payments from retired employees, particularly without a hearing, is unsustainable.
Appeal allowed.
Issues: Whether the petitioner was entitled to quashing of the summoning order in proceedings under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 on the ground that he had retired from the partnership and was not in charge of the firm when the cheque was issued or dishonoured.
Analysis: Vicarious liability under Section 141 attaches to a partner who was in charge of and responsible for the conduct of the business at the time of commission of the offence. A petition under Section 482 of the Code of Criminal Procedure, 1973 may succeed only where the accused produces unimpeachable and uncontroverted material showing that continuation of the prosecution would be an abuse of process. Here, the claimed retirement from the firm, the modified partnership deed, and the alleged intimation to the complainant were disputed. The cheque in question was alleged to be issued in replacement of a security cheque issued when the petitioner was admittedly a partner, and the effect of the alleged retirement was itself a matter of defence requiring trial.
Conclusion: Quashing was not warranted, because the material relied upon by the petitioner was not of such sterling quality as to conclusively negate liability at the threshold.
Dishonour of Cheque - vicarious liability of petitioner, having retired from the partnership - Section 138 read with Section 141 of the Negotiable Instruments Act (NI Act) - main thrust of the petitioner’s argument is that he was not the person responsible for the conduct of the accused firm at the time of issuance of the subject cheque - HELD THAT:- Concededly, the petitioner, at the time of the issuance of the security cheque, was a partner in the accused firm. The subject cheque is claimed to be given in exchange of the cheque which was issued at the time when the petitioner being partner was the person responsible for the conduct of the accused firm. Whether the petitioner can be held liable for dishonor of the replaced cheque, even if it is to be presumed that he had retired by that time, is a mixed question of facts and law which cannot be decided at this stage, without the evidence being led by the parties. Moreover, the retirement of the petitioner from the accused firm is also disputed and is subject matter of other litigations initiated by other partners. The said fact, thus, is not of such sterling nature to be considered while exercising power under Section 482 of the CrPC.
Therefore, from the totality of facts, it cannot be said at this stage that the petitioner was not the person responsible at the time of commission of offence committed by the accused partnership firm. To quash the proceedings by petition filed under Section 482 of CrPC, the petitioner is to place some unimpeachable and uncontroverted evidence which is beyond suspicion or doubt.
The factual issues that serve as defences in the case are not appropriate for determination under the powers conferred by Section 482 of the CrPC at this stage. It is well-established that this Court should refrain from expressing any views on disputed questions of fact in proceedings under Section 482 of the CrPC, as doing so could pre-empt the findings of the trial court.
Conclusion - Considering the material on record, the documents adduced by the petitioner cannot be said to be of such sterling and unimpeachable quality that it merits the quashing of the summons and consequential proceedings thereof. This Court can exercise its jurisdiction only upon unimpeachable and uncontroverted evidence being placed on record, however, in the absence of such evidence, the fact whether the accused person is responsible for the affairs of the accused company becomes a factual dispute, which is to be seen during trial.
This Court finds no reason to interfere with the impugned order passed by the learned Trial Court - Petition dismissed.
Issues: (i) whether a cheque described as a security cheque, and dishonoured on the ground of account closed, could be quashed at the threshold in proceedings under Section 138 of the Negotiable Instruments Act, 1881; (ii) whether pendency of proceedings under the SARFAESI Act bars prosecution under Section 138 of the Negotiable Instruments Act, 1881.
Issue (i): whether a cheque described as a security cheque, and dishonoured on the ground of account closed, could be quashed at the threshold in proceedings under Section 138 of the Negotiable Instruments Act, 1881.
Analysis: The inherent power to quash at the summoning stage must be used sparingly, because disputed factual defences ordinarily belong to trial. A cheque returned with the endorsement "account closed" falls within the ambit of dishonour attracting Section 138. Once execution of the cheque is not disputed, the presumption under Section 139 operates, and the drawer must rebut it with material of unimpeachable character. A mere assertion that the cheque was issued as security does not by itself negate liability; whether it was intended to be presented, whether any arrangement excluded its encashment, and whether any legally enforceable liability existed are factual matters requiring evidence.
Conclusion: The security-cheque defence could not justify quashing at the threshold, and the complaint under Section 138 was maintainable to proceed to trial.
Issue (ii): whether pendency of proceedings under the SARFAESI Act bars prosecution under Section 138 of the Negotiable Instruments Act, 1881.
Analysis: Proceedings under the SARFAESI Act and under the Negotiable Instruments Act serve different purposes. SARFAESI is a recovery mechanism, while Section 138 creates criminal liability for cheque dishonour. The two remedies operate in independent spheres, and the existence of recovery proceedings does not create a legal bar to criminal prosecution for dishonour of the cheque.
Conclusion: Pendency of SARFAESI proceedings did not bar continuation of the complaint under Section 138.
Final Conclusion: The petition was found to raise defences that required evidence at trial, and no ground for interference in inherent jurisdiction was made out.
Ratio Decidendi: At the stage of quashing, disputed defences against a cheque dishonour complaint, including the plea that the cheque was only a security cheque, cannot be conclusively accepted unless supported by unimpeachable material; and parallel recovery proceedings do not bar prosecution under Section 138.
Dishonour of Cheque - discharge of a legally enforceable debt or merely as a security instrument - simultaneous invocation of SARFAESI proceedings bar the criminal complaint under Section 138 of the NI Act or not.
HELD THAT:- It is relevant to note that the inherent jurisdiction of the Court under Section 482 of the CrPC ought to be exercised sparingly especially when the matter is at the stage of issuance of summons as the same has the effect of scuttling the proceedings without the parties having an opportunity to adduce the relevant evidence. The Hon’ble Apex Court, in the case of Rathish Babu Unnikrishnan v. State (NCT of Delhi) [2022 (4) TMI 1434 - SUPREME COURT] adverting to a catena of judgments, had underscored the parameters for exercising inherent jurisdiction to quash the proceedings at the stage of the summoning order.
In the present case, Respondent No. 2 had filed a complaint under Section 138 of the NI Act. The learned MM relying upon the complaint supported by the affidavit of the complainant, took cognizance under Section 138 of the NI Act, and passed the summoning order dated 02.07.2018 - the allegations made in the complaint, at the stage when the complaint is sought to be quashed at the outset, are to be taken as correct unless evidence of unimpeachable character has been produced.
Whether the subject cheque was issued in discharge of a Legally Enforceable Debt? - HELD THAT:- It is well-settled law that the presumption under Section 139 of the NI Act, applies once the execution of the subject cheque is undisputed. The burden is on the drawer to rebut the presumption that the cheque was issued for a legally enforceable debt or liability which is required to be established during trial.
In the present case, the petitioners contended that the subject cheque was in the nature of security and not against an accrued or existing liability at the time of its issuance. According to the petitioners, the cheque was provided solely to secure the transfer of title deeds from Yes Bank to Respondent No. 2 and was not intended to be presented for encashment. It is further submitted that upon the successful transfer of those title deeds, the underlying purpose of the cheque stood extinguished, and as such, its dishonour cannot attract penal consequences under Section 138 of the NI Act - In the present case, no material has been placed on record to prima facie demonstrate that Respondent No. 2 had agreed not to present the cheque after receipt of the title deeds. In the absence of such evidence, the liability under the subject cheque cannot be said to have been extinguished, and the consequences of its dishonour must follow the mandate of law—subject, of course, to the findings at trial.
In the present case, the loan account of the petitioners was declared NPA, and they failed to regularize their payments, prompting Respondent No. 2 to present the subject cheque for payment. Whether the subject cheque was given as security for facilitating the transfer of property documents from Yes Bank and not towards repayment of any legally enforceable liability constitutes defence of the accused and is a matter of trial. No unimpeachable material has been placed on record to indicate that the subject cheque was issued solely for securing the release of title deeds or that it was never intended to be presented for payment. The purpose behind the issuance of the cheque, and whether it was connected to a subsisting liability or merely a collateral assurance, is a disputed question of fact, which cannot be conclusively determined while exercising power under Section 482 of the CrPC.
Whether the simultaneous invocation of SARFAESI proceedings bar the criminal complaint under Section 138 of the NI Act? - HELD THAT:- The loan extended by financial institutions does not become the personal asset of the borrower; rather, it is disbursed in a fiduciary capacity, sourced from public funds contributed by taxpayers. Recognizing the need for a swift and effective mechanism to recover non-performing assets (NPAs), the legislature enacted the SARFAESI Act. This law empowers banks and financial institutions to recover dues without court intervention, ensuring financial stability - Conversely, the NI Act is a codified statute governing promissory notes, bills of exchange, and cheques. It establishes criminal liability for dishonour of cheques to uphold the sanctity of negotiable instruments and prevent financial misconduct. The SARFAESI Act and the NI Act serve distinct legislative purposes, addressing civil debt recovery and criminal liability for dishonoured cheques, respectively.
In the present case, the petitioners are not corporate debtors, nor are proceedings pending under the IBC. The SARFAESI Act contains no provision that bars or stays criminal prosecution under the NI Act. The pendency of SARFAESI proceedings, therefore, does not impede the continuation of proceedings under Section 138 of the NI Act.
Conclusion - It is well settled that the inherent powers should be exercised sparingly, with circumspection, and in the rarest of rare cases when the Court is convinced, on the basis of material on record, that allowing the proceedings to continue would be an abuse of the process of law. The inherent powers do not confer an arbitrary jurisdiction on the Court to act according to its whim or caprice. At this stage, this Court cannot go into the merits and/or come to the conclusion that there was no existing debt or liability.
In the present case, prima facie, it is evident that the principal grounds of challenge by the petitioners are all matter of defence at the trial - there are no illegality or irregularity in the impugned order. The present petition is dismissed.
TaxTMI 