TaxTMI Updates e-Newsletter
Apr 28,2025

Issues: Whether blocking of input tax credit under Rule 86A was invalid for want of independent application of mind, recorded reasons, and pre-decisional hearing, and whether the impugned blocking order could be interfered with in writ jurisdiction.

Analysis: Rule 86A permits the Commissioner or an authorised officer to block debit in the electronic credit ledger where there are reasons to believe that input tax credit has been fraudulently availed or is ineligible. The materials before the authority included information that the supplier was found non-existent at its declared place of business and had allegedly passed on irregular credit without actual supply. On those materials, the Court found that the authority had sufficient basis to form the requisite satisfaction. It distinguished decisions dealing with wholly non-speaking or mechanical orders and held that, on the facts, the impugned action was not shown to be arbitrary or without foundation. The Court also noticed the remedial mechanism under the guidelines, including the possibility of fresh examination and post-decisional consideration.

Conclusion: The blocking of input tax credit was upheld and no writ relief was granted.

Final Conclusion: The challenge to the temporary blocking of input tax credit did not succeed, while the petitioner was left to pursue the statutory and administrative remedy for reconsideration.

Ratio Decidendi: An order blocking input tax credit under Rule 86A will not be interfered with when it is supported by objective material giving rise to reasons to believe that the credit is ineligible or fraudulently availed, and the availability of a post-decisional remedial mechanism can sustain the interim action.

Issues: Whether the applicant was entitled to regular bail in a prosecution under the Central Goods and Services Tax Act, 2017.

Analysis: The prosecution case rested largely on documentary material and statements recorded during investigation. The trial court record showed that the charge-sheet had been filed, but the trial had not commenced and no witness had yet been examined. The offences alleged were triable by a Magistrate and carried a maximum sentence of five years. The applicant had remained in judicial custody for more than five months, and continued detention was found unlikely to serve any useful purpose. The statement recorded under Section 70 of the Central Goods and Services Tax Act, 2017 was held to be a matter for trial, and the official nature of the witnesses reduced the apprehension of their being influenced.

Conclusion: Regular bail was granted.

The core legal questions considered by the Court include:

(a) Whether the impugned order dated 7th January, 2025, passed under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) imposing demands and penalties on the Petitioner for alleged late fee and wrongful availment of input tax or short payment of tax is sustainable.

(b) Whether the rejection of the Petitioner's refund claim as time-barred under Section 54(1) of the CGST Act was correct, especially in light of the Supreme Court's order in the Suo Motu Writ Petition regarding extension of limitation periods.

(c) Whether the issuance of multiple audit memos and demand notices during the audit process under Section 65 of the CGST Act was legally valid and whether such memos could be treated as demand notices.

(d) Whether the Show Cause Notice (SCN) dated 1st August, 2024 issued under Section 74 of the CGST Act is liable to be quashed on grounds of procedural irregularities or otherwise.

(e) The availability and propriety of writ jurisdiction under Articles 226 and 227 of the Constitution of India to challenge the impugned order at this stage, or whether the Petitioner ought to avail appellate remedies under Section 107 of the CGST Act.

(f) Whether the Petitioner can seek waiver of pre-deposit required for filing an appeal before the Appellate Authority on grounds of financial incapacity.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of the impugned order under Section 74 of the CGST Act imposing demands and penalties

The legal framework governing this issue is Section 74 of the CGST Act, which deals with determination of tax not paid or short paid or input tax wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts. The impugned order was passed after adjudication of the Show Cause Notice issued pursuant to audit findings.

The Court observed that the adjudication order dated 7th January, 2025 contains detailed consideration of the Petitioner's replies and submissions. The Court refrained from entertaining the writ petition against the impugned order at this stage, emphasizing that the Petitioner must avail the statutory appellate remedy under Section 107 of the CGST Act. The Court's reasoning reflects the principle that adjudicatory orders under the CGST Act are subject to statutory appeal mechanisms, and writ jurisdiction is not ordinarily exercised to bypass these remedies.

The Court's conclusion was that the writ petition challenging the impugned order is premature and not maintainable, directing the Petitioner to approach the Appellate Authority.

(b) Rejection of refund claim as time barred and effect of extension of limitation

The Petitioner had filed a refund claim in 2019 which was rejected as time barred under Section 54(1) of the CGST Act. The Petitioner earlier filed a writ petition which resulted in an order dated 6th February, 2023 directing processing of the refund claim in light of the Supreme Court's Suo Motu Writ Petition (Civil) No. 3 of 2020 relating to extension of limitation periods.

The Court noted that the said order explicitly recognized that the benefit of relaxation in limitation was not accorded to the Petitioner and directed the respondents to process the refund application in accordance with law. This established that the limitation period for filing refund claims was extended, and the Petitioner was entitled to benefit of such extension.

This issue was thus settled in favor of the Petitioner in the earlier proceedings, and the Court did not reopen it in the present petition.

(c) Legality of issuance of multiple audit memos during audit under Section 65 of the CGST Act

Section 65 of the CGST Act empowers the proper officer to conduct audit of registered persons and requires that the findings be communicated to the taxpayer along with reasons and rights. However, the Act does not contemplate issuance of multiple audit memos determining tax liability or demanding payment during the audit process.

The Petitioner challenged the issuance of multiple audit memos, contending that they were time barred and not authorized as demand notices. The Court observed that the audit memos issued not only indicated audit findings but also called upon the Petitioner to pay tax, interest, and penalties, effectively functioning as demand letters.

The Court noted that the respondents' counsel failed to point out any statutory provision authorizing issuance of such demand letters during audit. The Court held that issuance of multiple audit memos as demand notices was irregular and not supported by the CGST Act/DGST Act. However, the Court clarified that such irregularities in audit memos do not vitiate the validity of the subsequent Show Cause Notice or the adjudication proceedings.

This analysis distinguishes between procedural irregularities in audit communications and the substantive validity of the SCN and adjudication order.

(d) Validity of the Show Cause Notice dated 1st August, 2024

The SCN was issued under Section 74 of the CGST Act based on audit findings. The Petitioner contended that the SCN was liable to be quashed due to procedural irregularities including issuance of multiple audit memos and the audit being conducted beyond the stipulated period under Section 65(4).

The Court rejected the contention that the SCN was liable to be quashed at the threshold stage. It held that although the SCN was premised on audit findings, it was issued within the statutory framework and any irregularities in audit memos did not affect the SCN's validity. The Court emphasized that the Petitioner was entitled to raise all contentions and defenses during adjudication and appeal stages.

(e) Availability of writ jurisdiction versus statutory appellate remedy

The Petitioner invoked writ jurisdiction under Articles 226 and 227 of the Constitution challenging the impugned order. The Court held that writ jurisdiction is not ordinarily available to challenge adjudicatory orders under the CGST Act where an efficacious statutory remedy of appeal exists under Section 107.

The Court directed the Petitioner to avail the appellate remedy and noted that the Petitioner's challenge at this stage was premature. The Court also clarified that if the appeal is filed within 30 days, it shall not be dismissed on grounds of limitation.

(f) Waiver of pre-deposit on grounds of financial incapacity

The Petitioner sought waiver of pre-deposit required for filing appeal before the Appellate Authority on grounds of financial inability. The Court declined to grant such waiver but directed that the Petitioner may make the prayer before the Appellate Authority itself, which has jurisdiction to consider such requests.

3. SIGNIFICANT HOLDINGS

"The impugned SCN may be premised on the findings of the audit report, the same is within the statutory framework. Any irregularities in issuing the audit memos does not impinge the validity of the impugned SCN."

"The CGST Act / DGST Act does not provide for issuance of the multiple audit memos determining the liability of a tax payer."

"At this stage, a writ petition would not be entertainable. The Petitioner ought to avail of the appellate remedy under Section 107 of the CGST Act in accordance with law."

"If the appeal is filed within the next 30 days, the same shall not be dismissed on the ground of limitation."

Core principles established include:

• The statutory appellate remedy under the CGST Act is the appropriate forum to challenge adjudicatory orders, and writ jurisdiction is not to be exercised to circumvent this remedy.
• Audit memos issued under Section 65 are meant to communicate audit findings and are not demand notices; issuance of multiple such memos as demand letters is irregular and unauthorized.
• Procedural irregularities in audit processes do not invalidate subsequent Show Cause Notices or adjudication orders passed under the CGST Act.
• The extension of limitation periods as recognized by the Supreme Court applies to refund claims under the CGST Act.
• Financial incapacity to make pre-deposit is a matter to be considered by the Appellate Authority and not by the High Court at the writ stage.

1. Whether the impugned ex-parte order dated 13.12.2023 passed under Section 73(9) of the Uttar Pradesh Goods and Services Tax Act, 2017 (hereinafter "the Act, 2017") imposing tax liability, penalty, and interest is barred by limitation under Section 73(10) of the Act, 2017.

2. The applicability and effect of various notifications extending or excluding the period of limitation under Section 73(10) of the Act, 2017, particularly for the financial year 2017-18.

3. Whether the writ petition challenging the impugned order is maintainable or whether the petitioner's remedy lies in appeal.

Issue-wise Detailed Analysis

Issue 1: Limitation under Section 73(10) of the U.P. GST Act, 2017 for passing assessment orders for financial year 2017-18

Legal Framework and Precedents: Section 73(9) of the Act empowers the proper officer to issue an order for recovery of tax not paid or short paid, or input tax credit wrongly availed or utilized. Section 73(10) prescribes a strict three-year limitation period for issuance of such orders, counted from the due date for furnishing the annual return or from the date of erroneous refund, whichever is applicable.

Section 44(1) mandates that every registered person furnish an annual return electronically by 31st December following the end of the financial year, subject to extension by the Commissioner.

Court's Interpretation and Reasoning: Ordinarily, the due date for filing the annual return for FY 2017-18 would have been 31.12.2018, making the limitation period under Section 73(10) expire on 31.12.2021. However, this due date was extended to 05.02.2020 by a Central Board of Direct Taxes and Customs notification dated 03.02.2018, adopted by the State on 05.02.2020.

Thus, the three-year limitation period for issuance of orders under Section 73(9) for FY 2017-18 would expire on 05.02.2023.

The petitioner contended that the impugned orders dated 05.10.2024 and 02.12.2023 were beyond this limitation and hence without jurisdiction.

Key Evidence and Findings: The petitioner relied on a prior judgment (Writ Tax No. 264 of 2024) wherein the Court held that the time limit expired on 05.02.2023 and orders passed beyond that were barred by limitation.

Application of Law to Facts: The Court initially found that the impugned orders were passed beyond the three-year limitation period and thus were barred by limitation.

Treatment of Competing Arguments: The State contended that subsequent notifications extended or excluded certain periods from the computation of limitation, thereby validating the impugned order's date.

Conclusion: Initially, the Court allowed the writ petition and quashed the impugned orders as barred by limitation.

Issue 2: Effect of Notifications Extending or Excluding Periods for Limitation under Section 73(10)

Legal Framework and Notifications: Two relevant notifications were considered:

• Notification dated 21.07.2022 issued under Section 168A of the Act, which extended the time limit for issuance of orders under Section 73(9) for FY 2017-18 up to 30.09.2023 and excluded the period from 01.03.2020 to 28.02.2022 from the computation of limitation.
• Notification dated 24.04.2023 which further extended the limitation period up to 31.12.2023, but with retrospective effect only from 31.03.2023.

Court's Interpretation and Reasoning: The Court observed that the 21.07.2022 notification was not brought to its notice in the earlier judgment (Writ Tax No. 264 of 2024). This notification effectively suspended the limitation period from March 2020 to February 2022 and extended the limitation up to September 2023.

Further, the 24.04.2023 notification extended the limitation period till 31.12.2023 but only with retrospective effect from 31.03.2023 onward, meaning it could not revive limitation periods that had already expired before that date.

Key Evidence and Findings: The impugned order dated 13.12.2023 falls within the extended limitation period as per the combined effect of the notifications dated 21.07.2022 and 24.04.2023.

Application of Law to Facts: Since the limitation period was extended and the period from 01.03.2020 to 28.02.2022 was excluded, the limitation had not expired as of 13.12.2023 when the impugned order was passed.

Treatment of Competing Arguments: The petitioner failed to produce the notification dated 21.07.2022 and relied solely on the earlier judgment which did not consider this notification. The State's argument that the impugned order was within time was accepted.

Conclusion: The Court concluded that the impugned order was not barred by limitation and was validly passed within the extended limitation period.

Issue 3: Maintainability of the Writ Petition

Legal Framework: The Act prescribes a statutory remedy of appeal against orders passed under Section 73(9).

Court's Interpretation and Reasoning: Since the impugned order was not barred by limitation and was validly passed, the petitioner's challenge by way of writ petition was not maintainable. The proper remedy was to file an appeal as provided under the Act.

Key Evidence and Findings: The petitioner did not produce the notification dated 21.07.2022 and did not avail the statutory appellate remedy.

Application of Law to Facts: The Court dismissed the writ petition on the ground of non-maintainability, emphasizing adherence to statutory remedies.

Treatment of Competing Arguments: The petitioner's reliance on the earlier judgment was insufficient to bypass the statutory appeal mechanism.

Conclusion: The writ petition was dismissed as not maintainable.

Significant Holdings

"The proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund." (Section 73(10) of the Act, 2017)

"The due date for filing annual return for the financial year 2017-18 was extended to 05.02.2020 and accordingly the limitation period under Section 73(10) expired on 05.02.2023, however, the notification dated 21.07.2022 excludes the period from 01.03.2020 to 28.02.2022 from computation of limitation and extends the time limit for issuance of order under Section 73(9) up to 30.09.2023."

"The notification dated 24.04.2023 further extends the limitation period up to 31.12.2023 but with retrospective effect only from 31.03.2023 and hence does not revive any limitation period expired before that date."

"The impugned order dated 13.12.2023 has been passed within the extended limitation period and is therefore not barred by limitation."

"Since the impugned order is not barred by limitation, the writ petition challenging the order is not maintainable and the remedy lies in filing an appeal as prescribed under the Act."

"The writ petition is dismissed."

Issues: Whether the writ petition challenging the GST MOV-10 notice and GST MOV-11 order was liable to be entertained despite the pendency of an appeal before the appellate authority, and whether any interim relief for provisional release of the goods and conveyance was warranted.

Analysis: The petitioner had already invoked the statutory appellate remedy against the impugned order, and the reliefs sought in the writ petition substantially overlapped with the issues pending before the appellate authority. In such circumstances, the Court declined to exercise writ jurisdiction for quashing the notice and order. As regards provisional release, the petitioner had already moved the appellate authority, so no separate adjudication was considered necessary at that stage. The Court also noted, prima facie, that the supplier appeared to be a non-existent entity and that the goods were liable to confiscation under the GST provisions, though these observations were expressly kept subject to the appellate determination.

Conclusion: The writ petition was not entertained and the challenge to the GST MOV-10 notice and GST MOV-11 order failed. No separate relief for provisional release was granted by the Court.

Issues: Whether the sale proceeds of fly ash constituted taxable income in the hands of the assessee, and whether the revisionary addition under Section 263 of the Income-tax Act, 1961 was sustainable.

Analysis: The sale of fly ash was undertaken pursuant to the statutory environmental notification issued under the Environment (Protection) Act, 1986, which required the amount realised from such sale to be kept in a separate account and utilised only for specified purposes until full utilisation targets were achieved. The material on record showed that the receipts were credited to a fly ash utilisation fund, the related expenses were adjusted against that fund and not claimed as general business expenditure, the development activities did not belong to the assessee, and the balance was transferred to the holding company. On these facts, the receipts did not represent income accruing to the assessee in the commercial sense.

Conclusion: The addition on account of sale of fly ash was not justified and the Revenue's challenge to the ITAT's order failed.

Final Conclusion: The appeal was dismissed because no taxable income arose to the assessee from the fly ash receipts and no substantial question of law was made out.

Ratio Decidendi: Where sale proceeds are statutorily earmarked for specified purposes under an environmental regime and are not available for the assessee's own benefit, such receipts do not constitute taxable income in the assessee's hands.

The core legal questions considered by the Court in this matter include:

(a) Whether the reassessment notice issued under Section 148 of the Income Tax Act, 1961 ("the Act") for the assessment year 2010-11 is valid and sustainable, given that the original assessment under Section 143(3) was completed and the reopening was initiated within four years from the end of the relevant assessment year;

(b) Whether the reasons recorded for reopening the assessment, based on findings in the subsequent assessment year 2011-12, constitute sufficient material to justify reopening under Section 147 of the Act;

(c) Whether the reopening on a "protective basis" to safeguard the interest of revenue is permissible when the alleged escaped income was already added in a subsequent assessment year;

(d) The applicability of judicial precedents, particularly the Supreme Court's ruling in NDTV Ltd. v. DCIT, regarding the validity of reassessment proceedings initiated on the basis of findings in subsequent assessment years;

(e) Whether the Assessing Officer was obligated to consider the appellate order of the Commissioner of Income Tax (Appeal) for the assessment year 2011-12, which was available at the time of rejecting the objection to reopening;

(f) The scope of jurisdiction and discretion of the Assessing Officer in reopening assessments within the prescribed time limits under the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Reassessment Notice under Section 148 within Four-Year Period

Legal Framework and Precedents: Section 148 of the Income Tax Act empowers the Assessing Officer to issue a notice for reassessment if there is reason to believe that income chargeable to tax has escaped assessment. The limitation period for such reopening is generally four years from the end of the relevant assessment year. The reopening must be based on tangible material and reasons recorded in writing.

Court's Interpretation and Reasoning: The Court noted that the reassessment notice was issued on 24 March 2015, within four years from the end of the assessment year 2010-11. The original assessment under Section 143(3) was completed on 7 March 2013. The reopening was thus within the statutory limitation period.

Application of Law to Facts: Since the reopening notice was issued within the prescribed four-year period and the reasons were recorded in writing, the Court found no infirmity in the timing or procedural compliance of the reassessment notice.

Conclusion: The reassessment notice under Section 148 is validly issued within the limitation period.

Issue (b): Sufficiency and Nature of Reasons Recorded for Reopening Based on Subsequent Assessment Year Findings

Legal Framework and Precedents: Section 147 requires the Assessing Officer to have "reason to believe" that income has escaped assessment. The Supreme Court in NDTV Ltd. v. DCIT clarified that reassessment proceedings can be initiated based on findings in subsequent assessment years, provided there is tangible material.

Court's Interpretation and Reasoning: The reasons recorded for reopening stated that during assessment proceedings for AY 2011-12, cash payments amounting to Rs. 1,85,66,920/- relevant to AY 2010-11 were identified but added in AY 2011-12. The Assessing Officer believed income had escaped assessment for AY 2010-11 and reopened the assessment on a protective basis.

The Court emphasized that the issue of cash receipts was not examined during the original AY 2010-11 assessment and the reopening was based on new material found during AY 2011-12 proceedings. The Court held that the reopening was justified by this fresh material.

Key Evidence and Findings: The large cash receipts identified during the AY 2011-12 assessment, which pertained partly to AY 2010-11, constituted new material. The original AY 2010-11 assessment had not addressed this issue.

Application of Law to Facts: The Court applied the principle from NDTV Ltd. that reassessment can be based on subsequent years' findings and found the Assessing Officer's reasons sufficient to constitute "reason to believe."

Treatment of Competing Arguments: The Petitioner argued that since the cash receipts were already added in AY 2011-12, reopening AY 2010-11 was unwarranted. The Court rejected this, noting that the addition in AY 2011-12 was substantive but did not preclude reopening AY 2010-11 on a protective basis for transactions relevant to that year.

Conclusion: The reasons recorded for reopening are sufficient and valid, based on new material from subsequent assessment proceedings.

Issue (c): Legality of Reopening on Protective Basis When Income Was Added in Subsequent Year

Legal Framework: The concept of reopening on a protective basis is recognized where the Assessing Officer seeks to safeguard the revenue's interest pending finalization of related assessments or appeals.

Court's Interpretation and Reasoning: The Court observed that the Assessing Officer reopened AY 2010-11 assessment protectively because certain agreements and cash receipts pertained to that year, though the entire amount was added in AY 2011-12. The reopening was not to double-tax but to ensure correct assessment in the correct year.

Application of Law to Facts: Given the overlapping transactions and the protective nature of the reopening, the Court held this approach permissible and not violative of principles of natural justice or tax law.

Conclusion: Reopening on a protective basis is lawful and justified under the circumstances.

Issue (d): Applicability of Supreme Court Precedent (NDTV Ltd.) on Reopening Based on Subsequent Assessment Year Findings

Legal Framework and Precedents: The Supreme Court in NDTV Ltd. held that reassessment proceedings can be initiated based on findings in subsequent assessment years, provided there is tangible material and the Assessing Officer has reason to believe income has escaped assessment.

Court's Interpretation and Reasoning: The Court found the ratio of NDTV Ltd. squarely applicable, as the present case involved reopening AY 2010-11 based on material found during AY 2011-12 assessment proceedings.

Application of Law to Facts: The Court applied this principle to uphold the reopening notice.

Conclusion: The precedent supports the validity of reopening in the present facts.

Issue (e): Obligation to Consider Commissioner of Income Tax (Appeal) Order Available at Time of Rejecting Objection

Legal Framework: The Assessing Officer is required to consider all relevant material before rejecting objections to reopening. However, appellate orders are not final until all appeals are exhausted.

Court's Interpretation and Reasoning: The Court noted that at the time of recording reasons for reopening, the appellate order of the Commissioner of Income Tax (Appeal) for AY 2011-12 was not in existence. Even when it was available at the time of rejecting objections, it was not final and was subject to further appeal before the Tribunal.

Treatment of Competing Arguments: The Petitioner argued that the Assessing Officer should have considered the appellate order to reject reopening. The Court rejected this, emphasizing the non-finality of the appellate order and the Assessing Officer's discretion.

Conclusion: The Assessing Officer was not obliged to consider the appellate order as a bar to reopening.

Issue (f): Jurisdiction and Discretion of Assessing Officer in Reopening Assessments

Legal Framework: The Assessing Officer's jurisdiction to reopen is circumscribed by the statutory provisions, including limitation periods and requirement of reasons recorded in writing. The discretion must be exercised reasonably and based on material.

Court's Interpretation and Reasoning: The Court found that the Assessing Officer exercised jurisdiction within the prescribed four-year period, based on tangible material and reasons recorded. The reopening was not arbitrary but founded on findings in subsequent assessment proceedings.

Conclusion: The Assessing Officer acted within jurisdiction and discretion in reopening the assessment.

3. SIGNIFICANT HOLDINGS

The Court held that:

"We do not find any infirmity in the proposed reopening of the case, since the issue of the alleged cash received was not the subject matter of investigation during the course of the original assessment proceedings, and the reopening is made within a period of four years from the end of the relevant assessment year and that constitutes sufficient material based on the findings and reasons given in assessment year 2011-12 and further the proposed proceedings are taken only on protective basis."

The Court further relied on the Supreme Court's ruling in NDTV Ltd. v. DCIT (2020) stating:

"Reassessment proceedings can be initiated based on findings in subsequent assessment years order."

The Court concluded that the reopening notice under Section 148 dated 24 March 2015 is valid and dismissed the petition challenging it.

Core principles established include:

- Reopening of assessment under Section 148

Outcome: The petition seeking expeditious disposal of the pending faceless appeal was disposed of with observations calling for early resolution of the pendency before the appellate authority.

Issues: Whether the receipts from centralised marketing and reservation related services were taxable as fees for technical services or fees for included services under the Act and the India-USA DTAA, and whether any substantial question of law arose.

Analysis: The appeal concerned payments received for marketing contribution, reservation contribution and reservation system support services under inter-company arrangements linked to the hotel business model. The Court noted that the same issue had already been decided in favour of the assessee in earlier assessment years and that the present controversy was covered by prior decisions of the Court. It held that the question whether such receipts constituted fees for technical services or fees for included services stood concluded against the Revenue. On that basis, no substantial question of law was found to arise.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; the receipts were not held taxable on the basis urged by the Revenue, and no substantial question of law arose.

Final Conclusion: The appeal failed and was dismissed, leaving undisturbed the view that the impugned receipts did not warrant the Revenue's proposed tax treatment.

Ratio Decidendi: Where the material issue is already covered by binding or followed precedent on the taxation of similar service receipts, no substantial question of law arises in a section 260A appeal.

(i) Whether the Income Tax Appellate Tribunal (ITAT) erred in upholding the application of Section 68 of the Income Tax Act, 1961, regarding alleged bogus purchases;

(ii) Whether the ITAT erred in adding the entire amount of alleged bogus purchases to the Assessee's income instead of only the gross profit margin embedded in those purchases;

(iii) Whether the impugned order passed by the ITAT was perverse.

2. Issue-wise detailed analysis:

Issue 1: Application of Section 68 of the Income Tax Act on alleged bogus purchases

The relevant legal framework centers on Section 68 of the Income Tax Act, which deals with unexplained cash credits and requires the assessee to satisfactorily explain the nature and source of such credits. The AO had treated the increase in sundry creditors as unexplained and alleged that the purchases were bogus, leading to an addition of Rs. 55,54,382/- to the Assessee's income. The AO issued summons under Section 131 to the sundry creditors, but none appeared, and some addresses were found to be nonexistent or incomplete.

The AO's assessment order did not explicitly state that the additions were made under Section 68; rather, the AO disallowed expenses on the basis that they were not wholly and exclusively for business purposes. However, the CIT(A) and subsequently the ITAT proceeded on the basis that the additions were under Section 68.

The Assessee contended that she had furnished all requisite details including PANs, income tax returns of the creditors, and that the identity and creditworthiness of the creditors were not in dispute. The Assessee further argued that since sales revenue was accepted, the purchases could not be wholly disallowed. The Assessee relied on precedents from the Gujarat High Court and Bombay High Court which held that additions under Section 68 require a failure to satisfactorily explain the credit, and that mere non-appearance of suppliers before the AO does not justify additions.

The Revenue's counsel argued that the addition was not under Section 68 but under the general provisions disallowing expenses not incurred wholly and exclusively for business. The Court noted that this contention was not considered by the ITAT and that the CIT(A) had erred in assuming the additions were under Section 68.

The Court emphasized that the ITAT must re-examine whether the additions were indeed made under Section 68 and if so, whether such additions are sustainable in light of the evidence furnished by the Assessee.

Issue 2: Addition of entire amount of alleged bogus purchases instead of only gross profit margin

The Assessee argued that even if the AO doubted the genuineness of the creditors, it was established that purchases were made because sales were recorded and accepted. Therefore, only the gross profit margin embedded in the purchases should have been added back as income, not the entire purchase amount. This approach aligns with the principle that expenses incurred for earning income cannot be wholly disallowed if the corresponding income is accepted.

The Court found that this contention was neither considered by the CIT(A) nor the ITAT. The Court directed the ITAT to examine whether any allowance should be made for purchases in the event it is held that the sundry creditors did not supply goods on credit, thereby ensuring a fair apportionment between genuine and bogus elements.

Issue 3: Allegation of perversity in the impugned order

The Assessee contended that the ITAT's order was perverse for failing to consider the Assessee's submissions and relevant legal precedents. The Court noted that the ITAT did not address the Assessee's key contentions, including the nature of additions and the appropriate quantum of addition.

Given the procedural and substantive lapses, the Court found merit in the contention that the impugned order was not properly reasoned and was liable to be set aside for fresh consideration.

3. Significant holdings:

The Court set aside the impugned ITAT order and remanded the matter for fresh adjudication. The Court directed the ITAT to:

o Examine whether the additions were made under Section 68 of the Income Tax Act and if so, assess their sustainability in light of the evidence provided by the Assessee regarding the identity and creditworthiness of the creditors;

o Consider the Assessee's contention that since sales were accepted, only the gross profit margin should be added back and not the entire amount of purchases;

o Address all contentions raised by the Assessee, including relevant judicial precedents, to ensure a reasoned and comprehensive decision.

The Court explicitly stated: "We clarify that we have not expressed any opinion on the merits of the controversy and all rights and contentions of the parties are reserved."

The core legal questions considered by the Court in this matter include:

• Whether the Assessing Officer violated the principles of natural justice by passing the final assessment order without granting or rejecting the petitioner's request for adjournment and opportunity to respond to the show cause notice.
• Whether the denial of exemption under Sections 11 and 12 of the Income Tax Act, 1961, on the ground of alleged non-compliance with filing timelines for Form No.10B and return of income, was justified.
• Whether the penalty order under Section 270A and the demand notice issued in disregard of the Court's stay order were valid.
• The systemic issues within the Income Tax Department's administration, particularly relating to faceless assessment proceedings, including procedural lapses, software deficiencies, and disregard of judicial orders.
• The appropriate remedial measures and administrative reforms to prevent recurrence of such systemic failures.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Violation of Principles of Natural Justice in Passing the Assessment Order

Legal framework and precedents: The principles of natural justice require that a party be given a fair opportunity to present its case before adverse orders are passed. In tax proceedings, this includes the right to be heard before an assessment order is finalized. The Income Tax Act, 1961, under Sections 143(2) and 143(3), mandates issuance of notices and opportunity for representation.

Court's interpretation and reasoning: The petitioner filed a request for adjournment on 02.03.2021 seeking time till 11.03.2021 to respond to the show cause notice dated 27.02.2021, which provided only three days for response. Despite this, the Assessing Officer passed the final assessment order on 04.03.2021 without granting or rejecting the adjournment request or providing an opportunity for submissions.

The Department initially filed an affidavit denying that any adjournment request was made against the 27.02.2021 notice, relying on order sheets and portal records. However, this affidavit was found to be false and contradictory to the documentary evidence on record, including the petitioner's communication and Court's own order dated 06.04.2021 admitting the petition and staying the assessment order.

The Court emphasized that the failure to consider the adjournment request and to pass the assessment order without hearing constituted a clear breach of natural justice. The Court noted that the assessment date was extended till 30.04.2021, further underscoring the unreasonable haste in passing the order.

Key evidence and findings: Documentary evidence included the petitioner's adjournment request dated 02.03.2021, the show cause notice dated 27.02.2021, and the order sheet of the faceless assessment portal. The Court found that the adjournment request was not reflected in the portal due to software synchronization issues, but was nonetheless filed and acknowledged.

Application of law to facts: The Court held that the Assessing Officer's conduct violated the mandatory requirement of affording a fair hearing, rendering the assessment order invalid.

Treatment of competing arguments: The Department's initial denial of the adjournment request was rejected due to the false affidavit. The Department's apology and subsequent withdrawal of the affidavit were accepted but did not absolve the breach.

Conclusion: The assessment order dated 04.03.2021 was quashed for violation of natural justice.

Issue 2: Denial of Exemption under Sections 11 and 12 on Grounds of Procedural Non-Compliance

Legal framework and precedents: Sections 11 and 12 of the Income Tax Act provide exemption for income applied for charitable or religious purposes, subject to compliance with procedural requirements including filing of return and audit report (Form 10B) within prescribed timelines. The Supreme Court and High Courts have held that procedural compliance is mandatory unless specifically exempted, as in Checkmate Services Pvt Ltd v VIT and Principal CIT v New Nobel Educational Society.

Court's interpretation and reasoning: The petitioner had filed its original audit report and return of income claiming exemption. Subsequently, a revised audit report was filed correcting inadvertent errors. The Department contended that the revised audit report was filed beyond the prescribed time and that the exemption was thus not allowable.

The Court noted that the revised audit report was filed belatedly (after approximately 18 months from the date of obtaining the report), and the petitioner did not revise the return of income accordingly. The Department's reliance on binding precedents emphasizing mandatory procedural compliance was accepted.

Key evidence and findings: The dates of filing original and revised audit reports and returns, and the failure to revise the return of income to reflect the revised audit figures.

Application of law to facts: The Court found that the exemption could not be allowed in absence of valid and timely filing of audit report and return, consistent with statutory mandates and judicial precedents.

Treatment of competing arguments: The petitioner's contention that the revised audit report should be considered was rejected due to procedural non-compliance.

Conclusion: The denial of exemption under Sections 11 and 12 was upheld on grounds of procedural non-compliance.

Issue 3: Validity of Penalty and Demand Notices Issued in Disregard of Court's Stay Order

Legal framework and precedents: Once a Court grants a stay on assessment proceedings or orders, the Department is bound to comply with such orders. Issuance of penalty or demand notices in violation of stay orders constitutes contempt and is liable to be quashed.

Court's interpretation and reasoning: Despite the stay order dated 06.04.2021 restraining operation of the assessment order, the Department passed a penalty order under Section 270A and issued a demand notice on 21.12.2021. The Court found this to be a deliberate and egregious violation of judicial orders, undermining the rule of law and judicial authority.

Key evidence and findings: The stay order dated 06.04.2021 and the subsequent penalty and demand notices issued in December 2021.

Application of law to facts: The Court quashed and set aside the penalty order and demand notice issued in violation of the stay.

Treatment of competing arguments: The Department tendered unconditional apology and withdrew the penalty order under Section 154. The Court accepted the apology but emphasized the gravity of the breach.

Conclusion: The penalty order and demand notice issued in violation of the stay were quashed.

Issue 4: Systemic Failures in Income Tax Department's Administration and Faceless Assessment Scheme

Legal framework and precedents: The Income Tax Department is obligated to administer tax laws in accordance with constitutional mandates, statutory provisions, and judicial orders. The faceless assessment scheme was introduced to enhance transparency and efficiency but must not compromise procedural fairness.

Court's interpretation and reasoning: The Court identified systemic failures including:

• Software deficiencies causing failure to record adjournment requests and hearing notes properly.
• Human errors and negligence in processing cases and ignoring Court orders.
• Lack of coordination between jurisdictional and faceless assessment officers.
• Failure to implement standard operating procedures (SOPs) and monitoring mechanisms.

The Court underscored that such systemic lapses undermine the rule of law and taxpayer rights.

Key evidence and findings: Affidavits filed by Income Tax Officers, internal inquiries, and reports of the Committee constituted by the Department to investigate and propose remedial measures.

Application of law to facts: The Court recognized the Department's acknowledgment of errors and its commitment to remedial steps, including software upgrades and institutional reforms.

Treatment of competing arguments: The Department tendered unconditional apology and submitted detailed affidavits explaining the genesis of failures and steps taken to rectify them.

Conclusion: The Court accepted the Department's apology and remedial measures but emphasized the need for strict compliance and monitoring.

Issue 5: Appropriate Remedial Measures and Directions

Legal framework and precedents: Courts have inherent powers to issue directions to ensure effective implementation of their orders and to prevent abuse of process.

Court's interpretation and reasoning: The Court directed that:

• The Commissioner of Income Tax (Judicial) (CIT (Judicial)) be made a mandatory party in all future Income Tax petitions to ensure centralized responsibility for compliance with Court orders.
• The CIT (Judicial) shall be the nodal officer responsible for implementation of Court directions and departmental instructions.
• The Department's Committee on improvement of compliance shall continue its work, including uploading Court orders on ITBA portal, introducing color coding and alerts for stay orders, enhancing communication between jurisdictional and faceless officers, and conducting training programs.
• The Department shall take administrative action against officers responsible for lapses.

Key evidence and findings: The Department's affidavit dated 2nd April 2025 detailing remedial steps, constitution of a multi-member Committee, and proposed technical and procedural improvements.

Application of law to facts: The directions aim to institutionalize accountability and prevent recurrence of errors.

Treatment of competing arguments: The Department's acceptance and cooperation were noted positively.

Conclusion: The Court issued binding directions to strengthen compliance and monitoring mechanisms.

3. SIGNIFICANT HOLDINGS

"The assessment order dated 04.03.2021 has been clearly passed in utter disregard of the principles of natural justice and is consequently quashed and set aside."

"The penalty order under Section 270-A dated 21.12.2021 and the Demand Notice under Section 156 dated 21.12.2021 are hereby quashed and set aside as they were passed in the teeth of the order dated 06.04.2021 by which the assessment order came to be stayed."

"The Department is directed to bear the costs of Rs. 500/- in each petition payable to The Gujarat High Court Advocates Library."

"The Commissioner of Income Tax (Judicial) shall be made a mandatory party in all future Income Tax petitions and shall bear the sole responsibility for implementation of the orders of this Court and to follow the departmental instructions to the hilt."

"The Department's acknowledgment of errors, tendering of unconditional apology, and commitment to remedial measures including software upgrades, establishment of monitoring committees, and training programs are noted with optimism."

"The failure of the Department to comply with Court orders and filing of a false affidavit constitute serious breaches of judicial discipline, which must be remedied to preserve the rule of law."

- Whether the reassessment proceedings initiated under Section 148 of the Income-tax Act, 1961 were valid when the notice was issued in the name of an entity (the Assessee) which had ceased to exist due to amalgamation with the Petitioner LLP prior to issuance of the notice.

- Whether the failure of the Respondent to dispose of the objections raised by the Petitioner regarding the invalidity of the reassessment notice and to grant a hearing before passing the assessment order under Section 147 read with Section 144B of the Act violated principles of natural justice.

- Whether the impugned assessment order and consequential demand notice could be sustained in law given the facts of merger and subsequent conversion of the amalgamated entity into an LLP.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reassessment Notice Issued in the Name of a Non-Existent Entity

Relevant Legal Framework and Precedents: The reassessment proceedings under Section 148 of the Income-tax Act require issuance of a notice to the correct Assessee. The principle that a notice issued to a non-existent entity is void ab initio has been recognized in various judicial pronouncements. The Supreme Court's decision in PCIT Vs. Maruti Suzuki India Ltd., (2019) 416 ITR 613 (SC) was relied upon, which held that reopening notices issued in the name of a non-existent entity are invalid.

Court's Interpretation and Reasoning: The Court noted that the Assessee, Kauvery Trexim Private Limited, had been amalgamated with Vital Connections Private Limited pursuant to an NCLT order dated 15.12.2017. Subsequently, Vital Connections Private Limited was converted into a Limited Liability Partnership named Vital Connections LLP (the Petitioner) effective 13.03.2018. The Respondent issued the reassessment notice dated 31.03.2021 in the name of Kauvery Trexim Private Limited, an entity that had ceased to exist well before the notice date.

Key Evidence and Findings: The Petitioner had submitted the certified copy of the Scheme of Amalgamation Order passed by the NCLT and annexures along with its response to the notice cum draft assessment order dated 28.03.2022. This demonstrated the merger and the non-existence of the Assessee as a separate legal entity at the time of issuance of the notice.

Application of Law to Facts: Since the reassessment notice was issued in the name of a non-existent entity, the proceedings initiated thereunder were void ab initio. The Respondent's failure to issue the notice in the name of the amalgamated entity or the Petitioner LLP rendered the reassessment invalid.

Treatment of Competing Arguments: The Respondent contended that there was no record to show that the Petitioner had intimated the merger approval order to the jurisdictional Assessing Officer prior to issuance of the notice. However, the Court observed that the Petitioner had brought the merger to the Respondent's attention through its submissions and uploaded the relevant documents promptly upon receipt of the notice. The Respondent's argument was insufficient to validate the notice issued to a non-existent entity.

Conclusions: The Court concluded that the reassessment notice issued under Section 148 of the Act in the name of Kauvery Trexim Private Limited was invalid and the consequent assessment order passed under Section 147 read with Section 144B was liable to be quashed.

Issue 2: Denial of Hearing and Non-Disposal of Objections Prior to Passing Assessment Order

Relevant Legal Framework and Precedents: Principles of natural justice mandate that an assessee must be given an opportunity of hearing before adverse orders are passed. Section 144B of the Income-tax Act provides for issuance of a show cause notice and opportunity to the assessee before finalizing the assessment order. The Court relied on established jurisprudence that non-disposal of objections and denial of hearing vitiates the assessment proceedings.

Court's Interpretation and Reasoning: The Petitioner submitted objections to the reassessment proceedings on 22.07.2021 and reiterated these objections in response to the notice dated 14.03.2022. Upon issuance of the show cause notice and draft assessment order on 28.03.2022, the Petitioner submitted a partial response on 29.03.2022 requesting disposal of objections and sought a video conference hearing. Despite these requests, the Respondent passed the assessment order on 30.03.2022 without disposing of the objections or granting a hearing.

Key Evidence and Findings: The record showed the Petitioner's repeated requests for disposal of objections and for a hearing, which were ignored. The Respondent proceeded to finalize the assessment order within two days of the show cause notice, indicating denial of a reasonable opportunity to the Petitioner.

Application of Law to Facts: The Court held that the Respondent's failure to dispose of objections and refusal to grant a hearing before passing the assessment order was a breach of natural justice and rendered the assessment order unsustainable.

Treatment of Competing Arguments: The Respondent did not specifically address the denial of hearing argument but relied on the absence of prior intimation of merger to justify the proceedings. The Court found this insufficient to override the procedural lapses demonstrated.

Conclusions: The assessment order passed without disposing of objections or granting a hearing was quashed for violation of principles of natural justice.

Issue 3: Validity of Demand Notice and Further Proceedings

Relevant Legal Framework and Precedents: A demand notice under Section 156 of the Income-tax Act can only be sustained if the underlying assessment order is valid. The Court referred to the principle that if the assessment order is quashed, the consequential demand notice also falls.

Court's Interpretation and Reasoning: Since the assessment order dated 30.03.2022 was quashed, the consequent demand notice dated the same day for Rs. 8,28,41,280/- also could not stand.

Key Evidence and Findings: The demand notice was issued pursuant to the impugned assessment order.

Application of Law to Facts: The Court set aside the demand notice along with the assessment order but clarified that the Department was free to issue a fresh notice to the correct entity if permitted under law.

Treatment of Competing Arguments: The Respondent did not contest the setting aside of the demand notice if the assessment order was quashed.

Conclusions: The demand notice was quashed along with the assessment order, with liberty to the Department to proceed afresh in accordance with law.

3. SIGNIFICANT HOLDINGS

"Following the ratio laid down in the case of PCIT Vs. Maruti Suzuki India Ltd., reported (2019) 416 ITR 613 (SC), the Assessment Order dated 30.03.2022 and the consequent notice of demand under Section 156 of the Income Tax Act, 1961 deserves to be and are hereby quashed and set aside."

"The Respondent could not have assumed the jurisdiction to issue a notice in the name of a non-existent entity."

"The impugned Assessment Order dated 30.03.2022 as well as the demand notice of even date are hereby quashed and set aside. It will be open for the Department to issue fresh notice to the Assessee, if statutorily permitted."

Core principles established include the requirement that reassessment notices must be issued to the correct legal entity existing at the time of issuance, and that failure to provide an opportunity of hearing and to dispose of objections prior to passing assessment orders violates natural justice and renders such orders invalid.

Final determinations were that the reassessment notice issued to the non-existent entity was void ab initio, the assessment order passed without disposing objections and granting hearing was invalid, and the consequential demand notice was also quashed. The Department was permitted to initiate fresh proceedings in compliance with legal requirements.

1. Whether the notice issued under Section 153C of the Income Tax Act dated 30.12.2024 is barred by limitation, considering the date of initiation of proceedings and the date of collection of materials from the petitioner, who is the "other person" under Section 153C.

2. The interpretation of the limitation period under Section 153C, specifically whether the six-year limitation period begins from the date of issuance of the show cause notice or from the date of receiving the seized materials by the Assessing Officer having jurisdiction over the "other person."

3. Whether the petitioner is estopped from contesting the proceedings on the ground of limitation, having previously settled the matter before the Interim Board for Settlement (IBS).

4. The applicability and scope of the provisos to Section 153C(1) of the Income Tax Act, especially in relation to the limitation period and procedural aspects when dealing with "other persons" whose documents or assets are seized during a search conducted on another person.

Issue-wise Detailed Analysis

Issue 1 & 2: Limitation Period under Section 153C

The legal framework centers on Section 153C of the Income Tax Act, which governs the assessment of income of any "other person" when books of account, documents, or assets seized during a search or requisition relate to a person other than the one originally searched. The section provides that the Assessing Officer having jurisdiction over such other person shall proceed to assess or reassess income, subject to a limitation period of six years.

The crucial interpretative question was the starting point for the limitation period: whether it should be reckoned from the date of initiation of the search or requisition (as per usual cases under Section 153A) or from the date when the seized materials are handed over to the Assessing Officer of the other person, as per the first proviso to Section 153C(1).

The petitioner contended that the limitation should be counted from the date of issuance of the show cause notice (30.12.2024), which would render the notice barred by limitation since the relevant assessment year was 2017-18. The petitioner relied on the Apex Court's judgment in CIT vs. Jasjit Singh, which held that limitation runs from the date of issuance of the show cause notice.

The respondent argued that the limitation period starts from the date of receipt of the seized materials by the Assessing Officer having jurisdiction over the other person, which in this case was 30.06.2022, and the notice dated 30.12.2024 was therefore well within the six-year period.

The Court analyzed the statutory language of Section 153C, especially the first proviso which states: "in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person."

The Court noted that the search was conducted on 10.11.2020, but the petitioner was not the searched person; rather, the petitioner was the other person from whom materials were seized on 30.06.2022. Thus, the limitation period for issuing notice under Section 153C began on 30.06.2022, not the date of search (10.11.2020) or the date of issuance of the show cause notice (30.12.2024).

The Court distinguished the petitioner's reliance on the Apex Court judgment by clarifying that the limitation under Section 153C is governed by its specific proviso, which modifies the general rule applicable under Section 153A. Therefore, the limitation period was correctly calculated by the respondent, and the issuance of the notice on 30.12.2024 was within the permissible time frame.

Issue 3: Effect of Settlement Before the Interim Board for Settlement (IBS)

The petitioner submitted that since a settlement was earlier arrived at before the IBS, it is unfair and impermissible for the Department to reopen or raise the same issue again. The petitioner relied on a Delhi High Court decision which emphasized finality in such settlements.

The respondent clarified that the settlement before the IBS was subject to the liberty granted to the Department to proceed with further action if new material was found subsequently. This liberty was explicitly recognized and preserved.

The Court concurred with the respondent's position, holding that the earlier settlement did not bar fresh proceedings if new incriminating material surfaced. Hence, the petitioner's contention that the matter was res judicata or barred by prior settlement was rejected.

Issue 4: Applicability and Interpretation of Section 153C Provisos

The Court undertook a detailed examination of the provisos to Section 153C(1), emphasizing that they are designed to address the procedural and limitation aspects uniquely applicable to "other persons" whose documents or assets are seized during a search conducted on another person.

The first proviso effectively shifts the reference date for limitation from the date of search or requisition to the date of receipt of seized materials by the Assessing Officer of the other person, thereby ensuring fairness and clarity in proceedings against such other persons.

The Court found that the respondent had correctly followed the statutory scheme, and the limitation was calculated in accordance with the law. The petitioner was free to contest the show cause notice on merits by filing a suitable reply within the prescribed time.

Significant Holdings

"In case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person."

This provision clarifies that for limitation purposes under Section 153C, the date of receipt of seized materials by the Assessing Officer of the other person is the relevant date, not the date of search on the original person.

The Court held that the issuance of the notice dated 30.12.2024 was within the six-year limitation period, as the seized materials were handed over on 30.06.2022.

The Court rejected the petitioner's plea that the proceedings were barred by limitation or estopped by prior settlement before the IBS, affirming that liberty to initiate fresh proceedings exists if new material is found.

The writ petitions challenging the notice under Section 153C and the impugned order dated 13.03.2025 were dismissed, with liberty granted to the petitioner to file a reply to the show cause notice within 30 days.

1. Whether the claim of weighted deduction under section 35(2AA) of the Income Tax Act, 1961 (the Act) for donations made to a scientific research institution is allowable when the donation receipt indicates eligibility under section 35(1)(ii) instead.

2. Whether the appellant-company can rectify an inadvertent claim made under the wrong subsection (35(2AA) instead of 35(1)(ii)) without filing a revised return, particularly in light of the Supreme Court decision in Goetze (India) Ltd. v. CIT.

3. Whether the donation made for construction of a state-of-the-art auditorium at Indian Institute of Science (IISc), Bengaluru, which is named after the father of the director of the appellant-company, constitutes an expenditure eligible for deduction under the scientific research provisions or is a capital expenditure not eligible for such deduction.

4. Whether the Assessing Officer erred in disallowing the claim of weighted deduction merely on the basis of the naming rights and without verifying the authenticity of the certificate or the specific use of the donation.

5. The applicability of the legal framework governing deductions for donations to approved scientific research institutions and the interpretation of "scientific research" under the Act.

Issue-wise Detailed Analysis

1. Allowability of Weighted Deduction under Section 35(2AA) vs. Section 35(1)(ii)

Legal Framework and Precedents: Section 35(1)(ii) and section 35(2AA) of the Income Tax Act provide for weighted deductions on donations made to approved scientific research associations or institutions. Section 35(1)(ii) allows a weighted deduction of 150% of the amount donated to approved institutions for scientific research, while section 35(2AA) provides a similar weighted deduction for donations to national laboratories or approved institutions for scientific research. The Central Board of Direct Taxes (CBDT) has issued notifications recognizing IISc, Bengaluru as an approved institution eligible for such deductions.

The Supreme Court decision in Goetze (India) Ltd. v. CIT is relevant regarding the claim of deductions at the assessment stage without filing a revised return.

Court's Interpretation and Reasoning: The Tribunal noted that the appellant-company initially claimed deduction under section 35(2AA) but the receipt from IISc, Bengaluru indicated eligibility under section 35(1)(ii). The Assessing Officer disallowed the claim on the ground that the appellant did not file a revised return to claim deduction under section 35(1)(ii), relying on Goetze (India) Ltd. However, the Tribunal held that this was not a fresh claim but a rectification of a clerical error in claiming deduction under the wrong subsection.

The Tribunal reasoned that since the donation was made to an approved institution and eligible for weighted deduction under section 35(1)(ii), denial of deduction on procedural grounds would be unjustified. The Tribunal emphasized that the Assessing Officer ought to have allowed the deduction under the correct provision, as the quantum of deduction (150%) remains the same under both subsections.

Key Evidence and Findings: The appellant furnished the donation receipt, letter of appreciation from IISc, and the relevant CBDT notification recognizing IISc as an approved institution. The Assessing Officer did not dispute the genuineness of the donation or the eligibility of IISc under section 35(1)(ii).

Application of Law to Facts: The Tribunal applied the statutory provisions and the principle of substance over form, holding that an inadvertent claim under the wrong subsection should not deprive the assessee of the deduction to which it is entitled.

Treatment of Competing Arguments: The Revenue relied on Goetze (India) Ltd. to argue that the claim could not be entertained without a revised return. The Tribunal distinguished the facts, noting that the claim was a correction rather than a new claim, and that the Assessing Officer failed to exercise discretion as per CBDT circulars to allow the claim under the correct provision.

Conclusion: The Tribunal held that the appellant was entitled to the weighted deduction under section 35(1)(ii) despite the initial erroneous claim under section 35(2AA), and the Assessing Officer's disallowance on procedural grounds was unsustainable.

2. Nature of Donation for Construction of Auditorium and Eligibility for Deduction

Legal Framework and Precedents: Section 35(1)(ii) allows weighted deduction for donations made for scientific research or for the provision of facilities for scientific research. The term "scientific research" has been interpreted to include activities integral to the pursuit of scientific knowledge, including seminars and workshops conducted in facilities such as auditoriums.

Court's Interpretation and Reasoning: The Assessing Officer contended that the donation was capital expenditure for construction of an auditorium, which is not eligible for deduction. Additionally, the naming of the auditorium after the director's father was argued as creating rights inconsistent with scientific research.

The Tribunal rejected these contentions, holding that the auditorium is an integral part of the scientific institute and is used for conducting seminars, workshops, and other activities essential to scientific research. The naming of the auditorium did not confer any rights affecting the scientific research or the donation's eligibility.

Key Evidence and Findings: The letter of appreciation from IISc confirmed the purpose of the donation and the use of the auditorium for scientific activities. The Tribunal noted that the Assessing Officer did not verify facts thoroughly before disallowing the claim.

Application of Law to Facts: The Tribunal applied the principle that facilities used for scientific research activities qualify under section 35(1)(ii), and capital expenditure on such facilities is eligible for deduction if it supports scientific research.

Treatment of Competing Arguments: The Revenue's argument that the donation was capital in nature and naming rights precluded deduction was found to be without merit. The Tribunal emphasized the functional use of the auditorium over the formality of naming rights.

Conclusion: The Tribunal upheld the eligibility of the donation for weighted deduction under section 35(1)(ii) despite it being used for construction of an auditorium, as the facility supports scientific research activities.

3. Verification of Authenticity and Procedural Compliance

Legal Framework and Precedents: The Income Tax Act requires that deductions under section 35(1)(ii) and 35(2AA) be supported by proper documentation and approval by prescribed authorities. The CBDT has issued circulars directing Assessing Officers to allow claims even if initially made incorrectly, provided the donation is genuine and to an approved institution.

Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer did not dispute the authenticity of the donation receipt or the letter of appreciation. The Assessing Officer's failure to verify the certificate's authenticity or the specific use of the donation was a procedural lapse.

Key Evidence and Findings: The appellant submitted the receipt, letter of appreciation, and CBDT notification. The Tribunal noted absence of any contrary evidence from the Revenue challenging these documents.

Application of Law to Facts: The Tribunal emphasized that proper documentary evidence was furnished and accepted, and the Assessing Officer should have allowed the claim accordingly.

Treatment of Competing Arguments: The Revenue's contention that the certificate's authenticity was not verified was rejected due to lack of any adverse material or inquiry.

Conclusion: The Tribunal held that the Assessing Officer erred in disallowing the claim without proper verification and that the claim was duly supported by authentic documents.

4. Effect of Delay in Filing Appeal and Condonation

Legal Framework and Precedents: The Income Tax Appellate Tribunal has discretion to condone delay in filing appeals if sufficient cause is shown. Administrative reasons and work pressure have been accepted as valid grounds in appropriate cases.

Court's Interpretation and Reasoning: The Tribunal condoned the delay of 17 days in filing the appeal by the Revenue, finding the reasons explained satisfactory.

Conclusion: Delay was condoned and the appeal admitted for adjudication.

Significant Holdings

"In our considered view, when donations paid by the appellant company to IISc, Bangalore is eligible for deduction u/s.35(1)(ii) of the Act, merely for the reason of making a wrong claim u/s.35(2AA) of the Act, the deduction available to the appellant-company cannot be denied only on the ground that the appellant-company has not made the claim by filing a revised return as required under law."

"The Assessing Officer is completely erred in rejecting the claim of the appellant-company by citing the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd., vs., CIT (supra), because, it is not a fresh claim of any deduction, but, it is only a rectification of mistake in making a claim under appropriate provisions of law."

"The donation was made by the appellant for the purpose of creation of auditorium facilities in the scientific institute, which is integral part of the scientific activity of the said institute and also naming of the said auditorium after the father of the director of the appellant company as 'A.V. Rama Rao Auditorium' did not create any acquisition of rights in or arising out of scientific research."

"The appellant is eligible for the claim of weighted deduction of the said payment of Rs. 5,00,00,000/- and, accordingly, the appellant is eligible 150% deduction of the payment of said donation for the current year to the tune of Rs. 7,50,00,000/-."

"Even if the amount is spent for construction of state-of-the-art Auditorium, the Auditorium may be used for the purpose of scientific research of conducting seminars, workshops and other activities which means the said purpose is for the prosecution or the provision of facilities for the prosecution of scientific research and, therefore, the appellant-company is entitled for deduction u/sec.35(1)(ii) of the Act."

"The Assessing Officer ought to have allowed the claim of the appellant-company under appropriate provisions of law. This is because the CBDT has issued circular way back in the year 1955 and directed all the Assessing Officers that even in a case of incorrect claim made by an assessee, but, it is the duty of the Assessing Officer concerned to educate the assessee and allow the claim as per the provisions of Income Tax Act."

The Tribunal dismissed the Revenue's appeal, thereby confirming the allowance of weighted deduction under section 35(1)(ii) of the Income Tax Act for the donation made to IISc, Bengaluru for the construction of an auditorium used for scientific research activities, despite the initial erroneous claim under section 35(2AA) and without filing a revised return. The decision establishes that procedural lapses in claiming deductions should not defeat substantive rights where the donation is genuine and eligible, and that capital expenditure on facilities integral to scientific research qualifies for weighted deduction under the Act.

1. ISSUES PRESENTED and CONSIDERED

• Whether the amount of Rs. 4.43 crores given to a group company constitutes a loan/advance attracting disallowance under section 36(1)(iii) of the Income Tax Act or is an investment in shares (share application money) not subject to such disallowance.
• Whether the advances given to another group company on 31.03.2016 can be treated as loans/advances for the purpose of section 36(1)(iii) of the Act, considering the nature of the transaction and the existence of any business or commercial exigency.
• Whether the interest disallowance under section 36(1)(iii) should be computed for the entire financial year or only for the actual period during which the loan/advance was outstanding.
• Whether the use of borrowed funds for giving interest-free loans/advances to group companies justifies disallowance of interest expenditure under section 36(1)(iii) of the Act.
• Whether the ratio of Supreme Court decisions in S.A. Builders v. CIT and ACIT vs. Tulip Star Hotels Ltd. applies to disallowance of interest expenditure in the present facts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature of Rs. 4.43 crores given to group company - Loan/Advance or Investment in Shares

Legal Framework and Precedents: Section 36(1)(iii) of the Income Tax Act disallows interest expenditure on loans or advances given out of borrowed funds unless used for business purposes. The distinction between loans/advances and investments in shares is critical for applicability of this provision.

Court's Interpretation and Reasoning: The Tribunal examined documentary evidence including share allotment returns, Board resolutions, and ledger accounts. It was established that the sum of Rs. 4.43 crores was given as share application money and shares were allotted in the same financial year. The funds used for this investment were fresh funds received from two directors, not borrowed funds.

Key Evidence and Findings: Submission of share allotment documents, Board resolutions, and ledger accounts substantiated the claim that the amount was invested in shares and not given as loan or advance. The investment was made from interest-free funds and not from borrowed funds.

Application of Law to Facts: Since the amount was invested as share capital and not as a loan or advance, section 36(1)(iii) disallowance provisions do not apply. Even if considered as loan/advance, the funds were not borrowed funds but interest-free funds from fresh investments, negating the basis for interest disallowance.

Treatment of Competing Arguments: Revenue argued that share allotment was subsequent and the transaction was a loan in the year under consideration, invoking section 36(1)(iii). The Tribunal rejected this, finding the investment and allotment occurred in the same year and funds were not borrowed.

Conclusion: Disallowance of interest on Rs. 4.43 crores under section 36(1)(iii) is not sustainable; the amount is an investment in shares, not a loan or advance.

Issue 2: Treatment of Advances Given to Another Group Company on 31.03.2016

Legal Framework and Precedents: Section 36(1)(iii) applies to interest on borrowed funds used for loans or advances not connected with business purposes. The existence of business or commercial exigency is relevant to determine the nature of advances.

Court's Interpretation and Reasoning: The Tribunal noted that the advance was given on the last day of the financial year. The Assessing Officer initially computed interest disallowance for the entire year, which was modified by the CIT(A) to restrict disallowance to the actual period (one day). The assessee claimed the transaction was a current account in the ordinary course of business and not a loan/advance attracting disallowance.

Key Evidence and Findings: The assessee failed to produce evidence establishing business or commercial exigency for the advance. No documentary proof was placed on record to show the nature of the transaction as a current account or business necessity. Oral submissions alone were insufficient.

Application of Law to Facts: In absence of evidence proving business purpose or commercial expediency, the advance is treated as loan/advance within the meaning of section 36(1)(iii). Interest disallowance is justified but must be limited to the actual period of loan outstanding.

Treatment of Competing Arguments: Assessee's contention of ordinary course of business and holding-subsidiary relationship was unsubstantiated by evidence. Revenue's position that the advance is a loan attracting disallowance was upheld.

Conclusion: Advances given on 31.03.2016 are loans/advances under section 36(1)(iii); interest disallowance is justified but should be restricted to the actual period (one day).

Issue 3: Computation Period of Interest Disallowance under Section 36(1)(iii)

Legal Framework and Precedents: Interest disallowance under section 36(1)(iii) should correspond to the period for which borrowed funds are used for loans/advances not connected with business purposes.

Court's Interpretation and Reasoning: The Assessing Officer initially computed interest for the entire year on advances given on 31.03.2016. The CIT(A) rightly restricted the disallowance to the actual period of loan (one day). The Tribunal concurred with this approach.

Key Evidence and Findings: Date of advance (31.03.2016) and absence of any other loan period supported limiting interest disallowance to one day.

Application of Law to Facts: Interest disallowance must be proportionate to the actual period of loan outstanding; full year disallowance is erroneous.

Conclusion: Interest disallowance on advances should be computed only for the actual period the loan was outstanding.

Issue 4: Use of Borrowed Funds for Interest-Free Loans/Advances to Group Companies

Legal Framework and Precedents: Interest expenditure on borrowed funds used to provide interest-free loans or advances to related parties without business purpose is disallowable under section 36(1)(iii).

Court's Interpretation and Reasoning: The Tribunal accepted that the assessee had paid substantial finance cost on interest-bearing borrowings. Loans/advances given to group companies without charging interest and without business purpose imply that borrowed funds were diverted for non-business use, justifying disallowance.

Key Evidence and Findings: Negative reserves and surplus indicated lack of internal funds; finance cost paid on borrowings; loans/advances interest-free and to group companies.

Application of Law to Facts: Interest disallowance is warranted where borrowed funds are used for non-business interest-free advances to related parties.

Treatment of Competing Arguments: Assessee's claim of using own interest-free funds for investment in one group company was accepted, but not for advances to other group company lacking business purpose.

Conclusion: Interest disallowance under section 36(1)(iii) is appropriate where borrowed funds are used for interest-free loans/advances to group companies without business purpose.

Issue 5: Applicability of Supreme Court Decisions in S.A. Builders and Tulip Star Hotels

Legal Framework and Precedents: Supreme Court rulings in S.A. Builders and Tulip Star Hotels address the scope of disallowance under section 36(1)(iii) regarding interest on borrowed funds used for loans or advances.

Court's Interpretation and Reasoning: The Tribunal noted that the ratio in these decisions supports disallowance where borrowed funds are used for interest-free loans/advances without business purpose. The assessee's reliance on these decisions to negate disallowance was rejected due to facts showing diversion of borrowed funds for non-business use.

Key Evidence and Findings: The factual matrix showed loans/advances without interest and lack of business purpose, aligning with the principles upheld in the Supreme Court decisions.

Application of Law to Facts: The principles in the cited Supreme Court decisions were applied to sustain disallowance on advances lacking business exigency.

Conclusion: The Supreme Court precedents support disallowance of interest expenditure under section 36(1)(iii) in the present facts; the assessee's contention based on these decisions is not tenable.

Overall Conclusions:

• The sum of Rs. 4.43 crores given to one group company is an investment in shares and not a loan/advance; interest disallowance under section 36(1)(iii) is not sustainable on this amount.
• The advances given to another group company on 31.03.2016 are loans/advances attracting disallowance under section 36(1)(iii) due to absence of business or commercial exigency evidence.
• Interest disallowance on such advances must be computed only for the actual period of loan outstanding.
• Use of borrowed funds for interest-free loans/advances to group companies without business purpose justifies disallowance of interest expenditure under section 36(1)(iii).
• The Supreme Court precedents relied upon support the disallowance in the present facts.
• The appeal is partly allowed accordingly: disallowance on interest relating to investment in shares is deleted; disallowance on interest relating to advances is sustained but restricted to actual loan period.

The core legal questions considered in this appeal are:

• Whether the appellate authority (CIT(A)) erred in directing the Assessing Officer (AO) to allow a deduction under section 80IB(10) of the Income Tax Act, 1961 (the Act) which was not claimed by the assessee in the original return of income nor disallowed by the AO during processing by CPC Bengaluru;
• Whether the CIT(A) had jurisdiction to entertain and allow an additional ground of appeal relating to the deduction under section 80IB(10) when such claim was not made in the original return and no revised return was filed;
• Whether the CIT(A) erred in admitting and allowing additional grounds of appeal without seeking the AO's comments;
• Whether the CIT(A) erred in adjudicating original and additional grounds of appeal which were irrelevant or not fit considering the facts of the case;
• Whether, in light of section 80A(5) of the Act, a deduction not claimed in the original return or revised return can be allowed at the appellate stage.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of deduction under section 80IB(10) when not claimed in original return

Legal Framework and Precedents: Section 80IB(10) provides deduction for profits and gains from certain housing projects. Section 80A(5) of the Act stipulates that if an assessee fails to make a claim for deduction under specified sections (including section 80IB) in the return of income, no deduction shall be allowed thereafter. However, judicial precedents have clarified that appellate authorities may entertain fresh claims not made in the original return if relevant material is on record. Notably, the Supreme Court in National Thermal Power Co. Ltd. v. CIT held that appellate authorities have power to entertain fresh claims not taken before lower authorities. The Bombay High Court in CIT v. Pruthvi Brokers & Shareholders and the Madras High Court in CIT v. Abhinitha Foundation (P.) Ltd. have held that claims not made in the original or revised return can be considered if relevant documents are available.

Court's Interpretation and Reasoning: The CIT(A) allowed the deduction under section 80IB(10) based on the assessee's submission that the omission to mention the deduction amount in the return was a bona fide oversight by the Chartered Accountant's staff during the COVID lockdown period. The project for which deduction was claimed had been consistently allowed in earlier years (AYs 2012-13, 2013-14, and 2014-15). The Form 10CCB quantifying the deduction was filed within the prescribed time and details were mentioned in the return, though the amount was inadvertently omitted.

The CIT(A) relied on the principle that substantial compliance and availability of requisite information can justify allowing the deduction despite non-mention in the return. The appellate authority followed judicial precedents permitting fresh claims at the appellate stage where the claim is bona fide and supported by records.

Key Evidence and Findings: The assessee's Form 10CCB was filed timely and quantified the deduction at Rs. 6,12,05,192/-. The project had valid building permission and occupancy certificates. Earlier years' assessments had allowed the deduction for the same project. The omission in the return was due to oversight during COVID-19 related disruptions.

Application of Law to Facts: The CIT(A) applied the principle of allowing fresh claims supported by evidence and prior acceptance in earlier years, despite the claim not being explicitly made in the original return. The Tribunal noted that the AO (CPC) had not disallowed the deduction on merits but only due to non-mention in the return.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) lacked jurisdiction to allow a deduction not claimed in the original or revised return, relying on the Supreme Court decision in Goetze India Ltd. vs. CIT, which restricts appellate authorities from allowing claims not made in returns. The assessee relied on other High Court decisions permitting fresh claims at appellate stage if supported by records.

Conclusions: While the CIT(A) allowed the deduction, the Tribunal observed that section 80A(5) prohibits allowance of deductions not claimed in the return. Although judicial precedents permit entertaining fresh claims, the appellate authority must adjudicate the allowability of such claims in light of section 80A(5). The CIT(A) had not passed a speaking order on this specific legal issue. Therefore, the Tribunal remanded the matter to the CIT(A) for fresh adjudication on whether the deduction can be allowed without claim in the return, directing a reasoned and speaking order after hearing the assessee.

Issue 2: Jurisdiction of CIT(A) to admit and allow additional grounds without AO's comments

Legal Framework and Precedents: Generally, appellate authorities admit additional grounds if they are relevant and connected to the subject matter of the appeal. However, procedural fairness requires that the AO be given an opportunity to comment on additional grounds to avoid prejudice.

Court's Interpretation and Reasoning: The Revenue contended that the CIT(A) erred in admitting and deciding the additional ground relating to section 80IB(10) deduction without obtaining AO's comments. The Tribunal did not specifically rule on this procedural issue but implicitly recognized the need for due opportunity by directing the CIT(A) to hear the assessee and pass a reasoned order.

Key Evidence and Findings: The additional ground was raised by the assessee before the CIT(A) challenging the disallowance of deduction. The AO had not disallowed the deduction on merits but the CPC had processed the return without the deduction claim.

Application of Law to Facts: The appellate authority has discretion to admit additional grounds, but procedural fairness requires AO's comments. The Tribunal's direction to the CIT(A) to pass a speaking order after hearing the assessee indirectly addresses this concern.

Treatment of Competing Arguments: Revenue argued that CIT(A) lacked jurisdiction and failed proper procedure. Assessee argued for allowance based on merits and precedents.

Conclusions: The Tribunal did not expressly decide on this ground but remedied procedural concerns by remanding for fresh adjudication with due opportunity.

Issue 3: Whether the AO disallowed the deduction under section 80IB(10)

Legal Framework and Precedents: The CPC processed the return under section 115JC (Alternate Minimum Tax) as the deduction under section 80IB(10) was not claimed in the return. The AO did not explicitly disallow the deduction on merits.

Court's Interpretation and Reasoning: The CIT(A) observed that the deduction was disallowed merely due to non-mention in the return and not on merits. The Tribunal agreed that the AO did not disallow the deduction on merits but the CPC's processing led to denial of the deduction.

Key Evidence and Findings: The return was processed without the deduction claim; no separate assessment order disallowing the deduction was passed by the AO.

Application of Law to Facts: The Tribunal recognized that the AO's action was limited to processing and not an adjudication on deduction merits.

Treatment of Competing Arguments: Revenue argued that the deduction was not claimed and hence disallowed. Assessee argued that the deduction was not disallowed on merits.

Conclusions: The Tribunal held that the deduction was not disallowed by the AO on merits but was not allowed due to non-claim in the return.

Issue 4: Adjudication of original and additional grounds which are irrelevant or unfit

Legal Framework and Precedents: Appellate authorities should decide only relevant and fit grounds based on facts and law.

Court's Interpretation and Reasoning: The Revenue contended that the CIT(A) erred in adjudicating grounds which were not fit or relevant. The Tribunal did not specifically address this ground but by remanding the matter for fresh adjudication, implicitly recognized the need for proper adjudication on relevant grounds.

Conclusions: The Tribunal's remand order ensures that only relevant grounds will be decided after due process.

Issue 5: Applicability of section 80A(5) regarding non-claim of deduction in return

Legal Framework and Precedents: Section 80A(5) states that no deduction under specified sections shall be allowed if not claimed in the return of income. However, judicial precedents have carved out exceptions permitting fresh claims at appellate stage if supported by records and bona fide.

Court's Interpretation and Reasoning: The Tribunal emphasized that despite the precedents allowing fresh claims, the appellate authority must adjudicate the allowability of such claims in light of section 80A(5). The CIT(A) had not done so. Therefore, the issue was remanded for fresh consideration with a speaking order.

Application of Law to Facts: The assessee's claim was not made in the original return but supported by Form 10CCB and prior years' acceptance. The Tribunal found that the CIT(A) must reconcile these facts with the statutory bar in section 80A(5).

Conclusions: The Tribunal directed the CIT(A) to adjudicate the allowability of the deduction claim in the absence of its mention in the return, ensuring compliance with section 80A(5). The assessee is to be given opportunity of hearing.

3. SIGNIFICANT HOLDINGS

"Although the assessee can claim a deduction which was not claimed in the original return filed or through a revised return and the Ld. CIT(A) can entertain such a new claim, in view of the various judicial precedents relied on by Ld. CIT(A), however, he has to adjudicate the issue as to whether the assessee is entitled to the claim of certain deductions / exemptions without claiming the same in the return of income as per the provisions of section 80A(5). However, he has not done the same. Under these circumstances, we deem it proper to restore the issue to the file of the Ld. CIT(A) with a direction to adjudicate the issue of allowability of the claim in absence of claiming the same in the return of income as per provisions of section 80A(5) of the Act and pass a speaking order on this issue. Needless to say the Ld. CIT(A) shall give due opportunity of being heard to the assessee and decide the issue as per fact and law."

Core principles established include:

• Appellate authorities may entertain fresh claims for deductions not made in original or revised returns if supported by evidence and bona fide reasons;
• However, such claims must be adjudicated in light of statutory provisions such as section 80A(5) which bar allowance of deductions not claimed in returns;
• The appellate authority must pass a reasoned and speaking order after giving the assessee an opportunity of hearing on such issues;
• Processing of returns by CPC without explicit disallowance on merits by AO does not amount to denial of deduction on merits;
• Procedural fairness requires that additional grounds admitted at appellate stage should be adjudicated with opportunity to AO to comment and assessee to be heard.

Final determinations:

• The Tribunal allowed the appeal filed by the Revenue for statistical purposes and remanded the issue of allowability of deduction under section 80IB(10) to the CIT(A) for fresh adjudication in accordance with law, particularly section 80A(5).
• The CIT(A) is directed to pass a speaking order after hearing the assessee and considering all relevant facts and legal provisions.

The core legal questions considered by the Tribunal in the appeal are:

• Whether penalty under section 270A of the Income Tax Act, 1961 ("the Act") is leviable on the assessee for claiming deduction of Health and Education Cess, which was disallowed based on a retrospective amendment introduced by the Finance Act, 2022.
• Whether the assessee's bona fide claim, supported by judicial precedents prevailing at the time of filing the return, can be treated as under-reporting of income attracting penalty under section 270A.
• Whether the assessee's voluntary surrender of the deduction during assessment proceedings absolves it from penalty liability.
• The applicability and effect of section 155(18) of the Act, and related procedural rules (Rule 132), in the context of surrendering the claim and avoiding penalty, particularly considering the timeline of notifications and assessment order.
• The distinction between "under-reporting" and "misreporting" under section 270A, and the appropriate quantum of penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Levy of penalty under section 270A for disallowance of Health and Education Cess deduction based on retrospective amendment

Relevant legal framework and precedents: Section 270A(1) empowers the Assessing Officer to levy penalty for under-reporting of income. Section 270A(2)(a) defines under-reporting as cases where assessed income exceeds returned income. Explanation 3 to section 40(a)(ii), inserted retrospectively from 01.04.2005 by the Finance Act, 2022, disallows deduction of cess payments. The Supreme Court decision in CIT v. K. Srinivasan and judicial precedents such as Sesa Goa Ltd. v. JCIT and Chambal Fertilizers & Chemicals Ltd. v. JCIT held education cess as allowable business expenditure prior to this amendment.

Court's interpretation and reasoning: The Tribunal noted that the assessee claimed deduction under section 37(1) based on the legal position prevailing at the time of filing the return. The retrospective amendment merely clarified the law and could not be invoked to impose penalty on a bona fide claim. The Tribunal emphasized that the claim was fully disclosed and supported by judicial rulings.

Key evidence and findings: The assessee's return disclosed the deduction; judicial precedents supported the claim; the Finance Act, 2022 amendment was retrospective; the assessee voluntarily surrendered the claim during assessment proceedings.

Application of law to facts: Since the claim was bona fide and disclosed, the Tribunal held that penalty under section 270A cannot be levied merely because of a subsequent retrospective amendment. The bona fide nature of the claim negates the element of concealment or misreporting.

Treatment of competing arguments: The Revenue argued that penalty was justified post amendment. The Tribunal rejected this, noting the amendment's retrospective nature and the bona fide claim. The Tribunal also relied on the principle from the Bombay High Court in CIT v. Yahoo India (P.) Ltd. that bona fide claims based on legal interpretation do not attract penalty.

Conclusions: Penalty under section 270A for disallowance of Health and Education Cess deduction, based on retrospective amendment, is not sustainable where the claim was bona fide and fully disclosed.

Issue 2: Effect of voluntary surrender of deduction during assessment proceedings on penalty liability

Relevant legal framework and precedents: Section 270A(6)(a) excludes from under-reported income any amount where the assessee offers a bona fide explanation and all material facts are disclosed. The assessee surrendered the claim voluntarily during assessment proceedings.

Court's interpretation and reasoning: The Tribunal found that voluntary surrender of the claim upon awareness of retrospective amendment demonstrated bona fide conduct. This mitigates penalty liability under section 270A.

Key evidence and findings: Letter dated 15.09.2022 surrendering the claim; full disclosure in return and assessment proceedings; no concealment or suppression.

Application of law to facts: The Tribunal applied section 270A(6)(a) and held that the surrendered claim cannot be treated as under-reported income attracting penalty.

Treatment of competing arguments: The Revenue contended penalty was justified despite surrender. The Tribunal rejected this, emphasizing bona fide disclosure and surrender.

Conclusions: Voluntary surrender of the disputed deduction during assessment proceedings precludes penalty under section 270A.

Issue 3: Applicability of section 155(18) and Rule 132 procedure in avoiding penalty

Relevant legal framework and precedents: Section 155(18) permits reassessment or re-computation of income upon application in prescribed form under Rule 132, which was notified effective 01.10.2022. The assessment order was passed on 25.09.2022, prior to notification.

Court's interpretation and reasoning: The Tribunal held that since the assessment was completed before notification of Rule 132, the assessee could not have availed the procedural remedy under section 155(18). The principle "Lex non cogit ad impossibilia" was applied to hold that the assessee cannot be faulted for not availing a remedy not available at the relevant time.

Key evidence and findings: Timeline of assessment order (25.09.2022) and Rule 132 notification (28.09.2022, effective 01.10.2022).

Application of law to facts: The procedural remedy under section 155(18) was not available at the time penalty was levied; therefore, non-availment cannot justify penalty.

Treatment of competing arguments: Revenue argued that assessee could have availed section 155(18) to avoid penalty. Tribunal rejected this on timing and procedural grounds.

Conclusions: The assessee's inability to apply under section 155(18) before assessment completion negates penalty justification based on non-availment of this remedy.

Issue 4: Quantum of penalty and distinction between under-reporting and misreporting

Relevant legal framework and precedents: Section 270A(7) prescribes penalty at 50% of tax on under-reported income; section 270A(9) prescribes 200% penalty for misreporting. CIT(A) reduced penalty from 200% to 50% treating the case as under-reporting.

Court's interpretation and reasoning: The Tribunal agreed with CIT(A) that the case did not involve misreporting but under-reporting. However, since the claim was bona fide and fully disclosed, even penalty for under-reporting under section 270A(1) and (2)(a) is unsustainable.

Key evidence and findings: No concealment or suppression; full disclosure; bona fide claim.

Application of law to facts: The Tribunal held that bona fide claims do not amount to furnishing inaccurate particulars or under-reporting, thus no penalty is warranted.

Treatment of competing arguments: Revenue sought penalty; Tribunal relied on judicial precedent (Yahoo India) to negate penalty on bona fide claims.

Conclusions: No penalty under section 270A is sustainable where the claim is bona fide and fully disclosed, even if under-reporting is technically established.

3. SIGNIFICANT HOLDINGS

"Mere making of a claim based on a bona fide interpretation of law, subsequently found unsustainable by retrospective amendment, does not attract penalty under the Act."

"Where a claim is made transparently and based on legal interpretation, even if not accepted, it does not amount to furnishing inaccurate particulars or under-reporting."

"The assessee cannot be faulted for not availing the benefit of section 155(18) once the assessment was already finalized and penalty proceedings initiated. The subsequent availability of procedural remedy cannot retrospectively cure the defect or justify the imposition of penalty."

"Voluntary surrender of the claim immediately upon awareness of the retrospective amendment and full disclosure during assessment proceedings negates the imposition of penalty under section 270A."

Final determinations:

• Penalty under section 270A levied on the assessee for claiming deduction of Health and Education Cess, disallowed retrospectively, is deleted.
• The bona fide nature of the claim and full disclosure preclude penalty liability.
• The assessee's inability to apply under section 155(18) due to timing of notification negates penalty justification based on non-availment of this remedy.
• The case involves under-reporting and not misreporting; however, even penalty for under-reporting is unsustainable given the bona fide claim.

The core legal questions considered in this appeal are:

(a) Whether the addition made under section 40(a)(ia) of the Income Tax Act is justified on the ground that the assessee failed to file Form 26A certifying that the interest payee had fulfilled the conditions under the first proviso to section 201(1) of the Act, despite the payee having offered the interest income to tax.

(b) Whether the assessee is entitled to claim deduction under section 80IA of the Act for profit from infrastructure facilities when the claim was not made in the original return of income filed under section 139(1) but was raised for the first time during appellate proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance under Section 40(a)(ia) for Non-filing of Form 26A

Relevant legal framework and precedents: Section 40(a)(ia) of the Income Tax Act provides for disallowance of certain expenses if tax is not deducted at source (TDS) or, if deducted, not deposited within the prescribed time. The first proviso to section 201(1) provides conditions under which a person is not treated as an assessee-in-default for failure to deduct or pay TDS, subject to furnishing a certificate in Form 26A (as per Rule 31ACB) certifying that the payee has included the income in their return and paid tax thereon.

The Hon'ble Supreme Court decision in Hindustan Coca Cola Beverages (P) Ltd. vs. CIT (2007) 293 ITR 226 (SC) held that no disallowance under section 40(a)(ia) is warranted if the recipient of the income has offered the same to tax in their return of income.

Court's interpretation and reasoning: The Tribunal noted that the interest was paid to M/s Srei Infrastructure Pvt. Ltd., who had offered the same to tax, as established in the first round of litigation and appellate orders. The Tribunal observed that the reliance placed by the lower authorities on the non-filing of Form 26A was misplaced because Form 26A was introduced only by the Income Tax (11th Amendment) Rules, 2012 effective from 12.09.2012, which post-dates the assessment year under consideration (AY 2008-09). Therefore, the requirement to file Form 26A or obtain the accountant's certificate under Rule 31ACB was not applicable for the AY in question.

Key evidence and findings: The appellate order in the first round had clearly found that the payee had included the interest income in its return and paid tax thereon. The assessee had failed to file Form 26A, but the Tribunal held this was irrelevant for the AY 2008-09. The lower authorities had also not produced any evidence contradicting the payee's inclusion of income in its return.

Application of law to facts: Since the payee had offered the interest income to tax, and the Form 26A requirement was not applicable for the AY under consideration, the addition under section 40(a)(ia) was not sustainable.

Treatment of competing arguments: The Revenue contended that the non-filing of Form 26A and failure to produce accountant's certificate justified the disallowance. The Tribunal rejected this, distinguishing the facts from the precedent cited by the assessee and emphasizing the inapplicability of Form 26A for the AY in question.

Conclusion: The Tribunal set aside the disallowance under section 40(a)(ia) and directed the Assessing Officer (AO) to delete the addition.

Issue (b): Claim of Deduction under Section 80IA when not Claimed in Original Return

Relevant legal framework and precedents: Section 80IA provides deduction in respect of profits from infrastructure facilities. Section 80AC mandates that such deductions shall not be allowed unless the return of income is furnished on or before the due date under section 139(1). The issue of whether a claim for deduction not made in the original return but raised for the first time on appeal is allowable is central.

The CBDT Circular No. 733 dated 03.01.1996 clarifies that rolling stock forming part of the railway system qualifies as infrastructure for deduction under section 80IA.

Court's interpretation and reasoning: The Tribunal referred to the first round of proceedings where the CIT(A) had admitted the additional ground filed by the assessee and allowed the deduction under section 80IA after detailed examination of facts, statutory audit reports, and the terms of the Build-Own-Lease-Transfer (BOLT) scheme agreement with Indian Railways.

The Tribunal noted that the assessee's operations involved providing railway wagons under a ten-year agreement, after which ownership would transfer to Indian Railways. The wagons were integral to the railway system, qualifying as rolling stock under the Indian Railways Act, 1989, and hence eligible for deduction.

The AO and CIT(A) in the second round disallowed the deduction on the ground that the claim was not made in the original return filed under section 139(1) within time, relying on section 80AC. The Tribunal found this reasoning perverse and factually incorrect, emphasizing that the assessee had filed the return within time but had not claimed the deduction therein. The Tribunal held that the claim could be made for the first time before the appellate authority and upheld the earlier finding allowing the deduction.

Key evidence and findings: The statutory audit report certified the facts of the agreement with Indian Railways, the nature of the wagons as rolling stock, and the operational details. The agreement with Indian Railways was verified, and the Tribunal found no dispute on compliance with conditions under section 80IA(7).

Application of law to facts: The Tribunal applied the legal provisions and circular clarifications to hold that the assessee was entitled to deduction under section 80IA despite the claim being raised at the appellate stage, as the return was filed within time and the claim was bona fide.

Treatment of competing arguments: The Revenue strictly relied on section 80AC to deny deduction on the ground of non-claim in the original return. The Tribunal rejected this rigid approach, finding the dismissal of the claim as perverse and contrary to the facts and earlier appellate findings.

Conclusion: The Tribunal set aside the order of the CIT(A) and directed the AO to allow the deduction under section 80IA of Rs. 1,08,41,626/-.

3. SIGNIFICANT HOLDINGS

The Tribunal established the following core principles and final determinations:

"No disallowance under section 40(a)(ia) of the Act is warranted if the recipient of the income has offered the same to tax in the return of income, and the requirement of filing Form 26A or obtaining accountant's certificate under Rule 31ACB is not applicable for the assessment year under consideration."

"The claim for deduction under section 80IA of the Act, though not made in the original return of income filed under section 139(1), can be admitted for the first time before the appellate authority, provided the return was filed within the due date and the assessee fulfills the conditions stipulated for such deduction."

"Rolling stock provided under the Build-Own-Lease-Transfer (BOLT) scheme to Indian Railways qualifies as an infrastructure facility eligible for deduction under section 80IA, as it forms part of the railway system as defined under the Indian Railways Act."

In conclusion, the Tribunal allowed the appeal of the assessee by setting aside the addition under section 40(a)(ia) and directing the AO to allow the deduction under section 80IA, thereby reversing the orders of the CIT(A) and AO on these issues.

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the rejection of the application for registration under section 12A of the Income Tax Act, 1961, on the ground that the trust deed contains a clause permitting payment of honorarium or salary to trustees, is legally sustainable.

(b) Whether the provisions of section 13(3) of the Income Tax Act can be invoked at the stage of registration under section 12A, or whether they apply only at the time of assessment of income under sections 11 and 12.

(c) Whether the presence of a clause in the trust deed allowing payment of honorarium or salary to trustees, without actual payment having been made, constitutes a violation sufficient to reject registration.

(d) Whether the principles of natural justice were violated by the Commissioner of Income Tax (Exemption) in rejecting the application without granting a personal hearing or adequate opportunity to cure alleged defects.

(e) Whether the Commissioner was justified in rejecting the registration application without specific objections being raised in earlier communications and without providing a fair opportunity to address the alleged defects.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (c): Legality of rejection of registration application based on clause permitting payment of honorarium or salary to trustees in the trust deed, without actual payment

Relevant legal framework and precedents: Section 12A of the Income Tax Act governs registration of trusts for claiming exemption under sections 11 and 12. Section 13 of the Act provides exceptions under which income exemption can be denied, particularly section 13(3) which prohibits payment of salary or honorarium to trustees beyond reasonable limits. Section 13(1)(c) prohibits benefits to trustees or specified persons, and section 13(2)(c) allows reasonable remuneration for services rendered. The Supreme Court in CIT Vs Kamala Town Trust established that section 13 carves out exceptions to exemptions and the burden lies on the Revenue to establish contravention.

Court's interpretation and reasoning: The Tribunal held that the mere presence of a clause in the trust deed permitting payment of honorarium or salary to trustees does not render the trust non-genuine or ineligible for registration under section 12A. The Tribunal emphasized that section 13(3) is triggered only when actual payments are made in excess of reasonable remuneration. The Tribunal observed that no actual payment of honorarium or salary to trustees had been made in this case, and thus no violation of section 13(3) had occurred.

Key evidence and findings: The trust deed contained a clause under "Powers of Trustees" allowing payment of honorarium or salary to trustees for services or involvement in projects, subject to approval by the Board. The Revenue relied on this clause to reject registration. The assessee submitted that no payments had been made. The Tribunal noted the absence of evidence of any salary or honorarium payments to trustees.

Application of law to facts: The Tribunal applied the legal principle that section 13(3) applies at the assessment stage to deny exemption if unreasonable payments are made. Since no payments had been made, the clause alone could not justify rejection of registration. The Tribunal further noted that reasonable remuneration is permissible under section 13(2)(c) and that payment of salary per se is not considered a "benefit" under section 13(1)(c).

Treatment of competing arguments: The Revenue argued that the clause itself violated section 13(3) and rendered the trust ineligible for registration. The assessee argued that section 13(3) applies only at assessment and no payments had been made. The Tribunal sided with the assessee, reasoning that the clause without actual payment does not trigger disqualification.

Conclusions: The Tribunal concluded that the impugned order rejecting registration on the sole ground of the clause permitting honorarium or salary payments, without any actual payment, was legally flawed and unsustainable.

Issue (b) and (g): Applicability of section 13(3) at registration stage under section 12A

Relevant legal framework and precedents: Section 12A governs registration of trusts for exemption, while section 13(3) provides exceptions applicable at the assessment stage. The Supreme Court ruling in Kamala Town Trust clarified that section 13 exceptions are to be applied during assessment.

Court's interpretation and reasoning: The Tribunal held that section 13(3) cannot be pressed into service to reject an application for registration under section 12A. The Tribunal emphasized that section 13(3) is designed to be applied at the time of income assessment to determine whether exemption under sections 11 and 12 should be denied due to improper payments.

Key evidence and findings: The Revenue relied on section 13(3) to reject registration based on the trust deed clause. The assessee contended that section 13(3) is irrelevant at the registration stage.

Application of law to facts: The Tribunal applied the statutory scheme and judicial precedents to hold that section 13(3) is not a ground to deny registration under section 12A. Registration is to be granted if the objects and activities are genuine and charitable, and compliance with section 13(3) is to be examined at assessment.

Treatment of competing arguments: The Revenue urged that section 13(3) violation in the trust deed itself disqualifies the trust. The assessee argued that section 13(3) applies only at assessment, not registration. The Tribunal accepted the latter view.

Conclusions: The Tribunal concluded that section 13(3) provisions cannot be invoked to reject registration applications under section 12A.

Issue (d) and (f): Violation of principles of natural justice and denial of personal hearing

Relevant legal framework: Principles of natural justice require that a party be given a fair opportunity to be heard before adverse orders are passed. Section 12AB requires the Commissioner to pass an order after affording reasonable opportunity of being heard.

Court's interpretation and reasoning: The Tribunal noted the appellant's contention that no personal hearing was granted despite a specific request. The Tribunal observed that the Commissioner is required to be satisfied about the genuineness of the trust and must pass an order in writing after affording reasonable opportunity to be heard.

Key evidence and findings: The appellant had requested personal hearing and filed objections. A personal hearing was conducted by the ITO (Exemption), but the appellant contended that the final order was passed arbitrarily without adequate opportunity. The Tribunal noted the communication timeline and the absence of specific objections in earlier notices regarding the clause.

Application of law to facts: The Tribunal emphasized that rejection of registration without affording a fair opportunity to cure defects or explain the clause violates natural justice. The absence of specific objections in earlier notices compounded the unfairness.

Treatment of competing arguments: The Revenue did not dispute the procedural lapse but relied on the clause to justify rejection. The Tribunal found the procedural infirmity significant.

Conclusions: The Tribunal held that the impugned order was passed in haste and without fair opportunity, violating principles of natural justice, thus warranting setting aside the order.

Issue (e): Arbitrary rejection without prior objection and failure to allow curing of defects

Relevant legal framework: The Commissioner must give notice of objections and allow the applicant to rectify defects before rejecting registration under section 12AB.

Court's interpretation and reasoning: The Tribunal noted that the Department's letter dated 25th October 2023, and the notice dated 4th January 2024, did not raise any objection regarding the clause in the trust deed that was ultimately the basis for rejection. The Tribunal found the rejection arbitrary and premature.

Key evidence and findings: The appellant had made amendments to the trust deed per Department instructions and had filed detailed replies and documents. The rejection was based on a new ground not previously communicated.

Application of law to facts: The Tribunal applied the principle that the applicant must be given an opportunity to cure defects once notified. The failure to do so rendered the rejection arbitrary.

Treatment of competing arguments: The Revenue argued that the clause itself was a disqualifying factor. The Tribunal rejected this, emphasizing procedural fairness.

Conclusions: The Tribunal concluded that the rejection was arbitrary and without due procedure, and hence unsustainable.

3. SIGNIFICANT HOLDINGS

"The mere fact that the trust deed is having clause under the head 'Powers of the Trustees' to receive honorarium or salary against the services or involvement by the trustee does not render the trust non-genuine or its activity becomes ineligible for registration u/s 12AB of the Act."

"The provisions of section 13(3) of the Act will trigger only in cases where the amount so paid to the trustee by way of salary or allowance or otherwise out of the resources of the trust or institution for services rendered by that person is in excess of what may be reasonably paid for such services."

"Payment of salary per se is not a benefit. To establish that some benefit was passed under section 13(1)(c) of the Act, it will be incumbent on the AO to have reasons to believe that the remuneration were legally not due to the employees/functionaries."

"Section 13(1)(c) does not prohibit payment of remuneration; it gets attracted if any benefit is provided to interested persons."

"The provision of section 13(3) of the Act cannot be pressed into play to decide the eligibility of registration of the Trust."

"Section 12AB undoubtedly requires the Commissioner to satisfy himself about the objects of the trust or institution and genuineness of its activities and grant a registration only if he is so satisfied."

"The Commissioner shall pass an order in writing either by granting the registration of the trust or cancelling its registration after affording a reasonable opportunity of being heard."

"Rejecting the application without providing such opportunity is unjust and is in violation of principles of natural justice."

The Tribunal set aside the order of rejection and directed the grant of registration under section 12A as sought by the appellant.

The core legal questions considered by the Tribunal in this matter include:

(a) Whether the Commissioner of Income Tax (Appeals) erred in admitting additional evidence without satisfying the conditions prescribed under Rule 46A of the Income Tax Rules, 1962, especially when the Assessing Officer had provided ample opportunity to the assessee to furnish requisite details.

(b) Whether the Commissioner of Income Tax (Appeals) erred in deleting additions made under Section 68 of the Income Tax Act without proper examination of the applicability of precedents to the facts of the case.

(c) Whether the Assessing Officer's order should have been upheld by the Commissioner of Income Tax (Appeals) in respect of the additions made.

(d) Whether the Income Tax Department's appeal is maintainable in light of the fact that it did not file any claim before the National Company Law Tribunal (NCLT) during the Corporate Insolvency Resolution Process (CIRP) and the Resolution Plan was approved by the NCLT without including the Department's claim.

(e) Whether the outstanding demand and interest raised by the Income Tax Department prior to the approval of the Resolution Plan under the Insolvency and Bankruptcy Code, 2016 (IBC) survive after the approval of the Resolution Plan by the NCLT.

(f) Whether the Revenue can enforce tax demands or continue proceedings in respect of dues not admitted or included in the Resolution Plan approved by the NCLT.

(g) Whether the assessee was entitled to further opportunity to submit evidence regarding the source of funds for certain loans, which were added back by the Commissioner of Income Tax (Appeals).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Admission of Additional Evidence and Deletion of Additions under Section 68

The Department challenged the Commissioner of Income Tax (Appeals) for admitting additional evidence without proper satisfaction of the conditions laid down in Rule 46A of the Income Tax Rules, 1962, and for deleting additions made under Section 68 of the Income Tax Act. The Department contended that the Assessing Officer had given ample opportunity to the assessee to furnish details, and the Commissioner erred in relying on precedents without examining their applicability to the facts.

The Tribunal noted these contentions but did not delve deeply into these procedural objections, as the principal issue that emerged related to the effect of the Resolution Plan approved by the NCLT on the outstanding tax demands. The Tribunal's focus shifted to the question of whether the tax demands could survive after the insolvency resolution process.

Issue (c): Whether the Assessing Officer's Order Should Have Been Upheld

The Department argued that the Commissioner of Income Tax (Appeals) ought to have upheld the additions made by the Assessing Officer. However, the Tribunal observed that the Assessing Officer's order was passed on 01.12.2017, and subsequent proceedings and appeals had resulted in a substantial reduction of demand. The Tribunal considered the impact of the insolvency resolution process on the enforceability of the demand.

Issue (d), (e), and (f): Effect of Non-Filing of Claim by Income Tax Department before NCLT and Extinguishment of Tax Demands

The pivotal issue before the Tribunal was whether the Income Tax Department's failure to file a claim before the NCLT during the CIRP process and the approval of the Resolution Plan without inclusion of the Department's claim extinguished the outstanding tax demand and interest raised prior to the Resolution Plan's approval.

The Tribunal examined the factual matrix: the Resolution Plan was approved by the NCLT on 06.12.2023, and the Income Tax Department had not submitted any claim in response to the public announcement inviting claims from creditors. The list of claims admitted in the Resolution Plan did not include any claim of the Income Tax Department.

The Tribunal relied heavily on the Supreme Court's decision in Ghanashyam Mishra & Sons (P.) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd., which clarified that once a Resolution Plan is approved under Section 31 of the IBC, all claims not included in the plan stand extinguished and no person, including Central or State Government authorities, can initiate or continue proceedings in respect of such claims. The Court emphasized that the Resolution Plan binds the corporate debtor, its creditors, and other stakeholders, including government authorities.

The Tribunal further referred to the ITAT Delhi decision in ACIT (OSD) vs. GAIL Mangalore Petrochemicals Ltd. and the Delhi High Court decision in TUF Metallurgical (P.) Ltd. vs. Union of India, which upheld the principle that tax claims not submitted during the CIRP process and not included in the Resolution Plan are extinguished post-approval. The Delhi High Court reiterated that the Revenue's right to recover such dues is extinguished and no proceedings can be continued.

The Tribunal also cited subsequent authoritative decisions, including the Supreme Court's dismissal of appeals in Commissioner of Central Excise and Service Tax Vadodra v. EMCO Ltd., which reaffirmed the binding nature of the Resolution Plan on statutory authorities.

The Department's argument that it being the State exchequer cannot be bound by the Resolution Plan was rejected based on the above precedents.

Issue (g): Opportunity to Submit Evidence Regarding Source of Funds

The assessee contended that the Commissioner of Income Tax (Appeals) erred in confirming additions of certain loans as unexplained due to non-submission of evidence regarding the source of funds and in not granting further opportunity to submit such evidence. The Tribunal noted these grounds but did not elaborate on this issue in detail, as the principal legal question revolved around the effect of the Resolution Plan on the outstanding tax demands.

3. SIGNIFICANT HOLDINGS

The Tribunal's key legal determinations and principles established are as follows:

"Once a resolution plan is duly approved by the adjudicating authority under sub-section (1) of Section 31 [of the IBC], the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan."

The Tribunal concluded that since the Income Tax Department did not file any claim before the NCLT during the CIRP and was not included in the Resolution Plan, the outstanding demand and interest raised prior to the approval of the Resolution Plan stand extinguished.

It was held that the Department cannot now claim and recover arrears that accrued prior to the approval of the Resolution Plan under Section 31 of the IBC.

The Tribunal rejected the Department's contention that it should be allowed to enforce the impugned orders and notices despite non-inclusion in the Resolution Plan.

Accordingly, the Tribunal dismissed the Department's appeal and allowed the assessee's appeal.

Issues: Whether the notification prohibiting employment of contract labour at the petitioner's ICD was vitiated for non-application of mind and for compliance with the factors prescribed under Section 10(2) of the Contract Labour (Regulation and Abolition) Act, 1970, including the conditions of work, the incidental or necessary nature of the work, its perennial character, ordinary performance through regular workmen, and the sufficiency of whole-time work.

Analysis: The challenge was confined to the validity of the impugned notification under Section 10 of the Contract Labour (Regulation and Abolition) Act, 1970. The statutory scheme requires the appropriate Government, before issuing a prohibition notification, to consider the conditions of work and benefits available to contract labour and have regard to the relevant factors specified in clauses (a) to (d) of Section 10(2). On the material placed before it, the Government had called for further information, examined the report and minutes of the Central Advisory Contract Labour Board, and only thereafter issued the notification. The record showed consideration of the wage disparity, absence of leave, annual increments, medical facilities and bonus, as well as the nature and duration of the work, the longstanding deployment of the same labour force since 1985, the substantial and continuing volume of work, and the fact that similar work was being done through regular workmen in a comparable establishment. The Court further held that the work need not be a core activity to fall within Section 10(2)(a), that the material supported a finding of perennial nature and sufficient volume, and that speculative factors such as revocability of the customs licence or possible business reduction did not displace the statutory assessment.

Conclusion: The notification was not shown to suffer from non-application of mind or from disregard of the statutory factors, and it was upheld.

Issues: Whether the petitioner was entitled to provisional release of the imported goods on the conditions imposed and to a direction for final assessment of the Bills of Entry.

Analysis: The petition under Article 226 sought assessment of the Bill of Entry and release of the imported goods for home consumption. Without entering into the merits, the Court directed the petitioner to deposit a specified amount within five working days, upon which the respondents were required to pass a provisional release order within three days. The Court also directed the respondents to complete the final assessment on the Bills of Entry after receiving the petitioner's reply and evidence in the pending proceedings.

Conclusion: The petitioner obtained partial relief by securing provisional release of the goods on compliance with the directed deposit, together with a direction for expeditious final assessment.

The core legal questions considered by the Court in this matter are:

1. Whether the waiver letter dated 17.01.2025 issued under Regulation 10(1)(l) of the Sea Cargo Manifest and Transhipment Regulations, 2018 (SCMTR, 2018) and Regulation 6(1)(l) of the Handling of Cargo in Customs Area Regulations, 2009 (HCCAR, 2009) is binding on the delivery agent (Respondent No. 4) for waiver of detention and demurrage charges on imported goods detained by Customs.

2. Whether Respondent No. 4 qualifies as an "Authorized Sea Carrier" or an "Authorized Carrier" under the SCMTR, 2018, and thus is bound by the provisions of the Regulations, including the waiver of detention charges.

3. Whether the detention and demurrage charges claimed by Respondent No. 4 are recoverable despite the waiver letter, considering the contractual terms under the Bill of Lading and the Customs Act, 1962.

4. The applicability and scope of the SCMTR, 2018 and the interplay between the Regulations and the contract of carriage, including the validity and binding nature of subordinate legislation relative to primary legislation.

5. The entitlement of the petitioner to physical delivery of the goods pending final disposal of the petition, given the financial constraints and ongoing detention.

Issue-wise Detailed Analysis

Issue 1: Binding Nature of the Waiver Letter dated 17.01.2025

Legal Framework and Precedents: The waiver letter was issued under Regulation 10(1)(l) of SCMTR, 2018 and Regulation 6(1)(l) of HCCAR, 2009. Regulation 10(1)(l) prohibits an authorized carrier from demanding container detention charges for containers laden with goods detained by Customs for verifying entries under sections 46 or 50 of the Customs Act, 1962, if entries are found correct. The waiver was issued after Customs examination confirmed the correctness of entries.

Court's Interpretation and Reasoning: The Court examined the nature of the waiver letter and the regulatory mandate. It held that the waiver letter is binding on Respondent No. 4, as it is issued by the competent Customs authority under the relevant regulations. The Court emphasized that the waiver applies to the detention charges from the date the goods were detained (24.12.2024) until the issuance of the No Objection Certificate (10.01.2025).

Key Evidence and Findings: The waiver letter dated 17.01.2025 was addressed to the Custodian (Respondent No. 3) and copied to Respondent No. 4 and the petitioner. The Customs examination report dated 10.01.2025 confirmed that the goods were found as declared, triggering the waiver under the Regulations.

Application of Law to Facts: Since the goods were detained for verification and found correctly declared, the waiver letter legally exempts the petitioner from paying detention charges for the relevant period. Respondent No. 4, as the delivery agent involved in the import transaction, is obliged to implement this waiver.

Treatment of Competing Arguments: Respondent No. 4 contended that the waiver letter was addressed only to the Custodian and not binding on them. The Court rejected this, noting the regulatory framework and the registration status of Respondent No. 4 as an Authorized Sea Agent, which binds them to comply with the waiver.

Conclusion: The waiver letter dated 17.01.2025 is binding on Respondent No. 4 for the period from 24.12.2024 to 10.01.2025 and must be implemented to waive detention charges accordingly.

Issue 2: Status of Respondent No. 4 as Authorized Sea Carrier or Authorized Carrier under SCMTR, 2018

Legal Framework and Precedents: SCMTR, 2018 defines "Authorized Carrier" (Regulation 2(1)(c)) as an authorized sea carrier, authorized train operator, custodian, or postal authority registered under Regulation 3. An "Authorized Sea Carrier" (Regulation 2(1)(d)) means the master of the vessel carrying goods, his agent, or any other person notified by the Central Government. Registration under Regulation 3 is mandatory for persons delivering arrival or departure manifests.

Court's Interpretation and Reasoning: Respondent No. 4 argued it is merely a delivery agent and not an Authorized Sea Carrier or Authorized Carrier, thus not bound by SCMTR, 2018. However, Respondent Nos. 1 and 2 produced evidence from the Customs ICEGATE portal showing Respondent No. 4's registration as an Authorized Sea Agent (ASA) under SCMTR, 2018.

The Court noted that Authorized Sea Agents act on behalf of Authorized Sea Carriers and are therefore subject to the Regulations. The Court further observed that Respondent No. 4's registration as ASA brings it within the regulatory ambit and obliges compliance with the waiver provisions.

Key Evidence and Findings: The registration snapshot from the Customs portal and the letter from Respondent No. 2 confirming Respondent No. 4's status as ASA were pivotal.

Application of Law to Facts: The Court applied the definitions and registration requirements of SCMTR, 2018, concluding that Respondent No. 4 is covered by the Regulations as an Authorized Sea Agent and must comply with its provisions.

Treatment of Competing Arguments: Respondent No. 4's contention that it is not the master of the vessel or its agent for filing Import General Manifest was countered by the registration status and the regulatory scheme, which expressly includes Authorized Sea Agents.

Conclusion: Respondent No. 4 is an Authorized Sea Agent under SCMTR, 2018 and is bound by the Regulations, including the waiver of detention charges.

Issue 3: Recoverability of Detention and Demurrage Charges Despite Waiver Letter and Contractual Obligations

Legal Framework and Precedents: The contract of carriage embodied in the Bill of Lading (B/L) imposes liability on the merchant (petitioner) to pay all dues, taxes, and charges, including demurrage and detention charges. Section 170 of the Indian Contract Act supports the carrier's lien for unpaid charges. The Customs Act, 1962 and SCMTR, 2018 regulate detention charges and their waiver in specific circumstances.

Court's Interpretation and Reasoning: Respondent No. 4 relied on the contract and its lien rights to claim detention charges for containers not returned within free days. It argued that the waiver letter was addressed only to the Custodian and did not absolve the petitioner of contractual obligations. It also contended that the Regulations, 2018 are subordinate legislation and cannot override the contract or primary legislation.

The Court noted that while contractual rights exist, the waiver letter issued by Customs under the Regulations applies specifically to detention charges for containers detained due to Customs verification where entries are found correct. The Court distinguished the period covered by the waiver (24.12.2024 to 10.01.2025) from any charges accruing thereafter.

Key Evidence and Findings: The Bill of Lading clauses and invoices for detention charges issued by Respondent No. 4 were examined. The Court noted the absence of any challenge to the validity of the waiver letter by Respondent No. 4 before any forum.

Application of Law to Facts: The Court applied the waiver provisions to exempt the petitioner from detention charges for the specified period. However, it did not preclude Respondent No. 4's right to claim charges accruing beyond that period or under other contractual terms.

Treatment of Competing Arguments: The Court rejected the argument that the Regulations are ultra vires or inapplicable to Respondent No. 4, given its registration and the regulatory framework. The Court also noted that Respondent No. 4's conditional waiver of charges until 02.03.2025 was a commercial decision, not a regulatory mandate.

Conclusion: The petitioner is exempt from detention charges for the period covered by the waiver letter. Charges beyond that period remain subject to contractual liability and are not affected by the waiver.

Issue 4: Validity and Scope of SCMTR, 2018 and Interaction with Primary Legislation and Contractual Rights

Legal Framework and Precedents: SCMTR, 2018 is framed under the Customs Act, 1962, specifically sections 30, 30A, 41, 41A, 53, 54, 56, 98(3), 157(2), and 158(2). The Regulations govern filing of manifests and related procedures, including detention charges. The Court referred to precedents affirming that subordinate legislation cannot override primary legislation or contracts unless expressly authorized.

Court's Interpretation and Reasoning: The Court acknowledged that SCMTR, 2018 is subordinate legislation but held that it is validly made under the Customs Act and governs the responsibilities of authorized carriers and agents, including waiver of detention charges in specified circumstances. The Court referred to Apex Court judgments emphasizing that arbitrariness or ultra vires claims must be grounded in statutory inconsistency or constitutional infirmity, which was not demonstrated here.

Key Evidence and Findings: The Court relied on the text of the Regulations and relevant statutory provisions, as well as the absence of any challenge to the validity of the waiver letter or Regulations by Respondent No. 4.

Application of Law to Facts: The Court applied the Regulations as valid and binding, requiring Respondent No. 4 to comply with the waiver. It also recognized that contractual rights and remedies under civil law remain available for disputes beyond the regulatory scope.

Treatment of Competing Arguments: Respondent No. 4's argument that the Regulations cannot override contractual rights was addressed by limiting the waiver's applicability to the period and conditions specified, without disturbing contractual claims beyond that.

Conclusion: SCMTR, 2018 is valid subordinate legislation applicable to Respondent No. 4 as an Authorized Sea Agent. The waiver letter issued under these Regulations is binding and must be implemented.

Issue 5: Entitlement to Physical Delivery of Goods Pending Disposal

Legal Framework and Precedents: The petitioner sought interim relief for physical delivery of goods pending final disposal, citing financial hardship and business losses due to prolonged detention.

Court's Interpretation and Reasoning: The Court, without delving into the detailed merits, directed Respondent No. 4 to release the goods in custody after implementing the waiver for the detention charges for the specified period. This direction was given to mitigate undue hardship to the petitioner and ensure smooth business functioning.

Key Evidence and Findings: The petitioner's repeated requests and correspondence with Respondent No. 4 and Customs authorities demonstrated the ongoing detention and financial impact.

Application of Law to Facts: The Court balanced the regulatory mandate and contractual rights with the commercial realities faced by the petitioner, ordering release subject to compliance with the waiver.

Treatment of Competing Arguments: Respondent No. 4's right to claim charges beyond the waiver period was preserved, and the Court clarified that this order does not preclude Respondent No. 4 from challenging the waiver or pursuing claims in appropriate forums.

Conclusion: The petitioner is entitled to physical delivery of the goods upon implementation of the waiver letter, subject to payment of any charges beyond the waiver period.

Significant Holdings

"The waiver order/letter dated 17.01.2025 issued by respondent No. 2 is binding upon respondent No. 4 and respondent No. 4 is required to implement waiver order passed by the respondent No. 2 as per the provisions of the Regulation 10 (1) (l) of the Regulations, 2018."

"Respondent No. 4 is already registered as an Authorized Sea Agent and was an agent of the Authorized Sea Carrier who has filed the Bill of Lading in question. The contention raised on behalf of respondent No. 4 with regard to challenge to the vires of Rule 10 (1) (l) also cannot be considered in these proceedings as respondent No. 4 has not challenged the legality and validity of waiver letter dated 17.01.2025 before any forum."

"The provision of Regulation 10 (1) (l) of Regulations, 2018 makes it clear that the Authorized Carrier is not permitted to demand any container detention charges if the containers are detained by the customs for the purpose of verifying the entries made under section 46 and section 50 of the Act, if the entries are found to be correct."

"Respondent No. 4 is hereby directed to release the goods which is under their custody and not under the detention of the Customs authority by implementing waiver letter dated 17.01.2025 for waiver of the detention charges under Regulation 10 (1) (l) Regulations, 2018 for the period from 24.12.2024 to 10.01.2025."

"If the respondent No. 4 is desirous to challenge the order of the Customs Authority for waiver of the detention charges, this order shall not come in its way. However, we have not expressed any opinion in respect of any such proposed proceedings."

The core legal questions considered by the Court include:

• Whether the Impugned Policy Circular No. 06/2018 dated 22.05.2018 is ultra vires the Foreign Trade (Development & Regulation) Act, 1992 and the Foreign Trade Policy 2015-2020 by unlawfully inserting additional conditions that curtail benefits under the Service Export from India Scheme (SEIS).
• Whether the Show Cause Notice dated 21.06.2024 issued under Section 28AAA of the Customs Act, 1962, based on the impugned Circular and the order-in-original passed by the DGFT cancelling SEIS scrips, is legally maintainable.
• Whether the petitioner is entitled to interim relief restraining the respondents from adjudicating the Show Cause Notice or staying its operation.
• The applicability and interpretation of Section 28AAA of the Customs Act, 1962 concerning recovery of duties in cases involving alleged collusion, wilful mis-statement, or suppression of facts in obtaining instruments such as SEIS scrips.
• Whether the petition challenging the Circular and the Show Cause Notice is premature and not maintainable at this stage.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Circular No. 06/2018 dated 22.05.2018

Relevant Legal Framework and Precedents: The Circular was issued under the Foreign Trade (Development & Regulation) Act, 1992 and pertains to the interpretation and implementation of the SEIS scheme under the Foreign Trade Policy 2015-2020. The petitioner relied on two High Court decisions-Bombay High Court in Atlantic Shipping Private Limited and Karnataka High Court in M/s ECL Puyvast India Pvt Ltd.-which had declared the Circular ultra vires and invalid.

Court's Interpretation and Reasoning: The Court acknowledged the petitioner's contention that the Circular unlawfully inserted additional conditions not contemplated under the parent statutes and policies. However, the Court did not delve into the merits of the validity of the Circular, noting that the issue is currently sub judice and subject to challenge before appropriate forums.

Application of Law to Facts: The petitioner's reliance on the Circular to deny benefits under SEIS was the foundation for the DGFT's order cancelling the scrips. The Circular's validity is thus central to the dispute but was not adjudicated in the present petition.

Treatment of Competing Arguments: The respondents argued that the Circular was relied upon by the DGFT in its order-in-original and that the petitioner's challenge to the Circular should be made in appropriate proceedings rather than at the stage of the present petition.

Conclusion: The Court refrained from deciding on the Circular's validity, indicating that the petitioner may challenge it in suitable proceedings.

Issue 2: Maintainability and Legal Basis of the Show Cause Notice dated 21.06.2024 under Section 28AAA of the Customs Act, 1962

Relevant Legal Framework: Section 28AAA of the Customs Act, 1962 provides for recovery of duties where instruments such as SEIS scrips have been obtained by collusion, wilful mis-statement, or suppression of facts, and subsequently utilized. The provision allows for recovery of duty along with interest and penalty.

Court's Interpretation and Reasoning: The Court observed that the impugned Show Cause Notice was a consequential proceeding following the DGFT's order-in-original dated 16.04.2024 cancelling the SEIS scrips and imposing penalties. The Show Cause Notice under Section 28AAA is a recovery mechanism triggered by the DGFT's cancellation order.

The Court noted that the DGFT's order remains in force and has not been stayed or set aside by any competent forum. Therefore, the Show Cause Notice issued by Customs authorities is legally maintainable and requires adjudication.

Key Evidence and Findings: The DGFT's order cancelling scrips worth Rs. 1,81,24,518/- and imposing a penalty of Rs. 50,00,000/- forms the basis for the Show Cause Notice. The petitioner's statements recorded under Section 108 of the Customs Act and investigations by the Directorate of Revenue Intelligence (DRI) further support the proceedings.

Application of Law to Facts: Since the Show Cause Notice is a statutory recovery proceeding consequent to the DGFT order, the Court held that it cannot be quashed at this stage. The petitioner's challenge to the underlying order is to be pursued in the appropriate forum.

Treatment of Competing Arguments: The petitioner argued that the Show Cause Notice is without jurisdiction and premised on an invalid Circular, thus liable to be quashed. The respondents countered that the petition is premature and the Show Cause Notice validly follows the DGFT order. The Court sided with the respondents, emphasizing the procedural propriety and the need for the petitioner to exhaust remedies before the DGFT order.

Conclusion: The petition challenging the Show Cause Notice is premature and not maintainable. The Customs authorities are entitled to proceed with adjudication.

Issue 3: Interim Relief and Stay of Proceedings

Court's Reasoning: Given the nature of the proceedings and the fact that the DGFT order has not been stayed, the Court declined to grant any interim relief restraining the respondents from adjudicating the Show Cause Notice or staying its operation.

Conclusion: No interim relief was granted.

Issue 4: Prematurity of the Petition

Court's Reasoning: The Court emphasized that since the DGFT order cancelling the SEIS scrips is under challenge and has not been stayed, the present petition challenging the Circular and the Show Cause Notice is premature. Interference at this stage could prejudice the ongoing proceedings and the petitioner's right to challenge the DGFT order before the competent forum.

Conclusion: The petition was dismissed in limine on grounds of prematurity without examining the merits.

3. SIGNIFICANT HOLDINGS

The Court held:

"The impugned show cause notice is in nature of recovery of consequential proceedings to the order passed by the DGFT which still holds the field and as such the respondent authorities are required to adjudicate the show cause notice in the facts of the case and no interference is called for at this stage."

"The Hon'ble Supreme Court in catena of decisions has held that the Court should not interfere at the stage of issuance of show cause."

"Any observation or interference by this Court may hamper further challenge to such order-in-original passed by DGFT before appropriate forum."

"In view of the above facts, no interference is made at this stage as the petition is filed at a premature stage in view of the fact that the very issue of challenge to the impugned Circular No. 6 of 2018 shall be the subject matter of challenge by the petitioner or to challenge the order-in-original passed by the DGFT and therefore in such circumstances, the petition is not entertained and accordingly dismissed in limine."

"We have not gone into the merits of the matter and the respondents shall adjudicate upon the show cause notice independently in accordance with law."

Core principles established include:

• Section 28AAA of the Customs Act provides a statutory mechanism for recovery of duties where instruments such as SEIS scrips are obtained by collusion, wilful mis-statement, or suppression of facts.
• A Show Cause Notice issued under Section 28AAA consequential to a DGFT order cancelling scrips is maintainable and not liable to be quashed at the preliminary stage.
• The Court will not interfere at the stage of issuance of a Show Cause Notice, especially when the underlying order is under challenge before an appropriate forum.
• Challenges to policy circulars or government notifications should be pursued through proper channels and forums rather than through premature writ petitions.

Final determinations:

• The petition challenging Circular No. 06/2018 and the Show Cause Notice dated 21.06.2024 is dismissed in limine as premature.
• No interim relief restraining the respondents from adjudicating the Show Cause Notice is granted.
• The respondents are directed to proceed with adjudication of the Show Cause Notice in accordance with law.

(i) Whether the Department had established a 'reasonable belief' to seize 3998.83 grams of gold valued at Rs 2,12,79,096 from the appellants traveling by bus on 04-05/09/2020, and whether the evidence on record proves that the seized gold bars were smuggled into India from Bangladesh without legal documentation;

(ii) Whether the appellants discharged the burden of proof under Section 123 of the Customs Act, 1962, regarding the presumption of smuggling;

(iii) Whether the failure to follow the procedure prescribed under Section 138B of the Customs Act vitiated the proceedings;

(iv) Whether the statements of the co-accused, which were later retracted, can be relied upon to establish liability for confiscation and penalty under Section 112(b) of the Customs Act, 1962.

Issue-wise Detailed Analysis:

Issue (i): Reasonable belief for seizure and proof of smuggling

The legal framework mandates under Section 110 of the Customs Act that seizure of goods can only be effected if the proper officer has a reasonable belief that the goods are liable to confiscation, i.e., smuggled goods. Section 123 shifts the burden of proof to the person from whom the goods were seized to prove that the goods are not smuggled, but only after the existence of reasonable belief is established.

Precedents emphasize that reasonable belief is a prerequisite for seizure and must be based on definite information or material, not mere suspicion or presumption. The belief must exist at the time of seizure, not formed subsequently. The Supreme Court and various High Courts have held that without reasonable belief, Section 123 cannot be invoked, and the onus remains on the Department to prove smuggling.

In the present case, the seized gold was found in transit far from any Customs port or notified area, with no foreign markings and purity levels below 99.99%. The appellants produced vouchers and invoices claiming licit purchase from registered traders. Investigations revealed that while the signatures on some invoices were disputed by the sellers, the sellers did not deny business transactions with the appellants. No conclusive evidence was gathered to establish foreign origin or illegal importation.

The Tribunal relied on authoritative rulings, including a detailed judgment of the Delhi High Court, which held that vague information and absence of foreign markings or other indicia do not constitute reasonable belief. The Tribunal also referred to the Bombay High Court's ruling clarifying that possession of gold without proper account does not ipso facto render it smuggled. The Supreme Court's interpretation of "reason to believe" as requiring honest, reasonable grounds based on objective material was also followed.

Applying these principles, the Tribunal concluded that the Department failed to establish reasonable belief at the time of seizure. The reliance on confessional statements alone, which were later retracted, was insufficient. The Department's failure to pursue further investigation to verify disputed signatures or financial transactions further weakened its case. Thus, the seizure was not legally sustainable.

Issue (ii): Discharge of burden under Section 123 by appellants

Once reasonable belief is established, Section 123 casts the burden on the person from whom goods are seized to prove that the goods are not smuggled. However, the Tribunal recognized that this burden is not absolute and that the Department must conduct a thorough investigation to negate claims of licit purchase.

In this case, appellants produced invoices, stock registers, and purchase records. The Department did not conclusively disprove these documents nor verify disputed signatures or financial transactions. The Tribunal noted that the appellants discharged their burden by producing credible documentary evidence, and the Department failed to negate it effectively.

Therefore, even if Section 123 were attracted, the appellants met their evidentiary burden, which was not overcome by the Department.

Issue (iii): Non-compliance with Section 138B and its effect on proceedings

Section 138B of the Customs Act mandates that statements recorded under Section 108 during investigation can only be relied upon if the person making the statement is examined during adjudication to ensure voluntariness and reliability. The Tribunal noted that the adjudicating authority relied heavily on statements of co-accused, which were retracted, without examining those persons as required under Section 138B.

Precedents cited by the Tribunal, including rulings of the Punjab and Haryana High Court and the Supreme Court, emphasize that statements recorded under coercion or without adherence to procedural safeguards cannot be used as substantive evidence. The failure to follow Section 138B renders such statements inadmissible and vitiates the proceedings.

The Tribunal found that since the procedure was not followed, the statements of the co-accused could not be considered voluntary or reliable, and reliance on them to establish guilt or confiscation was impermissible.

Issue (iv): Reliance on retracted confessional statements for confiscation and penalty

The Department's case primarily rested on confessional statements of the two persons from whom the gold was seized. However, these statements were retracted at the earliest opportunity. The Tribunal examined legal principles that confessional statements must be corroborated by independent evidence to form the basis of conviction or confiscation.

Supreme Court rulings were cited to the effect that confessions obtained under duress or coercion are inadmissible, and that confessions of co-accused cannot be used as substantive evidence against others without corroboration. The Tribunal found no independent corroborative evidence to support the confessions, and the statements were not subjected to the safeguards under Section 138B.

Consequently, the Tribunal held that the retracted confessional statements cannot be relied upon to justify confiscation or penalty.

Significant Holdings:

"Reasonable belief is a pre-requisite for seizure; the proper officer should have reasons to believe that the goods are smuggled goods before seizing them under Section 110; the reasonable belief cannot be based on presumption; a case of suspicion or speculation is not one of reasonable belief."

"Section 123 kicks in only when Section 110 is satisfied and that 'reasonable belief' exists and can be explained before the adjudicating authority or tribunal or court, as the case may be."

"If Revenue fails to prove reasonable belief, then the goods would not be liable to be seized in the first place; if there was no reasonable belief, then the onus cannot be shifted on the person from whom the goods were seized."

"Confessional statements recorded under Section 108 of the Customs Act must be corroborated by independent evidence and must be recorded following the procedure prescribed under Section 138B; failure to comply with this procedure renders such statements inadmissible."

"The burden envisaged in Section 123 is not absolute; once persons from whom gold was seized claim licit purchase, it is incumbent upon the Department to disprove the same with evidence after taking enquiries to a logical conclusion."

"The mere absence of foreign markings or labels on gold bars and the purity being below 99.99% do not constitute sufficient grounds for reasonable belief that the gold is smuggled."

"Statements of co-accused, especially when retracted and not subjected to examination under Section 138B, cannot be relied upon to establish guilt or justify confiscation and penalty."

The Tribunal's final determinations were:

(i) The Department failed to establish reasonable belief at the time of seizure; hence, the seizure was not sustainable and Section 123 could not be invoked;

(ii) The appellants discharged their burden of proof under Section 123 by producing credible documentary evidence, which was not effectively negated by the Department;

(iii) Non-compliance with Section 138B vitiated the reliance on statements recorded during investigation;

(iv) The retracted confessional statements of co-accused cannot be relied upon for confiscation or penalty;

Accordingly, the impugned order of confiscation and penalty was set aside and all appeals were allowed.

Issues: (i) whether the imported silicon steel scrap was classifiable under CTH 7204 49 00 or under CTH 7225 19 00 and whether import authorisation was required; (ii) whether the declared assessable value could be rejected and re-determined at USD 650 per MT; (iii) whether confiscation, redemption fine and penalty were sustainable.

Issue (i): whether the imported silicon steel scrap was classifiable under CTH 7204 49 00 or under CTH 7225 19 00 and whether import authorisation was required

Analysis: The relevant test under Note 8(a) of Section XV of the Customs Tariff Act, 1975 and the HSN Notes to heading 7204 is whether the goods are metal waste and scrap, meaning goods definitely not usable as such because of breakage, cutting-up, wear or similar reasons. The departmental Chartered Engineer and the re-examination report showed that the transformer cores had become damaged, de-shaped, rusted and could not be reused directly in their original condition. The request for mutilation and the admitted use for melting supported the character of scrap. The material was therefore not second-hand usable CRGO sheets or strips falling under heading 7225.

Conclusion: The goods were correctly classifiable under CTH 7204 49 00, and the import restriction or authorisation requirement for goods under CTH 7225 did not apply.

Issue (ii): whether the declared assessable value could be rejected and re-determined at USD 650 per MT

Analysis: Section 14 of the Customs Act, 1962 and Rule 3(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 make transaction value the rule, subject only to recognised exceptions. Rule 12 permits rejection only where there is a reasonable basis to doubt the declared value. No cogent evidence of contemporaneous higher-value imports, related-party influence, or flow back of consideration was established. Once the misclassification basis failed, the foundation for rejecting the declared value also disappeared. The enhancement based only on suspicion and the Chartered Engineer's estimate was not legally sustainable.

Conclusion: The declared transaction value could not be rejected, and the re-determination at USD 650 per MT was unsustainable.

Issue (iii): whether confiscation, redemption fine and penalty were sustainable

Analysis: Confiscation under Sections 111(d) and 111(m) of the Customs Act, 1962 depended on a valid finding of misclassification, misdeclaration or violation of law. As the goods were held to be correctly declared as scrap and no prohibition or misdeclaration was established, the statutory basis for confiscation failed. In the absence of a sustainable confiscation, redemption fine under Section 125 and penalty under Section 112 could not survive. The finding also left no occasion to sustain import restriction consequences under the Foreign Trade Policy.

Conclusion: Confiscation, redemption fine and penalty were not sustainable.

Final Conclusion: The appeal succeeded, the impugned orders were set aside, and the importer obtained consequential relief.

Ratio Decidendi: Where imported metal goods are shown by contemporaneous technical evidence to be unusable as such and fit only for remelting, they are classifiable as waste and scrap; in the absence of cogent evidence justifying rejection of transaction value, customs authorities cannot enhance value or impose confiscation and penalty merely on suspicion.

The core legal questions considered by the Tribunal in this appeal include:

- Whether the appellant, as a creditor, was eligible to file an application under Section 213 of the Companies Act, 2013 for investigation into the affairs of the respondent company;

- Whether the petition under Section 213(1)(a) or 213(1)(b) of the Companies Act, 2013 was maintainable, given the nature of allegations made;

- Whether the allegations raised by the appellant, including illegal allotment of convertible debentures, unauthorized increase in share capital, improper appointment/removal of auditors, unlawful conversion of company status, and fraudulent borrowing, constituted sufficient grounds for investigation under Section 213;

- Whether the National Company Law Tribunal (NCLT) erred in dismissing the petition on maintainability grounds without issuing notice or considering merits;

- The applicability and interpretation of Section 213 of the Companies Act, 2013, including the evidentiary threshold and procedural requirements for initiating an investigation;

- The relevance of pending arbitration proceedings and whether the petition was filed to circumvent those proceedings or as a fishing expedition;

- The role and jurisdiction of the NCLT in matters relating to proposed IPOs and regulatory compliance issues under SEBI.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility of the appellant to file an application under Section 213 of the Companies Act, 2013

Relevant Legal Framework and Precedents:

Section 213 of the Companies Act, 2013 empowers the Tribunal to order an investigation into the affairs of a company on an application made either by a specified number of members or persons holding a certain proportion of voting power (sub-section (a)) or by any other person or otherwise if circumstances suggest fraud, misfeasance, or oppression (sub-section (b)). The applicant must support the application with evidence showing good reasons for seeking such an investigation.

The Tribunal referred to the precedent in M/s RS India Wind Energy P Ltd v. PTC India Financial Services Ltd, which emphasized that an applicant must bring on record some evidence to establish a prima facie case and justify the need for investigation under Section 213.

Court's Interpretation and Reasoning:

The NCLT examined whether the appellant qualified under Section 213(a), which requires membership or voting power thresholds, and found that the appellant did not meet these criteria. The appellant was not a member of the respondent company but claimed creditor status. The Tribunal held that the appellant failed to provide sufficient documentary evidence such as invoices, ledgers, or proof of debt to establish creditor status or the nature and amount of debt. Consequently, the appellant did not qualify under Section 213(a).

Key Evidence and Findings:

The appellant submitted a ledger showing some exposure but did not provide detailed supporting documents like invoices or agreements. The respondent argued that the appellant was engaged in arbitration proceedings and that the petition was an attempt to circumvent those proceedings.

Application of Law to Facts:

The Tribunal applied the eligibility criteria strictly and found the appellant's claim insufficient to satisfy the threshold under Section 213(a). The absence of clear evidence showing the appellant as a member or qualifying creditor led to dismissal on maintainability grounds.

Treatment of Competing Arguments:

The appellant argued that sufficient allegations and prima facie evidence existed to warrant investigation. The respondent contended the petition was a fishing expedition and an abuse of process aimed at pressuring the company amid arbitration and proposed IPO plans. The Tribunal favored the respondent's position, noting the lack of concrete proof and the procedural deficiencies in the appellant's submissions.

Conclusion:

The appellant was not eligible to file the petition under Section 213(a) due to failure to meet membership or creditor thresholds and lack of supporting evidence.

Issue 2: Maintainability of the petition under Section 213(1)(b) of the Companies Act, 2013

Relevant Legal Framework:

Section 213(1)(b) permits the Tribunal to order an investigation if it is satisfied that the company's business is conducted with intent to defraud creditors or members, or for fraudulent or unlawful purposes, or if persons managing the company have been guilty of fraud, misfeasance, or misconduct. The Tribunal must be satisfied on the existence of such circumstances before ordering investigation.

Court's Interpretation and Reasoning:

The appellant's primary contention under Section 213(b) was that the company's business was being conducted with intent to defraud its creditors. However, the appellant was unable to substantiate this allegation with evidence. The Tribunal noted that the appellant was neither a member nor had shown that the company's affairs were conducted oppressively or fraudulently towards members. The pending arbitration between the parties indicated a dispute over money but did not establish fraudulent intent or misconduct warranting investigation.

Key Evidence and Findings:

The Tribunal reviewed the documents and submissions and found no prima facie evidence of fraud, misfeasance, or oppressive conduct. The respondent company's Board of Directors had approved the issuance of debentures and capital increases with shareholder consent, complying with relevant provisions of the Companies Act, including Section 71. The Tribunal also noted the absence of grievances from shareholders or creditors regarding the debenture issue or IPO.

Application of Law to Facts:

The Tribunal applied the stringent standard required for investigation under Section 213(b) and found the appellant's allegations unsubstantiated. Mere allegations without supporting evidence were insufficient to satisfy the Tribunal's satisfaction threshold.

Treatment of Competing Arguments:

The appellant argued that illegal allotment of debentures at a discount, unauthorized capital increase, improper auditor appointments, and fraudulent borrowing constituted grounds for investigation. The respondent countered that proper procedures were followed, approvals obtained, and no fraud or illegality was demonstrated. The Tribunal accepted the respondent's submissions and dismissed the petition as a fishing expedition.

Conclusion:

The petition was not maintainable under Section 213(b) as the appellant failed to establish circumstances suggesting fraud, misfeasance, or oppression by the company's management.

Issue 3: Whether the NCLT erred in dismissing the petition without notice and on maintainability grounds

Court's Interpretation and Reasoning:

The appellant contended that the NCLT dismissed the petition solely on maintainability without issuing notice or considering merits. The Tribunal clarified that it had examined the allegations and documents submitted and found no grounds for investigation. The dismissal was based on the appellant's failure to satisfy eligibility and evidentiary criteria under Section 213.

Application of Law to Facts:

The Tribunal's order was reasoned and based on the absence of prima facie evidence and failure to meet statutory thresholds. The appellant's lack of membership or creditor status and inability to prove fraud or misfeasance justified dismissal without further notice.

Conclusion:

No error was found in the NCLT's approach or order. The dismissal was appropriate and consistent with the legal framework.

Issue 4: Role of arbitration proceedings and proposed IPO in the petition

Court's Interpretation and Reasoning:

The Tribunal observed that arbitration proceedings between the appellant and respondent were pending regarding the money dispute. The appellant's petition appeared to be an attempt to circumvent arbitration and exert pressure on the respondent. The Tribunal also noted that issues relating to the proposed IPO were not within its jurisdiction and should be addressed before the Securities and Exchange Board of India (SEBI).

Application of Law to Facts:

The Tribunal declined to entertain the petition as a means to interfere with arbitration or IPO processes. It emphasized that regulatory matters concerning IPOs and securities fall under SEBI's purview.

Conclusion:

The petition was not a proper vehicle to challenge arbitration or IPO-related issues, and such matters should be pursued through appropriate forums.

3. SIGNIFICANT HOLDINGS

"The applicant has not brought in any valid proof including any grievance of any of the affected shareholders or creditors on account of the issue of such debentures on a discounted basis nor has he proved whether he is a creditor and in any way affected by such issue or proposed IPO which are apparently needed for restructuring or financial strength of the company for which we see that due procedure has been followed."

"The applicant does not qualify for filing this application under Section 213(a) (i) and (ii) of the Companies Act, 2013 and the Tribunal is not satisfied to take cognizance of this Company Petition."

"Though in para 15 of its impugned order, the Ld. NCLT has held the petition is not maintainable under sub-section (a) of Section 213 of Companies Act, 2013 yet if one examines the impugned order in its entirety, more specifically its para (Supra) one would find the Ld. NCLT had also dealt with circumstances enumerated in sub-section (b) of Section 213 of Companies Act, 2013."

"The appellant is not a member of the Respondent No.1 company, hence cannot allege the business of Respondent No.1 company is being conducted in a manner oppressive to its members; or the company is guilty of fraud, misfeasance or other misconduct towards its members; or members of the company have not been given due information etc."

"The Tribunal is not the authority to decide matters relating to a proposed IPO issue which has not been filed and such issues are to be taken up before the appropriate regulator, the SEBI."

Core Principles Established:

- Eligibility to file an application under Section 213(a) requires membership or voting power thresholds and evidentiary support.

- Investigation under Section 213(b) demands prima facie satisfaction by the Tribunal of fraud, misfeasance, or oppressive conduct, supported by evidence.

- Mere allegations without supporting proof do not warrant investigation and constitute an abuse of process or fishing expedition.

- Pending arbitration proceedings and regulatory matters such as IPOs are outside the scope of Section 213 investigations and must be pursued in appropriate forums.

Final Determinations:

The appeal was dismissed for lack of merit. The appellant was found ineligible to file the petition under Section 213(a) and failed to establish grounds for investigation under Section 213(b). The NCLT's dismissal of the petition on maintainability grounds was upheld as valid and justified.

- Whether the Adjudicating Authority was correct in admitting the Section 7 Application filed by the Financial Creditors against the Corporate Debtor and initiating the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

- Whether the admitted debt and default by the Corporate Debtor exist as per the evidence and legal framework.

- Whether the Appellant's claim of depositing the entire principal amount and disputing the calculation of interest, particularly penal interest, has any bearing on the continuation of CIRP.

- The applicability of RBI guidelines on penal interest and whether the Banks' charging of interest on interest violates these guidelines.

- Whether the Section 7 proceedings are being used as a recovery mechanism contrary to the object of IBC.

- The procedural and substantive requirements for withdrawal of CIRP under Section 12A of the IBC and Regulation 30A of the CIRP Regulations.

- The role of the Committee of Creditors (CoC) in considering settlement proposals and the effect of such proposals on the continuation or withdrawal of CIRP.

2. ISSUE-WISE DETAILED ANALYSIS

Admissibility of Section 7 Application and Existence of Debt and Default

The legal framework governing this issue is Section 7 of the IBC, which permits Financial Creditors to file an application for initiation of CIRP upon default by the Corporate Debtor. The Adjudicating Authority had admitted the Section 7 Application after recording a categorical finding of existence of debt and default. This was supported by documentary evidence including the Facility Agreement, Demand Notices, and a foreign decree passed by the Queen's Bench, UK, confirming the debt amount. The Adjudicating Authority also noted the rejection of settlement proposals by the Financial Creditors, which was interpreted as an acknowledgment of debt and default by the Corporate Debtor.

The Court's reasoning emphasized that the admitted debt and default are fundamental prerequisites for admission under Section 7. The Tribunal upheld the Adjudicating Authority's findings, observing that the Appellant's own conduct, including deposit of substantial sums and acknowledgment of debt, corroborates the existence of default. The Tribunal rejected the Appellant's contention that the Section 7 proceedings are barred by limitation, as this was already considered and decided against the Appellant.

Competing arguments centered on the Appellant's claim that the amount deposited should satisfy the entire debt and that the Banks' insistence on continuing CIRP is a recovery attempt, which is impermissible under IBC. The Banks countered by asserting that the amount deposited is insufficient and that the debt includes contractual default interest permissible under the Facility Agreement. The Tribunal held that these disputes over interest calculations and penal interest are not to be adjudicated in the admission proceedings under Section 7.

Dispute Regarding Penal Interest and Interest on Interest

The Appellant challenged the Banks' calculation of interest, particularly the levy of penal interest and interest on interest, contending that such charges violate RBI Guidelines dated 18.08.2023. The Appellant relied on these Guidelines to argue that penal interest should be reasonable, non-discriminatory, and not compounded, and that the Banks' practice amounts to unfair lending.

The Banks refuted this by stating that the RBI Guidelines relied upon do not apply to foreign currency loans and external commercial borrowings, which are governed by contractual terms under the Facility Agreement. Clause 8.3 of the Facility Agreement explicitly permits charging default interest on the entire outstanding amount, including principal and accrued interest. The Banks emphasized that the Corporate Debtor was aware of these terms since the invocation of the guarantee.

The Tribunal noted that disputes concerning the quantum and calculation of interest, including penal interest, are not issues for determination at the stage of admission of Section 7 Application. Such disputes are to be resolved during the resolution process or through appropriate mechanisms provided under the IBC.

Use of Section 7 Proceedings as a Recovery Mechanism

The Appellant argued that the continuation of CIRP despite deposit of the principal amount indicates misuse of Section 7 as a recovery tool, contrary to the legislative intent of IBC to provide a time-bound resolution process rather than recovery proceedings.

The Banks countered that the admitted debt and default justify the initiation of CIRP and that the Appellant's offer to pay is a delay tactic. The Tribunal observed that the existence of debt and default is undisputed and that the IBC contemplates CIRP even when the debt is acknowledged or partly paid, to ensure resolution of claims and compliance with the Code's procedural requirements.

Withdrawal of CIRP and Role of Committee of Creditors (CoC)

The Supreme Court's decision in GLAS Trust Company LLC vs. BYJU Raveendran & Ors. clarified that withdrawal of CIRP requires compliance with Section 12A of the IBC and Regulation 30A of the CIRP Regulations. These provisions mandate that any settlement proposal for withdrawal must be approved by the CoC with at least 90% vote share.

The Tribunal highlighted that the CoC had not yet been constituted due to procedural delays. It directed the Interim Resolution Professional (IRP) to constitute the CoC and place any settlement proposals submitted by the Appellant before it. The CoC is to consider such proposals, including the utilization of the Rs.369.11 crores deposited by the Appellant, and decide within 60 days whether to accept the settlement and allow withdrawal of CIRP.

The Tribunal emphasized that the decision to accept or reject the settlement proposal is a commercial decision of the CoC. If the proposal is rejected or the Section 12A application is not allowed, the Appellant may apply for withdrawal of the amount deposited with interest.

3. SIGNIFICANT HOLDINGS

"Considering the facts of the present case and looking at them from whichever angle, we have no hesitation to conclude that debt and default has been established."

"The issue of bar of limitation has already been decided and accepted by the Corporate Debtor that the petition is within limitation."

"The dispute between the parties regarding charging of penal interest and charging of interest on interest or other issues regarding computations, are not the issues, which need to be examined and decided in these proceedings."

"For withdrawal of CIRP, the appropriate course open for the parties to initiate proceedings under Section 12A with Regulation 30A."

"The CoC needs to be constituted to find out the claim of the Financial Creditors and to permit the Financial Creditors and other claimants to file their claims and the IRP to collate the claims."

"In event the Appellant is desirous of submitting a settlement proposal for withdrawal of Section 7 Application, it is always open for the Appellant to submit a proposal before the IRP, who can place the same before the CoC. In event the CoC with 90% vote share approve the settlement, the IRP can always file an Application for withdrawal of the proceedings."

"The entire process of submission of settlement proposal by the Appellant and consideration by the CoC shall be completed within 60 days from the date of this order."

Final determinations:

- The Adjudicating Authority's order admitting the Section 7 Application and initiating CIRP is upheld.

- The CIRP shall proceed with constitution of the CoC and consideration of claims.

- The Appellant may submit a settlement proposal to the CoC, including the deposited amount, for consideration under Section 12A and Regulation 30A.

- If the settlement is not approved, the CIRP shall continue and the Appellant may seek refund of the deposited amount with interest.

The core legal questions considered by the Tribunal in these appeals are:

• Whether the Leave and License Agreement dated 07.06.2019 entered into by the corporate debtor during the pendency of CIRP qualifies as an onerous contract under Regulation 10 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations) and can therefore be disclaimed by the liquidator;
• Whether the transaction under the Leave and License Agreement constitutes an undervalued transaction under Section 45 of the Insolvency and Bankruptcy Code, 2016 (IBC), and if so, whether the liquidator can avoid it;
• Whether Regulation 10 of the Liquidation Regulations, 2016, empowering the liquidator to disclaim onerous contracts, is ultra vires or inconsistent with the provisions of the IBC;
• Whether the adjudicating authority erred in rejecting the appellant's challenge to the public auction notice issued by the liquidator for sale of the corporate debtor's assets;
• Whether the adjudicating authority erred in directing the liquidator to reconsider the appellant's claim of Rs. 1.15 crore after due verification.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the Leave and License Agreement is an onerous contract under Regulation 10 of the Liquidation Regulations and can be disclaimed by the liquidator

Relevant legal framework and precedents: Regulation 10 of the Liquidation Regulations, 2016, empowers the liquidator to disclaim onerous property or contracts that impose a heavy burden on the corporate debtor during liquidation. The concept of an onerous contract is also explained in Accounting Standard (AS) 29, which defines an onerous contract as one where the unavoidable costs of fulfilling the contract exceed the economic benefits expected to be received. The Supreme Court judgment interpreting Section 535 of the Companies Act, 1956, which is pari materia to Regulation 10, was cited to emphasize that disclaimer powers are to protect creditors from onerous covenants and must be exercised with due circumspection.

Court's interpretation and reasoning: The adjudicating authority, through both the Technical Member and Judicial Member, examined whether the Leave and License Agreement was onerous. Both members concluded that the agreement was unprofitable and burdensome. The agreement was entered at a nominal rent of Rs. 5,000 per month for 12 years, which was significantly below market rates. The appellant later proposed a rent of Rs. 2.25 lakhs per month, confirming the inadequacy of the original rent. The security deposits and advance payments made by the appellant were already utilized by the erstwhile management, providing no benefit to creditors during liquidation. The Judicial Member clarified that although the agreement may not strictly fall under the definition of onerous contract as per AS 29, it qualifies as an unprofitable contract under Regulation 10(1)(b) of the Liquidation Regulations, which allows disclaimer of such contracts.

Key evidence and findings: The facts established included the date of the agreement (post initiation of CIRP), the nominal rent, the size and nature of the premises, the advance payments made by the appellant, and the appellant's own admission of willingness to pay higher rent later. The liquidator's letter asking the appellant to vacate and enter into a fresh agreement was ignored initially. The adjudicating authority found the transaction was not bona fide and was entered without good faith, adversely affecting the liquidation process and value maximization.

Application of law to facts: The Tribunal held that the Leave and License Agreement imposed a heavy burden on the corporate debtor and its creditors, qualifying as onerous property under Regulation 10. The liquidator was justified in disclaiming the agreement to protect the interests of creditors and facilitate liquidation.

Treatment of competing arguments: The appellant argued that the agreement was not onerous but merely unprofitable, and that there was a divergence of opinion between the Technical and Judicial Members on this point. The appellant also contended that the reference to Illustration 10 of AS 29 by the Judicial Member was misplaced as it is not part of Regulation 10. The Tribunal rejected these arguments, clarifying that both members agreed on the agreement being onerous or unprofitable under Regulation 10, and that the Judicial Member's reference to AS 29 was for illustrative purposes only and not part of the Regulation.

Conclusion: The Tribunal upheld the adjudicating authority's decision allowing the liquidator to disclaim the Leave and License Agreement under Regulation 10 as onerous property.

Issue 2: Whether the transaction is an undervalued transaction under Section 45 of the IBC and can be avoided

Relevant legal framework: Section 45 of the IBC defines undervalued transactions and empowers the liquidator to avoid such transactions. However, the adjudicating authority held that the Leave and License Agreement was not covered by Section 45 and rejected the liquidator's prayers under this provision.

Court's interpretation and reasoning: The adjudicating authority found no applicability of Section 45 to the transaction, and the Tribunal did not interfere with this finding. The liquidator's claim for recovery under Section 48(1) based on undervalued transaction was also rejected.

Conclusion: The transaction was not held to be an undervalued transaction under Section 45 of the IBC.

Issue 3: Whether Regulation 10 of the Liquidation Regulations is ultra vires or inconsistent with the IBC

Relevant legal framework: Section 34(2) of the IBC vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator upon appointment. Section 35(1)(d) and (o) empower the liquidator to protect assets and perform functions specified by the Board. Section 3(32) defines "specified" as those specified by regulations made by the Board under the Code. Regulation 10 is framed under these powers. Section 240(2)(y) authorizes the Board to make regulations regarding functions of the liquidator under Section 35.

Court's interpretation and reasoning: The Tribunal held that Regulation 10, empowering the liquidator to disclaim onerous contracts, is a valid exercise of the powers conferred by the IBC. The regulation is consistent with the objectives of the Code, including value maximization and efficient liquidation. The Tribunal distinguished the appellant's argument that only transactions enumerated in Sections 43 to 51 can be avoided, clarifying that disclaimer of onerous contracts is a separate power vested in the liquidator through regulations. The Tribunal also referred to the Supreme Court's interpretation of Section 535 of the Companies Act, 1956, which is analogous to Regulation 10, to support the validity of such disclaimer powers.

Conclusion: Regulation 10 of the Liquidation Regulations is intra vires the IBC and is not ultra vires or inconsistent with the Code.

Issue 4: Whether the adjudicating authority erred in rejecting the appellant's challenge to the auction notice

The appellant challenged the public notice issued by the liquidator for auction of the premises. The adjudicating authority dismissed this challenge, allowing the auction to proceed. The auction was successfully conducted for Rs. 4.21 crore. The Tribunal found no error in this decision.

Issue 5: Whether the adjudicating authority erred in directing the liquidator to reconsider the appellant's claim

The appellant had submitted a claim of Rs. 1.15 crore before the liquidator, which was initially rejected for non-compliance with prescribed format. The adjudicating authority directed the liquidator to reconsider the claim after due verification and allowed the appellant to submit the claim in the prescribed format within 30 days. The Tribunal upheld this direction as just and proper.

3. SIGNIFICANT HOLDINGS

"The intention of disclaiming a contract or property as onerous is to protect the creditors of the Corporate Debtor and releasing the Corporate Debtor from a heavy burden imposed by such a contract or property."

"The Leave and License Agreement dated 07.06.2019 is 'unprofitable' and 'burdensome' and attracts the provisions under Regulation 10 of the Liquidation Regulations, 2016."

"The power vested in the liquidator by Regulation 10 i.e., disclaimer of the onerous property is thus fully covered by provisions of the IBC and cannot be held to be beyond IBC or ultra vires to the IBC."

"Section 34(2) vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator; Section 35(1)(o) empowers the liquidator to perform such other functions as may be specified by the Board; Regulation 10 of the Liquidation Regulations is framed under these provisions."

"The Liquidator is justified in disclaiming the Leave and License Agreement dated 07.06.2019 as onerous contract under Regulation 10 of the Liquidation Regulations, 2016."

"There is no divergence of opinion between the Technical Member and Judicial Member; both have concluded that the transaction is onerous/unprofitable and can be disclaimed."

"The adjudicating authority rightly rejected the challenge to the auction notice and allowed the auction to proceed."

"The liquidator was rightly directed to reconsider the appellant's claim after due verification and submission in prescribed format."

- Whether the adjudicating authority erred in admitting the Section 7 applications filed by the financial creditor against the corporate debtor and the corporate guarantor.

- Whether the existence of financial debt and default was sufficiently proved to warrant initiation of Corporate Insolvency Resolution Process (CIRP).

- Whether the appellant's contention that payments were not due from the completed and sold units but from future commercial units and new tower, and that the project accounts were controlled by the debenture trustee, absolves the corporate debtor and guarantor from liability.

- Whether the delay in project completion and issuance of occupancy certificate, and the "zero period" declared by the Town and Country Planning authority, affect the admissibility of the Section 7 application.

- Whether the constitution of a Project Managing Committee (PMC) with financial creditor members absolves the corporate debtor of repayment obligations.

- Whether the financial creditor acted with mala fide intent in initiating CIRP proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility of Section 7 Application Based on Debt and Default

Relevant Legal Framework and Precedents: The adjudicating authority's role under Section 7 of the Insolvency and Bankruptcy Code (IBC) is limited to ascertaining whether a financial debt exists and whether a default has occurred. The Supreme Court's rulings in E.S. Krishnamurthy & Ors. v. Bharathi Hi-Tech Builders Pvt. Ltd. and M. Suresh Kumar Reddy v. Canara Bank & Ors. clarify that once the existence of debt and default is established, the adjudicating authority is bound to admit the application unless the debt is not due or payable.

Court's Interpretation and Reasoning: The Tribunal noted that the principal borrower issued debentures amounting to Rs.35 crore in 2016 and a further Rs.15 crore in 2021 under separate Debenture Trust Deeds (DTDs). Despite these issuances, no payments towards principal or interest have been made from 2016 to the date of filing the application in 2023. The corporate guarantor also failed to make payments after invocation of the guarantee. The debt and default were admitted facts, undisputed before the Tribunal.

Key Evidence and Findings: The default notices issued in 2019 and 2020, dishonour of post-dated cheques due to insufficient funds, legal notices under the Negotiable Instruments Act, and admitted liability in replies to notices all established the existence of debt and default.

Application of Law to Facts: Given the admitted default and debt, the Tribunal applied the legal principles from the Supreme Court judgments mandating admission of Section 7 applications upon proof of default.

Treatment of Competing Arguments: The appellant's argument that payments were not due from the sold units but from future commercial units and new towers was rejected as it does not absolve the corporate debtor of its repayment obligation under the DTDs. The Tribunal emphasized that the liability to pay principal and interest cannot be negated on the basis of project account operations or delays in construction.

Conclusion: The Tribunal upheld the admission of Section 7 applications as the debt and default were established beyond dispute.

Issue 2: Effect of Project Completion Delays, Occupancy Certificate, and "Zero Period" on Liability

Relevant Legal Framework and Precedents: The timing of project completion or issuance of occupancy certificate does not affect the existence of financial debt or default under the IBC. The debt becomes due as per the terms of the DTD irrespective of project delays.

Court's Interpretation and Reasoning: The Tribunal observed that although the occupancy certificate was applied for in 2016 and received only in 2021, and a "zero period" was declared by the Town and Country Planning authority from November 2017 to September 2020, these facts do not relieve the corporate debtor of its repayment obligations. The Tribunal noted that the principal borrower failed to make any payment towards principal or interest for over five years.

Key Evidence and Findings: The admitted non-payment despite the extended timelines and additional financing in 2021 supported the Tribunal's conclusion that the delay in project completion was not a valid defense.

Application of Law to Facts: The Tribunal applied the principle that the existence of financial debt and default is independent of the reasons for non-payment. The debtor's inability or failure to complete the project on time does not negate the debt.

Treatment of Competing Arguments: The appellant's contention that the financial creditor's initiation of CIRP was motivated by a desire to take over the project land was dismissed as speculative and unsupported by evidence.

Conclusion: The delay in project completion and related factors do not affect the admission of the Section 7 application.

Issue 3: Control of Project Accounts by Debenture Trustee and Impact on Liability

Relevant Legal Framework and Precedents: The obligation to repay financial debt under the DTD remains with the corporate debtor regardless of the operation or control of project accounts by the debenture trustee. The Tribunal's prior judgment in a related case involving the same parties clarified that the constitution of a Project Managing Committee or control by the financial creditor does not absolve the debtor of repayment obligations.

Court's Interpretation and Reasoning: The Tribunal rejected the appellant's argument that since the debenture trustee controlled the RERA and escrow accounts, the corporate debtor was not liable for repayment. The Tribunal held that the liability to pay principal and interest arises from the debt contract and cannot be avoided by pointing to the manner of fund management.

Key Evidence and Findings: The Tribunal relied on the prior judgment in Sandeep Jain v. IDBI Trusteeship Services Ltd. & Anr., which held that the constitution of a Project Managing Committee with financial creditor members does not diminish the corporate debtor's obligation to repay.

Application of Law to Facts: The Tribunal applied the principle that operational control over project funds does not affect the contractual obligation to repay financial debt.

Treatment of Competing Arguments: The appellant's submission that no money was siphoned off by promoters and that payments were to be made only from future sales was rejected as irrelevant to the admitted default.

Conclusion: The control of project accounts by the debenture trustee does not absolve the corporate debtor from its repayment obligations under the DTD.

Issue 4: Allegation of Mala Fide Intent by Financial Creditor

Relevant Legal Framework and Precedents: The IBC mandates admission of Section 7 applications upon proof of default, regardless of the financial creditor's motives, unless there is clear evidence of mala fide intent or abuse of process.

Court's Interpretation and Reasoning: The Tribunal found no evidence to support the appellant's claim that the financial creditor initiated CIRP proceedings with a malicious intent to take over the project land. The admitted default and non-payment justified the initiation of CIRP.

Key Evidence and Findings: The consistent non-payment despite notices and invocation of guarantee, and the legal framework requiring admission upon default, negated the appellant's mala fide allegations.

Application of Law to Facts: The Tribunal applied the principle that the existence of debt and default is the determinative factor for admission, not the creditor's subjective intent.

Treatment of Competing Arguments: The appellant's argument was dismissed as speculative and unsupported by evidence.

Conclusion: No mala fide intent was found on the part of the financial creditor; admission of Section 7 applications was proper.

3. SIGNIFICANT HOLDINGS

- "The default in repayment of the obligation by obligors cannot in any manner be put on the financial creditor nor constitution of PMC in any manner affect the obligation or absolve the corporate debtor from its default for repayment of the debt."

- "In Section 7 application the Adjudicating Authority was obliged to determine whether default has occurred or whether debt was due as remained unpaid. The Hon'ble Supreme Court... held that if the adjudicating authority is of the opinion that a 'default' has occurred, it has to admit the application unless it is incomplete."

- "Once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7."

- "The liability to pay the principal and interest cannot be washed off on the ground that project accounts were to be operated by IDBI Trusteeship Services Ltd."

- The Tribunal dismissed the appeals, holding that the adjudicating authority did not err in admitting the Section 7 applications against both the principal borrower and the corporate guarantor, given the admitted debt and default.

Issues: (i) Whether the direction requiring the suspended directors to deposit the amount withdrawn during the moratorium, together with interest, could be reopened in the present appeal; (ii) Whether the appellants' continued non-cooperation justified the impugned directions and costs.

Issue (i): Whether the direction requiring the suspended directors to deposit the amount withdrawn during the moratorium, together with interest, could be reopened in the present appeal.

Analysis: The amount had already been directed to be deposited in earlier proceedings arising from withdrawal of corporate funds during the CIRP moratorium. That direction had attained finality, and the subsequent challenge over the same issue was held to be barred by res judicata. The prior order requiring deposit of the principal amount with interest had not been interfered with, and the liability to restore the amount to the corporate debtor remained undisturbed.

Conclusion: The challenge to the deposit direction was rejected and the issue was decided against the appellants.

Issue (ii): Whether the appellants' continued non-cooperation justified the impugned directions and costs.

Analysis: The record showed repeated failure to furnish documents and comply with earlier orders during CIRP and liquidation. The conduct was treated as persistent non-cooperation and defiance of lawful directions, and the present proceedings were characterised as frivolous and vexatious. In that backdrop, imposition of additional costs was considered warranted.

Conclusion: The finding of non-cooperation was upheld and the costs order was sustained against the appellants.

Final Conclusion: The appeal was found to be meritless, the impugned directions were maintained, and additional costs were imposed for abusive and repetitive litigation.

Ratio Decidendi: A direction to restore corporate funds withdrawn in violation of the moratorium, once final, cannot be reopened in a later appeal on the same issue, and persistent non-cooperation with insolvency proceedings may justify adverse costs.

The core legal questions considered by the Tribunal are:

• Whether allotments of residential units made by the Corporate Debtor ("CD") on 19.09.2019, the date of commencement of the Corporate Insolvency Resolution Process ("CIRP"), were valid and binding on the CD and the Appellants.
• Whether the Interim Resolution Professional ("IRP") had the authority to cancel such allotments made on the date of CIRP commencement without issuing any show-cause notice or adjudicatory proceedings.
• Whether the payments made by the Appellants towards the allotments, which were made several months after the CIRP commencement and in accounts other than the designated U.P. RERA bank accounts, could validate the allotments.
• Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC") prohibits any allotment or transfer of assets by the Suspended Management after the commencement of CIRP.
• Whether the IRP was required to initiate proceedings under Section 45 of the IBC for avoidance of undervalued transactions before cancelling the allotments.
• Whether the Appellants' claims of allotment and payments made could be sustained in view of the moratorium and the facts on record.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Allotments Made on 19.09.2019 (Date of CIRP Commencement)

Legal Framework and Precedents: The CIRP commencement date is critical as per the IBC, moratorium under Section 14(1) prohibits the transfer or disposal of assets by the Corporate Debtor without the prior approval of the IRP/RP or the Adjudicating Authority. Allotments made by the Suspended Management post commencement of CIRP are generally void ab initio. The authority to manage the affairs of the CD vests with the IRP from the date of CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal noted that the allotment letters dated 19.09.2019, the same day CIRP commenced, were issued by the Suspended Management without any approval or consent of the IRP. The Tribunal held that the Suspended Management had no authority to allot units on or after the date of CIRP commencement. The IRP's control over the CD's assets commenced on 19.09.2019, and any allotment on that date by the Suspended Management was invalid.

Key Evidence and Findings: The allotment letter for Unit No. E-2401 was dated 19.09.2019. The application for allotment was dated 20.08.2019, prior to CIRP commencement. However, the payment of booking amount was made only on 18.12.2019, nearly three months after CIRP commencement. The Tribunal found no evidence of payment on or before 19.09.2019. The Appellants failed to produce any receipt for the alleged cheque dated 01.09.2019, and the only payment receipt was for a cheque dated 16.12.2019, encashed on 18.12.2019. The payments were also made to bank accounts other than the designated U.P. RERA accounts specified in the allotment application.

Application of Law to Facts: The Tribunal applied the moratorium provisions and held that any allotment on 19.09.2019 by the Suspended Management was void as it contravened Section 14 of the IBC. The absence of payment on or before the date of allotment further invalidated the allotments. Payments made months later could not validate or ratify the allotments.

Treatment of Competing Arguments: The Appellants argued that the allotments were bonafide, supported by Builder Buyer Agreements and payments made subsequently. The IRP contended that allotments without payment and outside designated accounts were void. The Tribunal sided with the IRP, emphasizing the moratorium and the absence of payment at the relevant time.

Conclusion: The allotments dated 19.09.2019 were invalid and void ab initio, and payments made after CIRP commencement did not confer any right on the Appellants.

Authority of IRP to Cancel Allotments Without Adjudicatory Proceedings

Legal Framework and Precedents: The role of IRP/RP is primarily administrative and supervisory during CIRP. Adjudicatory powers, including declaring undervalued transactions void, lie with the Adjudicating Authority under Section 45 of the IBC. Cancellation of allotments by the IRP without adjudication may be challenged as beyond jurisdiction.

Court's Interpretation and Reasoning: The Tribunal clarified that the IRP did not exercise adjudicatory powers but acted within his duty to protect the assets of the CD under the moratorium. The IRP found the allotments to be unauthorized and void due to non-compliance with payment terms and moratorium provisions, and accordingly communicated cancellation to the Appellants. The IRP did not initiate any proceedings under Section 45 for undervalued transactions as the transaction was not consummated within the relevant period prior to CIRP commencement.

Key Evidence and Findings: The IRP's letter dated 10.09.2022 communicated cancellation citing the moratorium and undervaluation. The IRP's reply to the Applications confirmed no Section 45 proceedings were initiated. The Tribunal noted that the IRP's cancellation was a protective administrative act, not an adjudicatory decision.

Application of Law to Facts: The Tribunal held that the IRP was duty-bound to protect CD's assets and prevent unauthorized allotments. The cancellation letter was a communication of invalidity of allotments rather than an adjudication. Hence, the IRP acted within powers vested by the IBC and moratorium.

Treatment of Competing Arguments: The Appellants contended that cancellation without show-cause or adjudication was illegal. The IRP argued the cancellation was necessary to protect CD's assets and was not an adjudicatory act. The Tribunal accepted the IRP's position.

Conclusion: The IRP had authority to communicate cancellation of unauthorized allotments as part of asset protection duties during CIRP without initiating formal adjudicatory proceedings.

Effect of Payments Made After CIRP Commencement and in Non-Designated Accounts

Legal Framework and Precedents: Payments towards allotments must be made as per terms of the allotment agreement, including designated bank accounts. Payments made after CIRP commencement and outside designated accounts do not validate allotments made in breach of moratorium.

Court's Interpretation and Reasoning: The Tribunal found that payments by the Appellants were made between December 2019 and January 2020, well after CIRP commencement on 19.09.2019. Further, payments were made in bank accounts other than the specified U.P. RERA accounts. This non-compliance with payment terms rendered the allotments invalid.

Key Evidence and Findings: The payment receipts and ledger entries confirmed payments were made on dates post-dating CIRP commencement and to different bank accounts. The allotment application clearly stipulated payment to designated accounts only.

Application of Law to Facts: The Tribunal applied the moratorium and contractual terms to hold that payments made after CIRP commencement and in non-designated accounts could not validate or ratify the allotments purportedly made on the date of CIRP commencement.

Treatment of Competing Arguments: The Appellants argued payments and Builder Buyer Agreements evidenced valid allotments. The IRP contended payments were not made as per terms and were too late. The Tribunal upheld the IRP's view.

Conclusion: Payments made after CIRP commencement and outside designated accounts did not validate the allotments, which remained void.

Applicability of Section 45 of the IBC (Avoidance of Undervalued Transactions)

Legal Framework and Precedents: Section 45 of the IBC empowers the IRP or liquidator to apply to the Adjudicating Authority to declare undervalued transactions void if such transactions occurred during the relevant period prior to CIRP commencement. The look-back period is one year (or two years for related parties) before CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal observed that the alleged allotments were claimed to have occurred on the CIRP commencement date itself, i.e., 19.09.2019. Hence, they fall outside the look-back period contemplated under Section 45. The IRP did not initiate any Section 45 proceedings as the transactions were not consummated prior to CIRP commencement and thus Section 45 was inapplicable.

Key Evidence and Findings: The IRP's reply confirmed no investigation or application under Section 45 was initiated. The Tribunal also noted that the alleged undervaluation was one of the reasons cited in the cancellation letter but was not the basis for any formal proceedings.

Application of Law to Facts: Since the transactions were claimed to have occurred on the date of CIRP commencement, Section 45's look-back period was not triggered. Therefore, no mandatory proceedings under Section 45 were required or initiated.

Treatment of Competing Arguments: The Appellants contended that undervaluation should have been adjudicated under Section 45. The IRP maintained that Section 45 was not attracted. The Tribunal agreed with the IRP.

Conclusion: Section 45 was not applicable to the transactions alleged on the CIRP commencement date, and no error was committed by the IRP in not initiating proceedings thereunder.

Effect of Moratorium under Section 14 of the IBC

Legal Framework and Precedents: Section 14(1) imposes a moratorium on the institution or continuation of suits or proceedings against the CD and prohibits any transfer, disposal, or alienation of assets without IRP/RP or Adjudicating Authority approval from the date of CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal emphasized that the moratorium commenced on 19.09.2019, the same day the allotments were purportedly made. Therefore, any allotment or transfer of assets by the Suspended Management on or after that date was prohibited and void.

Key Evidence and Findings: The moratorium order was operative from 19.09.2019. The allotment letters were dated the same day, but payments were made later. The Tribunal found the allotments were made in violation of the moratorium.

Application of Law to Facts: The moratorium barred any allotment or transfer of assets by the Suspended Management on 19.09.2019 or thereafter. The allotments were therefore void.

Treatment of Competing Arguments: The Appellants argued that allotments were valid and payments made. The IRP argued moratorium barred such allotments. The Tribunal upheld the moratorium's effect.

Conclusion: The moratorium under Section 14 prohibited allotments on or after CIRP commencement, rendering the allotments void.

3. SIGNIFICANT HOLDINGS

"The allotment letters dated 19.09.2019, the same day CIRP commenced, were issued by the Suspended Management without any approval or consent of the IRP. The Suspended Management had no authority to allot units on or after the date of CIRP commencement."

"The IRP did not exercise adjudicatory powers but acted within his duty to protect the assets of the Corporate Debtor under the moratorium. The cancellation communicated to the Appellants was a protective administrative act and not an adjudicatory decision."

"Payments made by the Appellants towards allotments were made several months after CIRP commencement and in bank accounts other than the designated U.P. RERA accounts. Such payments could not validate or ratify allotments purportedly made on the date of CIRP commencement."

"Section 45 of the IBC, dealing with avoidance of undervalued transactions, is applicable only to transactions occurring during the relevant look-back period prior to CIRP commencement. Transactions alleged on the date of CIRP commencement do not attract Section 45."

"The moratorium under Section 14 of the IBC prohibits any transfer or allotment of assets by the Suspended Management on or after the date of CIRP commencement, rendering such allotments void."

"The Applications filed by the Appellants challenging the cancellation of allotments were rightly rejected by the Adjudicating Authority as the allotments were void ab initio and payments made were not in accordance with the terms and moratorium provisions."

- Whether liquidated damages deducted by the Respondent from invoices during the Corporate Insolvency Resolution Process (CIRP) period can be claimed back by the Successful Resolution Applicant after approval of the Resolution Plan.

- Whether the approved Resolution Plan, which provided for a 12-month extension for completion of ongoing projects, prohibits the Respondent from deducting liquidated damages from the Corporate Debtor's invoices.

- Whether the extinguishment of claims under the Resolution Plan applies to liquidated damages deducted during the CIRP period but not claimed prior to CIRP.

- The applicability and distinction of precedents, particularly the judgment in Indian Oil Corporation Ltd. vs. Manjeet Cotton Pvt. Ltd., concerning extinguishment of claims and liquidated damages in the context of CIRP and Resolution Plans.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether liquidated damages deducted during CIRP can be reclaimed by the Successful Resolution Applicant post-approval of the Resolution Plan.

The legal framework governing this issue is primarily the Insolvency and Bankruptcy Code (IBC), which mandates that claims existing as on the date of approval of the Resolution Plan stand extinguished, and the Resolution Plan binds all stakeholders. The question arises whether liquidated damages deducted during the CIRP period, but not claimed prior to CIRP, fall within this extinguishment.

The Court noted that the liquidated damages in question were deducted pursuant to the terms and conditions of the Purchase Orders issued by the Respondent, which formed part of the running contract. The Resolution Professional had continued the contract during the CIRP on the same terms and conditions. The deduction of liquidated damages was in accordance with contractual provisions for delay penalties.

Key evidence included the absence of any claim for liquidated damages filed by the Respondent prior to or during the CIRP, and the fact that liquidated damages deducted after approval of the Resolution Plan had already been refunded to the Successful Resolution Applicant (amounting to Rs.31,67,727.69/-).

The Court applied the principle that the Resolution Plan extinguishes claims existing as of its approval date but does not affect contractual deductions made during the CIRP period in accordance with the contract terms. Since no claim was pending or filed, and liquidated damages were deducted as per contract, the Successful Resolution Applicant was not entitled to refund of such deductions.

The Court rejected the argument that the extension of 12 months granted by the Resolution Plan implied prohibition on deduction of liquidated damages. The extension was for completion of the project and did not negate the contractual right to liquidated damages for delay.

The competing argument that all claims stand extinguished post-Resolution Plan was addressed by distinguishing between claims admitted and dealt with in the Resolution Plan and deductions made during the contract period under contractual terms without any claim filed.

Conclusion: Liquidated damages deducted during the CIRP period as per contract terms cannot be reclaimed by the Successful Resolution Applicant after approval of the Resolution Plan.

Issue 2: Whether the approved Resolution Plan's provision for 12 months extension bars deduction of liquidated damages.

The Resolution Plan explicitly provided for a 12-month extension for completion of ongoing projects. The Appellant contended that this extension precluded any deduction of liquidated damages from invoices.

The Respondent argued that the extension was merely for completion of the project and did not affect the contractual provisions for liquidated damages for delay. The Court agreed with the Respondent, observing that granting extension of time does not imply waiver of liquidated damages for delays that occurred prior to or during the extension period.

The Court found that the extension period was to allow completion but did not absolve the Corporate Debtor or Successful Resolution Applicant from contractual liabilities such as liquidated damages for delays.

Conclusion: The 12-month extension under the Resolution Plan does not bar deduction of liquidated damages as per the contract terms.

Issue 3: Applicability and distinction of precedents, particularly the Indian Oil Corporation Ltd. judgment.

The Appellant relied heavily on the Tribunal's judgment in Indian Oil Corporation Ltd. vs. Manjeet Cotton Pvt. Ltd., where the Tribunal held that all claims, liquidated damages, advances, and interest up to the date of approval of the Resolution Plan stood extinguished and could not be agitated thereafter.

The Court analyzed the facts and distinguished the present case on critical grounds:

• In Indian Oil Corporation Ltd., the claim of liquidated damages was admitted by the Resolution Professional and explicitly dealt with in the Resolution Plan.
• In the present case, no claim for liquidated damages existed prior to or at the time of approval of the Resolution Plan, and none was filed by the Respondent.
• The liquidated damages deducted were pursuant to the contract terms during the CIRP period and not a pre-existing claim extinguished by the Resolution Plan.
• The Indian Oil case also involved an explicit prohibition on initiating proceedings for claims covered by the Resolution Plan, whereas here no such claim was pending or extinguished.

The Court further noted that the Adjudicating Authority had already refunded liquidated damages deducted after approval of the Resolution Plan, reinforcing that the Resolution Plan's extinguishment applies only to claims existing as of its approval date.

Conclusion: The precedent relied upon by the Appellant is distinguishable and does not support refund of liquidated damages deducted during the CIRP period under contractual terms.

3. SIGNIFICANT HOLDINGS

"The reliance on the approved Resolution Plan regarding extinguishment of the claim has no effect on the liquidated damages which were already deducted by Hindustan Petroleum Corporation Limited from the invoices as per the terms and conditions of the Purchase Order."

"Extension of 12 months is extension for completion of the work and liquidated damages deducted after 16.11.2021 has already been refunded."

"The Resolution Plan only extinguishes the claims that were subsisting on the day of Resolution Plan. No claim of Respondent was subsisting on the day of Resolution Plan, hence, there is no question of any extinguishment."

"The order passed in IA/303 is distinguishable on one more aspect. The IOCL, in that case, had issued a letter cautioning initiation of proceedings against 'the Resolution Applicant to recover its claim against which this Tribunal held that the 'said claim has been duly treated in the Resolution Plan and IOCL cannot initiate any proceedings in respect to such claims.'"

Core principles established include:

• Claims and liabilities existing as on the date of approval of the Resolution Plan stand extinguished, but deductions made under contractual terms during the CIRP period without any claim filed are not affected.
• Extension of time granted by a Resolution Plan for completion of projects does not negate contractual provisions for liquidated damages for delay.
• Successful Resolution Applicant cannot claim refund of liquidated damages deducted during CIRP period in accordance with contract terms where no claim was admitted or included in the Resolution Plan.
• Precedents concerning extinguishment of claims under the Resolution Plan apply only to claims admitted and dealt with in the Plan, and are distinguishable from contractual deductions made during CIRP.

Final determination: The Adjudicating Authority rightly rejected the application seeking refund of liquidated damages deducted during the CIRP period. The Appeal lacks merit and is dismissed.

- Whether the transfer of two Flats (Nos.903 and 904) by the Corporate Debtor (CD) in favor of the Appellants was a fraudulent transaction under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016.

- Whether the Adjudicating Authority was justified in declaring the sale deeds void and subject to charge, and in directing the Appellants to contribute to the assets of the CD.

- Whether the payments made by the CD to the Appellants as consultancy charges were bona fide or fraudulent transactions.

- The applicability and scope of Section 66 of the IBC, particularly regarding the power of the Adjudicating Authority to declare transactions void and to fix liabilities on persons knowingly party to fraudulent business conduct.

- The relevance and impact of prior rejection of claims by the Resolution Professional (RP) in the CIRP of a related company on the present proceedings.

- The extent and nature of liability of the Appellants, including the effect of their loan arrangements with lenders and ongoing repayment obligations.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the transfer of Flats was a fraudulent transaction under Section 66 IBC

Relevant legal framework and precedents: Section 66(1) of the IBC empowers the Adjudicating Authority to pass orders against persons knowingly party to carrying on the business of the CD with intent to defraud creditors or for any fraudulent purpose, making them liable to contribute to the assets of the CD. The Tribunal's prior decisions in Royal India Corporation Ltd. and Tridhaatu Kiriti Developers LLP were cited to support the broad scope of Section 66(1) to include persons beyond directors or partners.

Court's interpretation and reasoning: The Court noted that the sale of Flats was effected by registered sale deeds dated 21.08.2017 at a consideration of Rs.69,00,000/- each. The Appellants took loans amounting to Rs.55,20,000/- each from Bharat Co-operative Bank, which was disbursed directly into the CD's account. The Appellants have been servicing these loans continuously. The Court found that mere transfer of loan proceeds from the CD to a related company (Sangeeta Tex Dyes Pvt. Ltd.) where relatives of the Appellants are directors does not, per se, establish fraudulent intent in the sale transaction.

Key evidence and findings: The Appellants deposited earnest money and TDS, and the balance payments were made over 2017-2019. The Adjudicating Authority had expressed doubts about consultancy charges paid to the Appellants but did not find the sale consideration itself fraudulent. The RP's claim that amounts were transferred to a related company was not sufficient to characterize the sale as fraudulent.

Application of law to facts: The Court held that the sale transaction was supported by consideration, loan arrangements, and continuous repayment by the Appellants, and thus could not be declared void as fraudulent under Section 66(1). The Court relied on the Tripura High Court judgment in Sudipa Nath, which clarified that Section 66(1) does not confer jurisdiction to declare transactions void but to fix liabilities on persons responsible for fraudulent conduct.

Treatment of competing arguments: The Respondent argued that the sale was a facade to siphon off funds and that the Appellants were related parties whose transactions should be scrutinized strictly. The Appellants contended that the loan was bona fide and the sale valid. The Court gave weight to the bona fide nature of the loan and sale consideration, rejecting the Respondent's argument that the sale itself was fraudulent.

Conclusion: The Court set aside the Adjudicating Authority's declaration of the sale deeds as void but maintained scrutiny over the consultancy charges.

Issue 2: Whether the payments made as consultancy charges to the Appellants were bona fide or fraudulent

Relevant legal framework and precedents: Section 66(1) allows the Adjudicating Authority to hold persons liable who were knowingly parties to fraudulent business conduct. The absence of evidence supporting the legitimacy of payments can indicate fraudulent transactions.

Court's interpretation and reasoning: The Adjudicating Authority found that the Appellants failed to plead or demonstrate what consultancy services were rendered to the CD to justify payments of Rs.13,74,000/- and Rs.13,80,000/- respectively. The payments were made after the sale transactions and appeared to be a mechanism to adjust the balance sale consideration.

Key evidence and findings: The Adjudicating Authority noted the lack of material evidence on record regarding the consultancy services. The payments were credited towards the balance consideration, raising suspicion of a sham transaction designed to siphon off funds.

Application of law to facts: The Court upheld the Adjudicating Authority's finding that these consultancy charges were not bona fide transactions and were liable to be treated as fraudulent under Section 66(1).

Treatment of competing arguments: The Appellants did not provide any substantiation for the consultancy charges. The Respondent emphasized the lack of proof and the suspicious timing and nature of payments. The Court sided with the Respondent on this issue.

Conclusion: The Court upheld the direction that the Appellants must contribute the amounts equivalent to the consultancy charges back to the CD's assets.

Issue 3: The scope and effect of Section 66 of the IBC and the power of the Adjudicating Authority

Relevant legal framework and precedents: Section 66(1) empowers the Adjudicating Authority to hold persons liable to contribute to the assets of the CD if found knowingly party to fraudulent business conduct. The Tripura High Court in Sudipa Nath clarified that Section 66(1) does not empower the Adjudicating Authority to declare transactions void but to fix liabilities.

Court's interpretation and reasoning: The Court agreed with the Tripura High Court's interpretation that the jurisdiction under Section 66(1) is limited to fixing personal liabilities and does not extend to voiding sale deeds or transactions outright. The Court also referred to the Supreme Court's judgment in Gluckrich Capital Pvt. Ltd., which emphasized that civil remedies for recovery from third parties are independent and not available under Section 66.

Key evidence and findings: The Adjudicating Authority's declaration of the sale deeds as void was found to exceed its jurisdiction under Section 66(1). However, its direction for contribution regarding fraudulent consultancy payments was within scope.

Application of law to facts: The Court modified the impugned order to set aside the declaration of the sale deeds as void but upheld the contribution order regarding consultancy charges.

Treatment of competing arguments: The Appellants relied on the Tripura High Court and Supreme Court judgments to argue for limitation of the Adjudicating Authority's powers. The Respondent argued for a broad interpretation to include voiding transactions. The Court adopted the narrower interpretation consistent with the legislative intent and judicial precedents.

Conclusion: The Adjudicating Authority's power under Section 66(1) does not extend to declaring sale deeds void but can impose liability to contribute to the CD's assets for fraudulent transactions.

Issue 4: Impact of RP's claim rejection in CIRP of related company on current proceedings

Relevant legal framework and precedents: The RP's rejection of claims in the CIRP of Sangeeta Tex Dyes Pvt. Ltd. was argued by the Appellants to negate the present allegations. However, the Respondent contended that such rejection does not bar action under Sections 66 and 67 of the IBC.

Court's interpretation and reasoning: The Court held that the rejection of claims in a different CIRP does not preclude the RP from initiating proceedings under Section 66 in the present CIRP. The allegations and evidence must be considered independently.

Key evidence and findings: The RP's failure to prove claims in the other CIRP was not determinative of the present application alleging fraudulent transactions.

Application of law to facts: The Court found no merit in the Appellants' argument that the prior claim rejection barred the present proceedings.

Treatment of competing arguments: The Court favored the Respondent's position that separate proceedings and evidence are relevant for each CIRP.

Conclusion: The prior claim rejection does not affect the Adjudicating Authority's jurisdiction or findings in the present matter.

Issue 5: Liability of Appellants in light of loan arrangements and ongoing repayments

Relevant legal framework and precedents: The Appellants took loans from a bank, which were disbursed to the CD's account, and have been repaying them. The liability to repay loans and the bona fide nature of such financial arrangements are relevant to assessing fraudulent intent.

Court's interpretation and reasoning: The Court observed that the loans were taken by the Appellants and the amounts were credited to the CD's account, establishing a legitimate financial transaction. Continuous repayment by the Appellants further supports the bona fide nature of the sale.

Key evidence and findings: Loan sanction letters, disbursement records, and repayment history were considered. The Court found no evidence that the loan transactions were a sham or part of fraudulent conduct.

Application of law to facts: The Court held that the Appellants' loan arrangements and repayments negate the characterization of the sale transaction as fraudulent.

Treatment of competing arguments: The Respondent's argument that the loan amount was diverted post receipt was not sufficient to override the bona fide loan and repayment facts.

Conclusion: The Appellants' liability under the loan agreements remains valid and does not constitute fraudulent conduct under Section 66.

3. SIGNIFICANT HOLDINGS

- "Section 66(1) contemplates an application thereunder only by the resolution professional and by none other. Section 66(1) also restricts the power of NCLT subject to being satisfy with pre-requisite that any business of the corporate debtor has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the corporate debtor with mens rea to make them personally liable to make such contributions to the assets of the corporate debtor as it may deem fit." (Tripura High Court, Sudipa Nath)

- "The sale transaction in favour of the Appellants could not have been declared void. The sale was made and consideration amount was received in the account of the CD and after receiving the amount, it was transferred. Mere transfer of amount to a related company does not lead to a conclusion of fraudulent sale."

- "To the extent of consultancy charges of Rs. 13,74,000/- to Mrs. Sangeeta Mehta and Rs. 13,80,000/- to Mr. Divyank Jatinder Mehta cannot be said to be a bona-fide transaction and are liable to be treated as fraudulent."

- "The Adjudicating Authority's power under Section 66(1) does not extend to declaring sale deeds void but can impose liability to contribute to the CD's assets for fraudulent transactions."

- "The remedy against third party for recovery of dues payable to corporate debtor is not available under Section 66 of IBC, and civil remedies which may be available in law are independent of the said Section." (Supreme Court, Gluckrich Capital Pvt. Ltd.)

- The Appellants are directed to deposit the amounts equivalent to the consultancy charges within 30 days, while the declaration of the sale deeds as void is set aside.

The core legal questions considered by the Tribunal were:

1. Whether the Company Petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") was barred by limitation, considering the default date alleged and the date of filing.

2. Whether the acknowledgment of debt in the Corporate Debtor's financial statements and orders passed by the Uttar Pradesh Real Estate Regulatory Authority ("UPRERA") extended the limitation period under the Limitation Act, 1963.

3. Whether the Respondents (homebuyers/allottees) satisfied the statutory threshold under the second proviso to Section 7(1) of the IBC for initiating Corporate Insolvency Resolution Process ("CIRP") against a real estate developer.

4. Whether the Respondents who had obtained Recovery Certificates ("RC") or decrees under the RERA Act ceased to be financial creditors and thus were ineligible to file the Company Petition under Section 7.

5. Whether the Company Petition was instituted fraudulently or with malicious intent, warranting penal action under Section 65 of the IBC.

6. Whether the conversion of the partnership firm into the Corporate Debtor company absolved the latter of pre-existing liabilities and obligations.

7. Whether the Adjudicating Authority erred in admitting the Company Petition without proper consideration of the factual and legal contentions raised by the Appellant-Corporate Debtor.

Issue-wise Detailed Analysis

1. Limitation of the Company Petition

Legal Framework and Precedents: The limitation period for filing a petition under Section 7 of the IBC is governed by the Limitation Act, 1963. Section 22 of the Limitation Act provides that in cases of continuing breaches, limitation runs afresh with each successive default. Section 18 of the Limitation Act allows extension of limitation where there is an acknowledgment of liability. The Supreme Court judgments in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal and related cases emphasize that entries in the balance sheet may amount to acknowledgment of debt, but such acknowledgment must be unequivocal and free from caveats.

Court's Reasoning and Findings: The Tribunal noted that the default date alleged was 10.12.2015, while the petition was filed on 12.01.2024, nearly eight years later. However, the Tribunal observed that the Corporate Debtor's failure to deliver possession and refund amounts constituted a continuing default under Section 22 of the Limitation Act. Further, the Corporate Debtor acknowledged the outstanding amounts in its balance sheet dated 30.06.2022 without any caveats, thereby extending the limitation period under Section 18. The Tribunal also factored in the Supreme Court's suo moto extension of limitation due to the COVID-19 pandemic, which excluded the period from 15.03.2020 to 31.05.2022 from limitation calculation.

The Tribunal distinguished the Appellant's reliance on judgments that required strict pleadings on limitation, noting that the Company Petition clearly mentioned continuing default and attached relevant documents, including the RERA orders and balance sheet entries. The Tribunal held that limitation is a mixed question of law and fact and can be adjudicated even without specific pleadings on limitation, citing Sesh Nath Singh vs Baidyabati Sheoraphuli Co Operative.

Application of Law to Facts: The continuing default, acknowledgment in balance sheets, and regulatory orders collectively established that the petition was within limitation. The Appellant's contention that the accounts filed with UPRERA did not amount to acknowledgment was rejected as the financial statements were found to be unqualified acknowledgments.

Conclusion: The Company Petition was not barred by limitation.

2. Threshold Requirement under Section 7(1) of the IBC

Legal Framework and Precedents: The second proviso to Section 7(1) requires that for a real estate developer, at least 100 allottees or 10% of the total allottees (whichever is lower) must file the application. The Supreme Court in Vishal Chelani v. Debashis Nanda clarified that allottees who become decree holders under RERA remain financial creditors for IBC purposes.

Court's Reasoning and Findings: The project comprised 247 units, and the Respondents collectively held 34 units, satisfying the threshold. The Appellant's claim that certain allotments were forged or fully repaid was not substantiated with credible evidence. The Tribunal noted that even excluding disputed units, the remaining units met the threshold. The Tribunal also rejected the contention that allottees with recovery certificates ceased to be financial creditors, relying on the Supreme Court's and this Tribunal's recent rulings.

Application of Law to Facts: The Respondents met the statutory threshold. The Corporate Debtor's balance sheet continued to reflect outstanding deposits, corroborating the existence of debt.

Conclusion: The statutory threshold requirement under Section 7(1) was satisfied.

3. Status of Recovery Certificate Holders as Financial Creditors

Legal Framework and Precedents: Section 5(8)(f) of the IBC defines financial creditors to include allottees. The Supreme Court in Vishal Chelani held that allottees who obtain recovery certificates under RERA remain financial creditors. This was reaffirmed by this Tribunal in Rahul Gyanchandani & Ors. v. Parsvnath Landmark Developers Pvt. Ltd.

Court's Reasoning and Findings: The Tribunal held that obtaining recovery certificates or decrees under RERA does not alter the status of allottees as financial creditors. The Corporate Debtor's argument that such persons are not eligible to initiate proceedings under Section 7 was rejected.

Application of Law to Facts: The Respondents, including those holding recovery certificates, were financial creditors entitled to initiate CIRP.

Conclusion: Recovery certificate holders remained financial creditors under the IBC.

4. Allegations of Fraud and Malicious Intent under Section 65 of the IBC

Legal Framework and Precedents: Section 65 penalizes initiation of CIRP with fraudulent or malicious intent. The burden of proof lies on the party alleging such intent. The Tribunal in Monotrone Leasing Pvt. Ltd. v. PM Cold Storage Private Ltd. held that penal action requires substantial evidence of fraud or ulterior motive.

Court's Reasoning and Findings: The Appellant alleged forgery, suppression of facts, and that some allottees were speculative investors or had withdrawn from the project. However, the Tribunal found no documentary evidence substantiating fraudulent or malicious intent. The Adjudicating Authority had already rejected these claims after detailed examination. Even excluding disputed allottees, the remaining applicants met the threshold. The Tribunal emphasized the summary nature of IBC proceedings and the high standard of proof required for penal action.

Application of Law to Facts: The allegations were unsubstantiated and insufficient to invoke Section 65.

Conclusion: No fraud or malicious intent was established; thus, no penal action was warranted.

5. Effect of Conversion of Partnership Firm into Corporate Debtor Company

Legal Framework: Sections 369 and 370 of the Companies Act, 2013 provide that registration of a company by conversion does not affect existing liabilities or pending legal proceedings. The company continues to bear all pre-existing debts and obligations.

Court's Reasoning and Findings: The Corporate Debtor was incorporated by conversion of the partnership firm M/s Nikhil Associates. The Tribunal held that this conversion did not absolve the Corporate Debtor of liabilities. The Statement of Affairs filed post-conversion correctly reflected outstanding liabilities, including those to the allottees.

Application of Law to Facts: The Corporate Debtor remained liable for all pre-existing debts and obligations.

Conclusion: Conversion did not affect the Corporate Debtor's liabilities or the maintainability of the petition.

6. Adjudicating Authority's Admission of the Company Petition

Court's Reasoning and Findings: The Tribunal found no infirmity in the Adjudicating Authority's order admitting the petition. The Authority had comprehensively considered limitation, threshold, allegations of fraud, and the status of recovery certificate holders. It had found the petition within limitation, the applicants genuine financial creditors, and no evidence of malafide intent.

Application of Law to Facts: The Adjudicating Authority's findings were supported by evidence and legal principles.

Conclusion: The admission order was upheld.

Significant Holdings

"As the outstanding deposits from the Applicant Financial Creditors against the flats booked by them have been acknowledged by the Respondent Corporate Debtor in its Balance Sheet as recently as up to 30.06.2022, the present Application filed on 19.01.2024 is found to have been filed within limitation period even as per section 18 of the Limitation Act, 1961."

"The Corporate Debtor cannot evade its pre-existing commitments by merely undergoing a change in its legal structure. The principles enshrined in Section 369 reaffirm that the entity continues to bear the same financial and contractual responsibilities, and the present proceedings must be adjudicated considering the continuity of obligations post-conversion."

"Section 65 of the Code provides for penal action for initiating Insolvency Resolution Process with a fraudulent or malicious intent for any purpose other than for the resolution. However, the same cannot be construed to mean that if a petition is filed under Section 7, 9 or 10 of the Code without any malicious or fraudulent intent, then also such a petition can be rejected by the Adjudicating Authority on the ground that the intent of the Applicant/Petitioner was not resolution for Corporate Insolvency Resolution Process."

"The mere fact that some applicants may have obtained recovery certificates does not preclude them from initiating proceedings under the Code, as long as the fundamental criteria of 'debt' and 'default' are satisfied."

"The Company Petition was filed within the limitation period as the default was continuing, and the Corporate Debtor had acknowledged the debt in the balance sheet, thereby extending limitation under Section 18 of the Limitation Act."

"The statutory threshold prescribed under the second proviso to Section 7(1) of the Code was satisfied by the Respondents, and the objections regarding eligibility of certain allottees were without merit."

Final Determinations

The Tribunal dismissed the appeal and upheld the Adjudicating Authority's order admitting the Company Petition under Section 7 of the IBC. It held that:

• The petition was not barred by limitation due to continuing default and acknowledgment of debt.
• The Respondents satisfied the statutory threshold to initiate CIRP.
• Recovery certificate holders remain financial creditors for IBC purposes.
• No fraud or malicious intent was established to invoke Section 65 penalties.
• The Corporate Debtor remained liable for pre-existing debts despite conversion.
• The Adjudicating Authority did not err in admitting the petition and initiating CIRP.

Issues: (i) Whether the Section 9 application based on alleged operational debt was maintainable when the record indicated personal and matrimonial disputes, collusion, and doubts about the genuineness of the invoices and purchase orders; (ii) Whether the imposition of costs for filing a frivolous and motivated petition was justified.

Issue (i): Whether the Section 9 application based on alleged operational debt was maintainable when the record indicated personal and matrimonial disputes, collusion, and doubts about the genuineness of the invoices and purchase orders.

Analysis: The appeal was assessed against the statutory scheme governing operational insolvency, including the requirement of a debt, default, and absence of a qualifying dispute under the Code. The record showed a close nexus between the parties, overlap in management and access to company records, and surrounding matrimonial and shareholder disputes. The Tribunal also relied on admissions and surrounding circumstances suggesting that the transaction record, invoices, and purchase orders were not free from doubt and that the proceeding was being used to advance personal grievances rather than to pursue genuine insolvency resolution.

Conclusion: The Section 9 application was not fit for admission and the challenge to the dismissal failed.

Issue (ii): Whether the imposition of costs for filing a frivolous and motivated petition was justified.

Analysis: Once the Tribunal concluded that the petition was filed in the backdrop of personal disputes and with an ulterior motive, the award of costs followed as a consequence of the finding that the proceeding was an abuse of the insolvency process.

Conclusion: The cost order was upheld.

Final Conclusion: The insolvency proceeding was treated as an impermissible attempt to convert a private dispute into corporate insolvency litigation, and the dismissal of the appeal left the impugned order intact.

Ratio Decidendi: A Section 9 application is liable to be rejected where the materials show that the alleged debt is entangled with a collusive or ulterior dispute and the insolvency process is being invoked as an instrument of personal vendetta rather than genuine debt resolution.

Issues: (i) Whether the notice invoking the guarantee was duly served on the personal guarantor despite being sent to an address different from the one stated in the guarantee deed; (ii) Whether the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 was within limitation in view of the alleged acknowledgements in the balance sheets.

Issue (i): Whether the notice invoking the guarantee was duly served on the personal guarantor despite being sent to an address different from the one stated in the guarantee deed.

Analysis: The guarantor did not specifically deny receipt of the notice dated 16 January 2017. The objection was confined to the address used for service. The same address was also used for the subsequent notice under Rule 7 of the 2019 Rules, which was received by hand. In the absence of a categorical denial of receipt, and in light of the surrounding circumstances, service of the invocation notice was treated as duly effected.

Conclusion: The notice invoking the guarantee was held to have been duly received by the appellant.

Issue (ii): Whether the application under Section 95 of the Insolvency and Bankruptcy Code, 2016 was within limitation in view of the alleged acknowledgements in the balance sheets.

Analysis: The default date was treated as 31 January 2017, but the limitation period was held to have been extended by acknowledgements made in the balance sheets during the subsistence of limitation. The guarantee deed itself provided that acknowledgements by the borrower would bind the guarantor. Since acknowledgements in writing attract Section 18 of the Limitation Act, 1963, each valid acknowledgement gave rise to a fresh period of limitation. The application was therefore not treated as time-barred.

Conclusion: The application under Section 95 was held to be within limitation.

Final Conclusion: The impugned order was affirmed and the challenge failed on both service and limitation.

Ratio Decidendi: A personal guarantor cannot avoid service of an invocation notice by a mere technical objection to the address when receipt is not specifically denied, and a written acknowledgement of debt in balance sheets, made within the limitation period, extends limitation under Section 18 of the Limitation Act, 1963 and binds the guarantor where the guarantee deed so provides.

Issues: (i) Whether the performance bank guarantee and earnest money could be invoked and forfeited on the successful resolution applicant's failure to implement the approved resolution plan; (ii) Whether alleged non-disclosure of the transaction audit report and allegedly incorrect financial information made the resolution plan implementation voidable; (iii) Whether the refund of the amount infused by the successful resolution applicant, including interest, was sustainable; (iv) Whether the interim trade creditors' unpaid dues incurred during the period of the former successful resolution applicant's control were payable from the fixed deposit amount; (v) Whether the CoC's claim for compensation and damages in the bank's application was maintainable.

Issue (i): Whether the performance bank guarantee and earnest money could be invoked and forfeited on the successful resolution applicant's failure to implement the approved resolution plan.

Analysis: The process memorandum expressly provided that the performance guarantee would remain alive until implementation of the successful resolution plan and could be invoked for breach of the letter of intent or resolution plan, including failure to implement the plan to the satisfaction of the CoC. It also prohibited set-off of the performance guarantee against the consideration payable under the plan. The record showed repeated defaults and non-implementation by the successful resolution applicant, and the CoC invoked the guarantee in accordance with the contractual framework.

Conclusion: The invocation and forfeiture of the performance bank guarantee and earnest money were valid and sustainable, in favour of the CoC and against the successful resolution applicant.

Issue (ii): Whether alleged non-disclosure of the transaction audit report and allegedly incorrect financial information made the resolution plan implementation voidable.

Analysis: The relevant information duty under section 29 and Regulation 36(2) covered material information necessary for formulation of the resolution plan, but did not, at the relevant time, require sharing of the transaction audit report or avoidance application materials with the resolution applicant. The applicant had access to the information memorandum and virtual data room, was expected to conduct its own due diligence, and the plan itself acknowledged the risk of inadequacy or error in the information supplied. The applicant was also aware that avoidance proceedings were contemplated, as reflected in the CoC meeting and in the plan's provision for related costs. The alleged non-disclosure did not render performance voidable.

Conclusion: The challenge based on non-disclosure failed, and the successful resolution applicant could not avoid implementation on that ground.

Issue (iii): Whether the refund of the amount infused by the successful resolution applicant, including interest, was sustainable.

Analysis: The amount sought to be refunded comprised different components, but the performance guarantee and earnest money were not part of the equity infusion and could not be treated as set-off against the equity commitment. The applicant had not completed the required equity infusion under the resolution plan, and section 42(6) of the Companies Act, 2013 did not govern the consequences of non-compliance with a resolution plan. However, the amount of Rs. 38.2 crores, with accrued interest standing at Rs. 42.99 crores in fixed deposit, remained available for appropriate adjustment after payment of legitimate dues of interim trade creditors.

Conclusion: Refund of the entire Rs. 93.82 crores was not sustainable; only the balance remaining after meeting the interim trade creditors' dues was refundable, in favour of the successful resolution applicant only to that limited extent.

Issue (iv): Whether the interim trade creditors' unpaid dues incurred during the period of the former successful resolution applicant's control were payable from the fixed deposit amount.

Analysis: The liabilities were created during the period when the corporate debtor was under the former successful resolution applicant's management. The approval order of the later resolution plan had specifically recorded the unpaid balance of about Rs. 20.9 crores and directed that the fixed deposit of Rs. 42.99 crores be retained intact and abide by further orders. The Adjudicating Authority's refusal to decide the claim on the ground that it had to be pursued in some other proceeding was incorrect, because the claim arose in the same CIRP framework and the RP had already recognised the outstanding liability.

Conclusion: The interim trade creditors were entitled to payment of their outstanding dues of Rs. 20.9 crores, with interest earned, from the fixed deposit amount, in favour of the interim trade creditors.

Issue (v): Whether the CoC's claim for compensation and damages in the bank's application was maintainable.

Analysis: The application sought compensation, interest, litigation costs, and other damages for alleged non-implementation of the plan. While the CoC could seek relief contemplated by the process documents and insolvency framework, the Adjudicating Authority could not, in this proceeding, adjudicate unliquidated compensation and damages as a general claim for damages under section 60(5)(c) of the Code. The rejection of the application was therefore upheld, though the reason assigned below was not fully accepted.

Conclusion: The CoC's claim for compensation and damages was not entertained as a standalone damages claim, and the rejection of that application was upheld.

Final Conclusion: The impugned order was modified in part. The forfeiture of the performance bank guarantee and earnest money was upheld, the interim trade creditors were granted payment from the fixed deposit, the blanket refund of the full amount to the successful resolution applicant was set aside, and the compensation claim application of the CoC was not granted.

Ratio Decidendi: A successful resolution applicant is bound by the approved resolution plan and the governing process memorandum, cannot set off or reclaim the performance guarantee as part of its plan consideration, cannot avoid implementation on the basis of alleged non-disclosure that was not statutorily required to be shared at the relevant time, and liabilities created during its control of the corporate debtor may be directed to be satisfied from funds preserved for that purpose in the CIRP.

- Whether the adjudicating authority was justified in directing the replacement of the Resolution Professional (RP) prior to completion of the land survey and without deciding the pending application for replacement (I.A. No. 524/KB/2025).

- Whether the direction for conducting a land survey to ascertain the correct extent of land, factory premises, and location of plant and machinery of the corporate debtor was appropriate and justified.

- Whether the challenge process in the Corporate Insolvency Resolution Process (CIRP) should remain stayed pending the land survey and decision on the RP replacement application.

- Whether the appeals filed by the Resolution Professional and Committee of Creditors against the impugned order dated 09.04.2025 are maintainable and sustainable in law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for directing replacement of the Resolution Professional prior to completion of land survey and decision on pending application

Relevant legal framework and precedents: Under the Insolvency and Bankruptcy Code (IBC), the replacement of an RP is governed by the adjudicating authority's discretion based on conduct and performance. The RP is entrusted with managing the CIRP and is expected to act in accordance with the information available and the records of the corporate debtor. The procedure for replacement involves filing an interlocutory application and hearing the parties before passing any order.

Court's interpretation and reasoning: The Tribunal noted that the application for replacement of the RP (I.A. No. 524/KB/2025) was pending and listed for hearing on 22.04.2025. The RP had already filed a reply asserting that the information in the information memorandum was based on the corporate debtor's records and that the issue was yet to be adjudicated. The Tribunal observed that the adjudicating authority's direction in paragraph 44 of the impugned order to replace the RP within one week was premature, as the pending application for replacement had not yet been decided. Further, the Tribunal opined that the replacement should be considered only after the completion of the land survey, which was crucial to ascertain the facts relevant to the RP's conduct.

Key evidence and findings: The Tribunal relied on the fact that the RP had responded to the replacement application and that the land survey had been directed but not yet completed. The conduct of the RP, as alleged, was intertwined with the accuracy of the information memorandum, which in turn depended on the land survey results.

Application of law to facts: The Tribunal applied the principle of natural justice and procedural propriety by holding that an order for replacement of the RP should not be passed without hearing the parties and before the material facts (land survey report) were available. It emphasized that the adjudicating authority's direction to replace the RP was not sustainable at this stage.

Treatment of competing arguments: The RP argued that the information memorandum was prepared as per records and the replacement application was pending adjudication. The Committee of Creditors (CoC) initially sought replacement but later decided not to replace the RP and preferred to challenge the order directing replacement. The Tribunal balanced these positions by deferring the replacement decision until after the land survey and hearing of the pending application.

Conclusions: The Tribunal concluded that the direction to replace the RP prematurely was not justified and should be reconsidered after the land survey and hearing of the replacement application.

Issue 2: Appropriateness of directing a land survey to ascertain correct extent of land and plant and machinery location

Relevant legal framework and precedents: The CIRP requires accurate and complete disclosure of the corporate debtor's assets for proper resolution. The information memorandum must reflect the true extent of assets, including land and machinery, to enable resolution applicants to make informed decisions. The adjudicating authority has the power to direct investigations or surveys to ascertain facts relevant to the CIRP.

Court's interpretation and reasoning: The Tribunal upheld the adjudicating authority's direction in paragraph 40 of the impugned order for conducting a land survey to determine the correct extent of land, factory premises, and location of plant and machinery, including demarcation of leasehold, freehold, and third-party lands. It noted that no grievance was raised by the RP or CoC against this direction.

Key evidence and findings: The Tribunal referred to the affidavit filed by the suspended director and the pleadings in I.A. No. 453/2025 by Amit Metaliks, which alleged incomplete disclosure of land in the information memorandum. The adjudicating authority's order to conduct the survey was based on these factual contentions.

Application of law to facts: The Tribunal applied the principle that accurate asset disclosure is fundamental to CIRP and that the adjudicating authority's direction for a land survey was a reasonable step to ensure transparency and fairness in the resolution process.

Treatment of competing arguments: No substantial opposition was raised against the land survey direction by the RP or CoC. The Tribunal found the direction justified and necessary.

Conclusions: The Tribunal affirmed the appropriateness of the land survey direction and found no reason to interfere with it.

Issue 3: Status of the challenge process and whether it should remain stayed pending land survey and RP replacement decision

Relevant legal framework and precedents: The challenge process in CIRP involves resolution applicants contesting various aspects of the process. Stays on the challenge process may be granted to ensure fairness and due process, especially when material facts are under investigation.

Court's interpretation and reasoning: The Tribunal noted that the challenge process had been stayed by the adjudicating authority due to the pending application for amendment of the information memorandum and the land survey direction. It observed that the challenge process should resume once the land survey report is available and a decision on the RP replacement application is taken.

Key evidence and findings: The stay of the challenge process was linked to the pendency of I.A. No. 453/2025 and the land survey. The Tribunal's direction to resume the challenge process after completion of the survey and RP replacement decision was aimed at balancing procedural fairness and continuity of CIRP.

Application of law to facts: The Tribunal applied the principle that CIRP should proceed expeditiously but also fairly, allowing resolution applicants to challenge based on complete and accurate information.

Treatment of competing arguments: The RP and CoC did not raise specific objections to the stay but were concerned about the delay. The Tribunal addressed these concerns by directing resumption post-survey.

Conclusions: The Tribunal directed that the challenge process may resume promptly after receipt of the land survey report and decision on RP replacement.

Issue 4: Maintainability and sustainability of appeals against the impugned order dated 09.04.2025

Relevant legal framework and precedents: Appeals against orders of the adjudicating authority under the IBC are maintainable before the Appellate Tribunal if they pertain to substantial questions of law or procedural irregularities affecting CIRP.

Court's interpretation and reasoning: The Tribunal entertained the appeals filed by the RP and CoC challenging certain directions in the impugned order, particularly the direction to replace the RP. It considered the appeals maintainable and proceeded to examine the merits.

Key evidence and findings: The appeals raised significant issues regarding procedural propriety and fairness in the replacement of the RP and the conduct of the CIRP.

Application of law to facts: The Tribunal applied the statutory provisions enabling appeals and found that the issues raised warranted adjudication.

Treatment of competing arguments: The Tribunal balanced the interests of the RP, CoC, and resolution applicants in ensuring a fair and transparent CIRP.

Conclusions: The appeals were held maintainable and disposed of with directions as detailed above.

3. SIGNIFICANT HOLDINGS

"Having noted the conduct of the present RP- Mr. Sanjeev Kumar Jalan, we direct his replacement in one week. In the event, the CoC is not able to replace the RP, we would appoint an RP in place of the present one." (Paragraph 44 of impugned order - held unsustainable at this stage)

"For the purpose, a land survey may be conducted at the earliest to ascertain the correct extent of land, factory premises, location of the plant and machinery available for the CIR Process with proper demarcation of leasehold and freehold land and that of third parties over which the plant or factory of the corporate debtor is located." (Paragraph 40 of impugned order - upheld)

Core principles established:

• The replacement of the RP must be decided after due consideration of the pending application and material facts, including results of a land survey, to ensure procedural fairness.
• The adjudicating authority is empowered to direct a land survey to ascertain accurate asset details essential for the CIRP.
• The challenge process in CIRP may be stayed pending resolution of material factual disputes but should resume expeditiously once those disputes are resolved.
• Appeals against orders of the adjudicating authority concerning procedural and substantive aspects of CIRP are maintainable and warrant thorough examination.

Final determinations on each issue:

• The direction to replace the RP prior to completion of the land survey and hearing of the replacement application was set aside.
• The direction for conducting a land survey was affirmed as appropriate and necessary.
• The challenge process stay was upheld temporarily but directed to resume promptly after the land survey report and RP replacement decision.
• The appeals were disposed of with directions to the adjudicating authority to reconsider the RP replacement application after the land survey.

The core legal questions considered by the Tribunal in this appeal are:

• Whether the Section 9 application under the Insolvency and Bankruptcy Code, 2016 ("IBC") filed by the Operational Creditor was maintainable, specifically whether the minimum threshold amount of default prescribed under Section 4 of the IBC (Rs. 1 crore effective from 24.03.2020) was met.
• Whether the Operational Creditor suppressed material facts regarding payments made by the Corporate Debtor prior to issuance of the Section 8 demand notice, thereby misleading the Adjudicating Authority.
• Whether the Adjudicating Authority committed an error in admitting the Section 9 petition ex-parte without giving the Corporate Debtor a fair opportunity to be heard, thus violating the principles of natural justice.
• The validity and relevance of the payments claimed to have been made by the Corporate Debtor to the Operational Creditor, including the characterization of payments made by related entities or persons.
• Whether the interest claimed by the Operational Creditor was payable under the contract and should be included in calculating the default amount for threshold purposes.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Maintainability of Section 9 Application and Threshold Limit under Section 4 of IBC

Legal Framework and Precedents: Section 4 of the IBC mandates a minimum default of Rs. 1 crore for an application under Section 9 to be maintainable, effective from 24.03.2020. The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) laid down that the Adjudicating Authority must verify the existence of a default and whether it exceeds the prescribed threshold before admitting a petition under Section 9. This threshold is reiterated in Tribunal precedents emphasizing strict compliance.

Court's Interpretation and Reasoning: The Tribunal examined whether the Operational Creditor's claim exceeded Rs. 1 crore after accounting for payments made by the Corporate Debtor. The Appellant contended that payments aggregating approximately Rs. 11 lakhs were made before the Section 8 demand notice, which the Operational Creditor suppressed. If these payments are considered, the outstanding amount falls below Rs. 1 crore, rendering the petition non-maintainable.

Key Evidence and Findings: The Operational Creditor's bank statements revealed receipts aggregating Rs. 13 lakhs from various sources: Rs. 9.50 lakhs from Shreeji Equipments, Rs. 2.50 lakhs from Simon Kumar Patel, and Rs. 1 lakh from Rameshbhai Patel. However, the ledger account maintained by the Operational Creditor for the Corporate Debtor failed to reflect these payments. Instead, some payments appeared in the ledger for Shreeji Equipments, a sister concern or proprietary firm related to the Corporate Debtor, and payments by individuals associated with the Corporate Debtor were recorded under Shreeji Equipments' ledger.

Application of Law to Facts: The Tribunal noted the mismatch between bank statements and ledger accounts and found the Operational Creditor's ledger account for the Corporate Debtor was not updated or accurate. The payments by related entities and individuals connected to the Corporate Debtor were prima facie payments on behalf of the Corporate Debtor, and their exclusion from the ledger of the Corporate Debtor was misleading.

Treatment of Competing Arguments: The Operational Creditor argued that payments from Shreeji Equipments and others were independent transactions unrelated to the Corporate Debtor. The Appellant rebutted that these payments were effectively on behalf of the Corporate Debtor due to the relationship between the parties. The Tribunal found the Operational Creditor failed to provide a credible explanation for the ledger discrepancies and accepted the Appellant's contention that the payments should be accounted for in the Corporate Debtor's outstanding dues.

Conclusion: The Tribunal concluded that the outstanding debt, after accounting for these payments, was below the Rs. 1 crore threshold, making the Section 9 application not maintainable.

Issue 2: Suppression of Material Facts and Alleged Fraud by Operational Creditor

Legal Framework: The IBC and principles of natural justice require full and fair disclosure of material facts. Suppression or misrepresentation can vitiate proceedings.

Court's Interpretation and Reasoning: The Tribunal observed that the Operational Creditor suppressed the payments made by the Corporate Debtor and related parties, which materially affected the maintainability of the petition. The ledger accounts provided were inconsistent and incomplete, indicating a deliberate attempt to mislead the Adjudicating Authority.

Key Evidence and Findings: The bank statements and ledger accounts showed discrepancies. The Operational Creditor's failure to reflect payments post 12.05.2023 in the ledger of the Corporate Debtor was significant. The Tribunal inferred that the Operational Creditor did not present a true and updated ledger account.

Application of Law to Facts: The Tribunal treated the suppression as material and prejudicial, leading to a misrepresentation before the Adjudicating Authority.

Treatment of Competing Arguments: The Operational Creditor denied suppression, stating payments were unrelated. The Tribunal found this explanation unconvincing.

Conclusion: The Tribunal held that the Operational Creditor suppressed material facts and misled the Adjudicating Authority.

Issue 3: Violation of Principles of Natural Justice Due to Ex-parte Admission

Legal Framework: The principles of natural justice require that a party be given a fair opportunity to be heard before adverse orders are passed. Ex-parte orders are permissible only where the party deliberately avoids appearance despite due notice.

Court's Interpretation and Reasoning: The Corporate Debtor claimed it was deprived of a fair opportunity because the Section 8 notice was served at an incorrect address, leading to non-appearance before the Adjudicating Authority. The Adjudicating Authority admitted the petition ex-parte after publication of notice and non-appearance of the Corporate Debtor.

Key Evidence and Findings: The Tribunal noted the Corporate Debtor's contention that the notice was served incorrectly, which prevented it from defending itself. The Adjudicating Authority's admission of the petition ex-parte without hearing the Corporate Debtor was therefore questioned.

Application of Law to Facts: The Tribunal found that the Corporate Debtor was denied a fair hearing, which is a fundamental requirement under the IBC and the principles of natural justice.

Treatment of Competing Arguments: The Operational Creditor argued that the notice was properly served and the Corporate Debtor deliberately avoided appearance. The Tribunal did not find sufficient evidence to reject the Corporate Debtor's claim of improper service.

Conclusion: The Tribunal held that the ex-parte admission violated the principles of natural justice.

Issue 4: Inclusion of Interest Amount in Default Calculation

Legal Framework: Under the IBC, the default amount includes principal and interest only if the interest is payable under the contract or established practice.

Court's Interpretation and Reasoning: The Operational Creditor claimed an interest amount of Rs. 15,19,753/- added unilaterally to the principal amount. The Appellant contended that no contract provision or past practice existed for payment of interest.

Key Evidence and Findings: No contractual clause or history of interest payments was demonstrated by the Operational Creditor.

Application of Law to Facts: The Tribunal agreed with the Appellant that the interest amount was not payable and should be excluded from the default calculation.

Treatment of Competing Arguments: The Operational Creditor's unilateral addition of interest was rejected due to lack of contractual basis.

Conclusion: Interest claimed was excluded from the default amount.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Prima-facie, we are persuaded to infer that the Ledger Account of the Corporate Debtor as maintained by the Operational Creditor is not an updated Ledger Account and did not depict the true and correct status of payments received by them from the Corporate Debtor. If the payment of Rs 11 lakhs claimed to have been made by the Corporate Debtor after 12.05.2023 is taken into account, the outstanding liability falls below Rs 1 Cr. and thus fails to meet the minimum threshold limit prescribed under Section 4 of the IBC. The Adjudicating Authority was therefore misled into admitting the Corporate Debtor into CIRP."

"If the payments made by the Corporate Debtor after 12.05.2023 are factorised, the debt due to the Operational Creditor was clearly below the prescribed minimum threshold limit of Rs 1 Cr. and hence the Section 9 application of the Operational Creditor was not maintainable. Triggering of CIRP in the present facts of the case where, prima-facie, the outstanding liability is below the threshold limit is unwarranted."

"The Appeal is admitted. We therefore set aside the impugned order. The order passed by the Adjudicating Authority initiating CIRP against the Corporate Debtor and all other orders pursuant to impugned order are set aside. The Corporate Debtor Company is freed from the rigours of CIRP and is allowed to function independently with immediate effect."

Core principles established include:

• Strict adherence to the minimum default threshold under Section 4 of the IBC is mandatory for maintainability of Section 9 applications.
• Operational Creditors must disclose all material facts, including payments received, to prevent misleading the Adjudicating Authority.
• Interest claimed must be contractually or customarily payable to be included in default calculations.
• Principles of natural justice require that the Corporate Debtor be given a fair opportunity to be heard before admission of insolvency proceedings.
• Ex-parte admission without proper service and opportunity to defend is liable to be set aside.

Issues: Whether the Adjudicating Authority and the Resolution Professional could entertain and quantify the workers' claim for wages relating to the layoff period preceding commencement of CIRP, and whether such claim was barred from adjudication by the moratorium under the Insolvency and Bankruptcy Code, 2016.

Analysis: The layoff notice preceded commencement of CIRP, and the dispute regarding entitlement to wages for the layoff period arose from pre-CIRP facts governed by labour law. The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 bars enforcement and execution of claims, but does not prevent determination of the quantum of dues. The issue whether workers were entitled to salary for the layoff period was outside the insolvency jurisdiction and could have been pursued before the appropriate labour forum. The Resolution Professional, therefore, was justified in computing the claim only up to the layoff period and the Adjudicating Authority rightly declined interference.

Conclusion: The challenge to the computation of wages for the layoff period was not maintainable before the insolvency forum, and the impugned rejection of the claim was upheld.

The core legal questions considered by the Court are:

• Whether the Directorate of Enforcement (ED) has the power under Section 8(4) of the Prevention of Money-Laundering Act, 2002 (PMLA) and the related Rules of 2013 to direct a bank to transfer the amounts held in Fixed Deposits (FDs) along with accrued interest in the name of the Enforcement Directorate during the pendency of adjudication and confiscation proceedings.
• Whether the provisional attachment and subsequent confirmation of attachment of the FDs by the Adjudicating Authority under the PMLA permits the ED to take possession by way of transfer of the FD amounts before the conclusion of proceedings before the Special Court.
• The scope and limits of the powers conferred on the ED and subordinate officers under Chapter III of the PMLA, specifically Sections 8(1), 8(3), 8(4), 8(5), and 8(7), in relation to attachment, adjudication, and confiscation of property.
• Whether the Prevention of Money-Laundering (Taking Possession of Attached or Frozen Properties Confirmed by the Adjudicating Authority) Rules, 2013, or the Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2013, empower the ED to direct transfer of attached property amounts during ongoing proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Power of ED under Section 8(4) PMLA and related Rules to direct transfer of FD amounts during pendency of proceedings

Relevant legal framework and precedents: Section 8 of the PMLA, 2002, under Chapter III, governs attachment, adjudication, and confiscation of property involved in money laundering. Sub-section (1) empowers the Director or an officer not below the rank of Deputy Director to provisionally attach property believed to be proceeds of crime for a maximum of 180 days. The provisional attachment must be confirmed by the Adjudicating Authority under sub-section (3), after which the attachment continues during investigation or trial. Sub-section (4) mandates that upon confirmation of attachment, the Director or authorized officer shall "forthwith take possession" of the attached or frozen property in the prescribed manner. Sub-section (5) and (7) provide for confiscation orders by the Special Court after trial.

The Prevention of Money-Laundering (Taking Possession of Attached or Frozen Properties Confirmed by the Adjudicating Authority) Rules, 2013, particularly Rules 4(4) and 4(5), prescribe the procedure for taking possession of attached or frozen properties.

Court's interpretation and reasoning: The Court noted that the power to attach property provisionally and confirm such attachment is clearly delineated under Section 8. However, the phrase "take possession" under sub-section (4) does not explicitly authorize the ED to direct the transfer of the amounts held in Fixed Deposits to the Enforcement Directorate's name during the pendency of adjudication or trial. The Court emphasized that possession of movable property such as FDs does not necessarily mean transfer of title or ownership, especially before confiscation orders are passed by the Special Court.

The Court further observed that the power exercised by the Deputy Director (a subordinate officer) must conform strictly to the procedure prescribed under Chapter III of the PMLA. The direction to the bank to transfer the FD amount along with accrued interest by way of a Demand Draft to the ED was found to exceed the statutory mandate.

Key evidence and findings: The provisional attachment order dated 06.02.2024 was confirmed by the Adjudicating Authority on 30.07.2024. The ED issued a communication directing the bank to transfer the FD amounts. The petitioner challenged this direction, contending that the ED lacked power to effect such transfer during pendency of proceedings.

Application of law to facts: The Court applied the statutory scheme of Section 8 and the relevant Rules to the facts and concluded that the ED's direction to transfer the FD amounts was not supported by the PMLA or the Rules. The attachment confirmed by the Adjudicating Authority only freezes the property and does not vest ownership or possession in the ED to the extent of transferring funds before final confiscation.

Treatment of competing arguments: The ED relied on Section 8(4) and Rules 4(4), 4(5) of the 2013 Rules to justify the direction. The Court rejected this interpretation, noting the absence of any express power to transfer funds and the procedural safeguards embedded in the PMLA to protect the rights of the attached party pending final adjudication.

Conclusion: The direction by the ED to transfer FD amounts along with interest to its name during pendency of the appeal and trial was held to be unsustainable and beyond the scope of statutory powers.

Issue 2: Scope of attachment, adjudication, and confiscation under Section 8 and interplay with Special Court proceedings

Relevant legal framework and precedents: Section 8(3)(b) provides that the order passed by the Adjudicating Authority becomes final only after an order of confiscation is passed by the Special Court under sub-section (5) or (7). The confiscation order is made only after trial and conviction for money laundering. Until then, the attachment remains provisional or confirmed but not final.

Court's interpretation and reasoning: The Court emphasized the sequential process envisaged by the statute: provisional attachment -> confirmation by Adjudicating Authority -> trial and confiscation by Special Court. The Court underscored that the confirmed attachment order does not transfer ownership or possession rights to the ED but merely freezes the property to prevent its dissipation.

Key evidence and findings: The petitioner had challenged the attachment order and had an appeal pending before the Appellate Tribunal. The Court acknowledged the ongoing appellate proceedings and the safeguards available to the petitioner.

Application of law to facts: The Court held that the attachment order remains in force during investigation or trial but does not authorize the ED to dispose of or transfer the property before final confiscation. The procedural protections ensure that the petitioner's rights are preserved until the Special Court's determination.

Treatment of competing arguments: The ED's attempt to expedite possession by transfer of funds was rejected as inconsistent with the statutory scheme and the principle of fair adjudication.

Conclusion: The confirmed attachment order is effective to freeze the property but does not authorize transfer or disposal of the property before final confiscation by the Special Court.

Issue 3: Validity of relying on the Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2013 to justify transfer of property

Relevant legal framework and precedents: The Prevention of Money-Laundering (Issuance of Provisional Attachment Order) Rules, 2013, regulate the procedure for issuing provisional attachment orders under the PMLA. Rule 5 of these Rules was specifically considered.

Court's interpretation and reasoning: The Court found no provision in these Rules that permits the ED to direct transfer of attached property amounts to itself during pendency of proceedings. The Rules focus on procedural aspects of attachment and do not confer substantive rights to possession or ownership before final confiscation.

Key evidence and findings: The ED's reliance on Rule 5 to justify the transfer direction was not supported by the text or intent of the Rules.

Application of law to facts: The Court held that the Rules cannot be interpreted to override the statutory safeguards and the scheme of Chapter III of the PMLA.

Treatment of competing arguments: The ED's argument was rejected as lacking statutory foundation.

Conclusion: The Rules do not empower the ED to transfer attached property amounts during ongoing adjudication or trial.

3. SIGNIFICANT HOLDINGS

The Court held:

"Since the fixed FDRs, which is a movable property and the power has been exercised by the Deputy Director, an Officer subordinate to the Director of Enforcement, who is bound by the procedure that is specifically set out in Chapter III of the PMLA in relation to the attachment, adjudication and confiscation, since the FDR's of the petitioners has already faced an attachment, we find that the direction issued to transfer the amount in the name of the Directorate of Enforcement to be unsustainable."

"We are unable to trace any such power, to direct transfer of the property while the proceedings are pending before the Special Court, in the name of the Enforcement Director and we do not think that Rule 5 of the Rules of 2013, in any case, permit such a course of action to be adopted."

"Since we find no justification for the aforesaid action... we deem it appropriate to quash and set aside the said direction, though we make it clear that in so far as the order of attachment, which is already pending before the appellate Authority, the final decision shall be taken by the Authority, with all the remedies that are available to be invoked by the petitioner."

Core principles established include:

• The ED's power to attach property under the PMLA is limited to provisional attachment and confirmation by the Adjudicating Authority, and does not extend to transferring ownership or possession of attached property before final confiscation by the Special Court.
• The phrase "take possession" under Section 8(4) does not authorize transfer of funds in Fixed Deposits to the ED during pendency of proceedings.
• The procedural safeguards under the PMLA and Rules ensure protection of the rights of the attached party until final adjudication.
• Directions issued by the ED to banks to transfer attached FD amounts along with interest to the ED's name during pendency of trial are beyond the statutory powers and unsustainable.

Final determinations on each issue:

• The direction issued by the ED to the bank to transfer the FD amounts along with accrued interest to the Enforcement Directorate was quashed and set aside.
• The attachment order confirmed by the Adjudicating Authority remains in force, and the petitioner's appeal against it is pending, with all remedies available.
• The ED must adhere strictly to the procedural framework prescribed under the PMLA and cannot take possession of attached property by way of transfer before final confiscation.

Issues: Whether the rejection of the request for appointment of a common adjudicator for the petitioners' pending service tax matters was liable to be interfered with.

Analysis: The matters arose out of separate show-cause proceedings and separate adjudication orders, and the petitioners had never questioned the competence of the respective adjudicating authorities at earlier stages of the litigation. Although a common legal question existed, the factual bases of the individual matters were distinct. The request for a common adjudicator was made only at a later stage after remand, and allowing it would further prolong the proceedings. In the peculiar facts, the Court found no sufficient ground to upset the impugned rejection order.

Conclusion: The request for appointment of a common adjudicator was not accepted, and the refusal to interfere with the rejection order was in favour of the Revenue.

Final Conclusion: The writ petitions were disposed of without granting the prayer for clubbing of adjudication, and the separate adjudication process was left undisturbed.

Ratio Decidendi: A belated request for a common adjudicator, made after repeated rounds of adjudication and remand, need not be entertained where the individual proceedings are distinct and interference would only delay disposal.

Issues: Whether CENVAT credit taken and utilised in respect of service tax paid under reverse charge mechanism could be denied, and whether the penalty reduced by the appellate authority required interference.

Analysis: The admissibility of credit on the underlying input services was not in dispute. The only objection was that, in respect of reverse charge liability, the credit became available only after payment of service tax, and the credit used for the June 2017 liability was therefore utilised prematurely. The Tribunal held that Rule 9 of the CENVAT Credit Rules, 2004 has to be read with Rule 4(7) of those Rules, under which credit is allowed after payment of the tax by the recipient. Since the tax was in fact paid and the returns were filed before issuance of the show-cause notice, the mistake was treated as a procedural lapse. In the absence of suppression of facts or intent to evade duty, denial of credit and imposition of equal penalty were not justified, and the reduced penalty was found appropriate.

Conclusion: The credit could not be denied on merits, and the reduction of penalty was upheld; the revenue's challenge failed.

Ratio Decidendi: Where the entitlement to CENVAT credit is otherwise established and the only defect is premature utilisation after payment under reverse charge, the lapse is procedural if the tax is subsequently discharged and there is no suppression or intent to evade, so denial of credit or severe penalty is not warranted.

Issues: (i) Whether the commission received by an Amway distributor was liable to service tax as consideration for Business Auxiliary Service; (ii) whether cum-tax benefit was admissible in computing the tax demand; (iii) whether the extended period of limitation and the related penalties could be sustained.

Issue (i): Whether the commission received by an Amway distributor was liable to service tax as consideration for Business Auxiliary Service.

Analysis: The distributor's activity in relation to promotion and sale of Amway products was treated as linked to sales promotion for the client. At the same time, the commission attributable to the distributor's own purchases and retail margin could not be equated with consideration for service, while the commission linked to the sales group's performance remained taxable. On the facts, the Tribunal upheld service tax liability on the commission amount, subject to the limitation and valuation findings recorded separately.

Conclusion: The commission was taxable to the extent upheld in the order, and the assessee was not completely exempt from service tax.

Issue (ii): Whether cum-tax benefit was admissible in computing the tax demand.

Analysis: Where the assessee does not separately collect service tax and the receipts are to be treated as inclusive of tax, the gross receipts have to be recomputed on a cum-tax basis. The Tribunal held that the lower authority had erred in denying the benefit after it had already been granted in the original order and had not been put in issue by the Revenue.

Conclusion: Cum-tax benefit was admissible and the demand had to be recomputed accordingly.

Issue (iii): Whether the extended period of limitation and the related penalties could be sustained.

Analysis: The Tribunal found that the assessee was an individual distributor who could genuinely have entertained doubt about the taxability of the receipts, and therefore the element of suppression with intent to evade was not established. In such a situation, the longer limitation period could not be invoked, and the penalty equivalent to tax also could not survive. The connected penalties were set aside.

Conclusion: The extended period was not sustainable and the related penalties were set aside.

Final Conclusion: The appeal succeeded only in part: the demand was upheld for the normal period, while the extended-period demand and penalties were set aside and the matter stood modified accordingly.

Ratio Decidendi: Where a taxpayer's conduct shows a bona fide dispute or scope for doubt on taxability, the extended limitation period requiring suppression or intent to evade cannot be invoked, and valuation must be recomputed on a cum-tax basis where the receipts are not separately charged as tax.

The core legal question revolves around the interpretation of Section 66E(e), which covers declared services involving an agreement to refrain from an act, tolerate an act or situation, or do an act, and whether the sums collected as penalties or liquidated damages fall within this scope as consideration for such services.

In addressing this, the Tribunal examined the relevant legal framework, including:

• Section 65B(44) defining "service" as any activity carried out by a person for another for consideration, including declared services.
• Section 66E(e) specifying declared services relating to agreeing to obligations to refrain, tolerate, or do acts.
• Section 67 Explanation (a) clarifying that "consideration" includes any amount payable for taxable services.

Precedents heavily relied upon include prior decisions of the Tribunal in the appellant's own cases and the authoritative ruling in South Eastern Coalfields Ltd v. CCE & ST, Raipur. These cases elucidated the nature of consideration and the necessity for an agreement specifically contemplating an obligation to refrain, tolerate, or do an act, supported by a corresponding flow of consideration.

The Tribunal's reasoning emphasized that the agreements between the appellant and contractors were primarily for supply of goods or services, with consideration fixed for such supply. The penal clauses for delays or breaches were safeguards to protect commercial interests and not the basis for the contract consideration. The imposition of penalties or forfeiture is a consequence of breach, not an agreed service for which consideration flows.

It was noted that the recovery of liquidated damages or penalties does not amount to payment for "tolerating an act" or "agreeing to refrain from an act" in the contractual sense contemplated by Section 66E(e). The parties do not intend to tolerate breaches; rather, penalties are imposed to deter breaches and compensate for losses. There is no independent agreement to tolerate or refrain from acts in exchange for consideration.

The Tribunal distinguished this from situations where parties explicitly agree to refrain from an act for consideration, such as non-compete agreements or agreements not to supply goods to third parties in return for payment, which would fall under Section 66E(e).

Further, the Tribunal observed that the Department itself had issued Circular No.214/1/2023-ST clarifying that only agreements specifically referring to obligations to refrain, tolerate, or do acts with corresponding consideration qualify under Section 66E(e). The amounts collected as penalties or forfeitures in this case do not meet this criterion.

The Tribunal also noted that the Revenue had withdrawn appeals challenging the binding precedent set by South Eastern Coalfields Ltd, reinforcing the applicability of that decision.

In applying the law to the facts, the Tribunal found that the amounts collected as penalties and forfeitures were not consideration for any taxable service but were compensatory and penal in nature, thus not taxable under the Finance Act.

Competing arguments by the Revenue that these amounts represent consideration for tolerating breaches were rejected based on the absence of any contractual intention to tolerate breaches and the lack of an independent agreement for such toleration.

Consequently, the Tribunal concluded that the impugned orders confirming service tax demand on these amounts were unsustainable and set aside the demand.

The significant holdings include the following verbatim excerpts encapsulating the core legal principles:

"Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under Section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act."

"The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration."

"The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party."

"It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards 'consideration' for 'tolerating an act' leviable to service tax under Section 66E(e) of the Finance Act."

Core principles established are:

• The amount collected as penalty, liquidated damages, or forfeiture for breach of contract is not consideration for a declared service under Section 66E(e).
• For a service to be taxable under Section 66E(e), there must be an express agreement to refrain from, tolerate, or do an act, supported by consideration specifically for that obligation.
• Penal sums recovered due to breach or non-performance are compensatory and deterrent in nature and do not constitute taxable consideration.
• Binding precedents and departmental circulars support this interpretation, and the absence of an independent agreement to tolerate or refrain excludes such amounts from service tax liability.

Accordingly, the Tribunal allowed the appeal, set aside the service tax demand, and held that the amounts collected as penalties, liquidated damages, and forfeiture of security deposits are not taxable services under Section 66E(e) of the Finance Act, 1994.

1. Whether the issuance of the Show Cause Notice (SCN) beyond the statutory limitation period prescribed under Section 73 of the Finance Act, 1994, is barred by limitation.

2. Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act can be invoked in the facts of the present case, specifically whether there was suppression of facts or wilful misstatement by the appellant.

3. The applicability and interpretation of the term "suppression of facts" in the context of service tax assessment and demand.

4. The relevance and effect of discrepancy between income declared in Income Tax returns and Service Tax ST3 returns filed by the appellant.

5. The applicability of various precedents cited by both parties on limitation and suppression issues.

Issue-wise Detailed Analysis:

1. Limitation for Issuance of Show Cause Notice under Section 73 of the Finance Act, 1994

The relevant legal framework is Section 73 of the Finance Act, 1994, which mandates that the department must issue a notice within thirty months from the "relevant date" for recovery of service tax that has not been levied or paid, or short-levied or short-paid. The proviso to Section 73(1) extends this period to five years if the short payment is due to fraud, collusion, wilful misstatement, suppression of facts, or contravention of provisions with intent to evade tax.

The "relevant date" is defined in Section 73(6) as the date on which the periodical return is filed or the last date for filing such return, as applicable.

In the present case, the SCN was issued on 24.09.2020 for financial years 2014-15, 2015-16, and 2016-17, which was beyond the statutory limitation period of 18 months (thirty months from the relevant date) for each year. The appellant argued that this delay of 2 to 4 years renders the SCN barred by limitation.

The department contended that the extended period of limitation is invokable due to suppression of facts by the appellant, as evidenced by the discrepancy between income declared in Income Tax returns and ST3 returns.

The Court analyzed the timelines and confirmed the delay in issuance of SCN beyond the normal limitation period but proceeded to consider whether the extended period under the proviso is applicable.

2. Applicability of Extended Period of Limitation and Suppression of Facts

The key legal question was whether the appellant suppressed facts or made wilful misstatements to evade payment of service tax, thereby justifying invocation of the extended limitation period.

The Court noted that the appellant declared lower income in ST3 returns compared to Income Tax returns, which was not explained or disclosed to the Service Tax department. The appellant's explanation that the difference was on account of defence pension, salary, and savings bank interest (not taxable under service tax) was accepted to some extent by the Adjudicating Authority, who allowed deductions on these heads. However, the appellant failed to provide proof supporting their claim of export of technical consultancy services, which would have been exempt or zero-rated.

The Court emphasized that under the self-assessment regime, the onus is on the assessee to correctly assess and declare taxable value and pay service tax accordingly. The failure to declare taxable income or turnover in ST3 returns, despite being aware of the actual income, constitutes suppression of facts.

The Court rejected the appellant's contention that filing of Income Tax returns disclosing actual income suffices as disclosure to the Service Tax department. It held that income declared in Income Tax returns does not amount to disclosure of taxable value to the service tax authorities, as the two are distinct statutory regimes with different requirements.

The Court found that the appellant's conduct amounted to deliberate concealment of taxable income and short payment of service tax, thus invoking the extended limitation period under the proviso to Section 73(1).

3. Interpretation of "Suppression of Facts" and Mens Rea

The Court examined precedents on the interpretation of "suppression of facts" and the requirement of mens rea (intention or knowledge) for invoking extended limitation and penalty provisions.

It was noted that the term "suppression" in Section 73 is not qualified by "wilful" and mere suppression of facts is sufficient to invoke extended limitation and penalty. The Andhra Pradesh High Court in a cited case held that mens rea is not an essential ingredient for imposing penalty under service tax provisions.

The Court distinguished the appellant's case from precedents where suppression was not found due to facts being known to both parties or mere omission without intent. Here, the appellant knowingly declared less income to evade tax, which constitutes suppression.

The Court also rejected the appellant's reliance on cases where bona fide belief or confusion about taxability was held to negate suppression, stating that ignorance or assumption without verifying law is no excuse under the self-assessment regime.

4. Effect of Discrepancy Between Income Tax and Service Tax Returns

The Court observed that the discrepancy between Income Tax returns and ST3 returns filed by the appellant was a crucial factor indicating suppression. The department discovered the short payment only after comparing the two sets of returns.

The appellant's failure to disclose the correct taxable turnover in ST3 returns despite filing Income Tax returns showing higher income was held to be deliberate concealment.

The Court held that such concealment deprives the department of the opportunity to assess and collect correct service tax within the normal limitation period, justifying the extended period.

5. Treatment of Competing Arguments and Precedents

The appellant relied on several Supreme Court and Tribunal decisions emphasizing strict construction of extended limitation provisions and requiring proof of suppression with knowledge or intent.

The Court analyzed these precedents and found them distinguishable on facts, as those cases involved either known facts to both parties or bona fide omissions without intent to evade tax.

The department's reliance on various Tribunal decisions was upheld, which held that failure to disclose taxable turnover, even if information is in public domain or Income Tax returns, constitutes suppression if not disclosed to service tax authorities.

The Court also noted that under the self-assessment scheme, the duty to correctly assess and pay tax lies squarely on the assessee, and ignorance or assumptions do not excuse non-compliance.

Significant Holdings:

"The appellant had declared the actual income in their Income Tax returns and less income in their statutory ST3 returns under Service Tax. This short declaration of income clearly shows that appellant wants to evade payment of service tax on the portion of income, which they short declared in the ST3 returns."

"Declaration of income in the IT returns filed with Income Tax department does not tantamount to declaring the taxable values to the service tax department."

"Unless the correct income/taxable values are declared in the ST3 return, the department has no way of knowing about the provisions of services or receipt of taxable consideration by the appellant."

"The appellant failed to declare the differential taxable values to the service tax department which clearly points to suppression on the part of the appellant with an intent to evade payment of service tax."

"Under the self assessment regime, a person providing taxable services is required to assess his tax liability correctly and discharge the same in the proper manner, by the prescribed due dates and file periodical returns showing the above details."

"The words 'suppression' is not preceded by wilful. It is clear that the word 'suppression of facts' has not been qualified with the word 'wilful'. In other words, mere suppression of facts is enough to invoke the extended period under the Service Tax law and impose penalty under section 78 of the Act."

"The department has rightly invoked the extended period of limitation."

The Tribunal upheld the impugned order confirming the demand for service tax along with interest and penalty, dismissing the appeal filed by the appellant solely on the ground of limitation. The extended period of limitation was held to be rightly invoked due to suppression of facts by the appellant in their ST3 returns, despite disclosure of actual income in Income Tax returns.

1. Whether the buildings constructed by the Appellant for entities registered under Section 12AA of the ITA, 1961 are "meant predominantly for religious use by general public" so as to qualify for exemption under clause 13 of Notification No.25/2012-ST dated 20.06.2012, as amended.

2. Whether the Appellant is entitled to claim abatement under Notification No.26/2012-ST dated 20.06.2012 and the benefit of Notification No.30/2012-ST dated 20.06.2012 on the service portion of the works contracts.

3. Whether the Appellant's discharge of VAT/sales tax liability on the entire consideration received from the works contracts precludes the demand of service tax on the same consideration.

4. Whether the demand of service tax based on information from Income Tax Department records (ITR, Form 26AS) is sustainable.

Issue 1: Exemption under Clause 13 of Notification No.25/2012-ST - Predominant Religious Use

The legal framework involves clause 13 of Notification No.25/2012-ST dated 20.06.2012, which exempts services provided by way of construction of a building owned by an entity registered under Section 12AA of the ITA, 1961, if the building is "meant predominantly for religious use by general public."

The Court examined whether buildings constructed for entities such as schools and hospitals registered under Section 12AA fall within this exemption. The Revenue contended that since these entities are educational and medical institutions, their buildings are not predominantly for religious use.

The Tribunal relied on a prior decision of this Tribunal in a closely analogous matter, where it was held that educational and medical purposes constitute "charitable purpose" under Section 2(15) of the ITA, 1961, and entities registered under Section 12AA for charitable purposes are entitled to the exemption under clause 13 irrespective of the nature of use being educational or medical rather than strictly religious. The Authorized Representative for the Revenue could not cite any contrary precedent.

Accordingly, the Tribunal concluded that the exemption under clause 13 applies to buildings constructed for entities registered under Section 12AA engaged in educational and medical activities, thus entitling the Appellant to exemption on this ground.

Issue 2: Claim of Abatement and Benefit of Notification No.30/2012-ST

The Appellant claimed abatement under Notification No.26/2012-ST and benefit under Notification No.30/2012-ST on the service portion of the works contract. The adjudicating authority had denied abatement on the ground that the contract was not a works contract. The Commissioner (Appeals) allowed abatement of 60% under clause (A) of sub-rule (ii) of Rule 2A of the Service Tax (Determination of Value) Rules, 2006, and extended the benefit of Notification No.30/2012-ST in respect of the service portion.

The Tribunal examined Rule 2A of the Service Tax (Determination of Value) Rules, 2006, which provides that the value of the service portion in a works contract is the gross amount charged less the value of property in goods transferred. The explanation to the rule states that where VAT or sales tax has been paid on the value of property in goods, that value is deemed as the value of property in goods for service tax valuation.

Given that the Appellant had discharged VAT/sales tax on the entire consideration, the value on which VAT was paid is deemed to be the value of property in goods transferred. Therefore, the Tribunal held that the Appellant is entitled to deduct this value from the gross contract amount to arrive at the taxable service portion, thereby allowing the abatement and benefit claimed.

Issue 3: Effect of VAT/Sales Tax Discharge on Service Tax Demand

The Appellant contended that since VAT/sales tax liability was discharged on the entire consideration, no service tax is payable on the same amount. The Tribunal referred to the provisions of Rule 2A, which explicitly provide for deduction of the value of goods on which VAT/sales tax has been paid from the gross contract value to determine the service portion liable to service tax.

The Tribunal found from VAT assessment orders and TDS certificates that VAT/sales tax was indeed paid on the consideration received. Therefore, the Appellant's claim that the taxable service portion is reduced by the value of goods on which VAT was paid was accepted. This reduced taxable value was found to be lower than the amount on which service tax demand was raised, justifying the Appellant's position.

Issue 4: Reliance on Income Tax Department Records for Demand

The demand was initiated based on information from the Income Tax Department, including ITR and Form 26AS. The Tribunal noted that in a series of decisions, coordinate benches have held that demands based solely on income tax records cannot be sustained without independent verification and proper adjudication.

Accordingly, the Tribunal held that reliance on income tax records alone is insufficient to uphold the service tax demand.

Conclusions on Issues

The Tribunal concluded that:

- The exemption under clause 13 of Notification No.25/2012-ST applies to buildings constructed for entities registered under Section 12AA of the ITA, 1961, even if used for educational or medical purposes, as these constitute charitable purposes.

- The Appellant is entitled to claim abatement under Rule 2A and benefit of Notification No.30/2012-ST, as VAT/sales tax was discharged on the value of goods transferred in the works contract.

- The taxable service portion is correctly determined after deducting the VAT-paid value from the gross contract value.

- Demands based solely on income tax records are not sustainable.

Significant Holdings and Legal Reasoning

The Tribunal succinctly stated the legal position on exemption under clause 13 as follows:

"Educational and medical purpose is a 'charitable purpose' and therefore the benefit of clause 13 of Notification No.25/2012-ST dated 20.06.2012, as amended, cannot be denied, if the buildings owned by entities registered under Section 12AA are used for educational and medical purposes."

On valuation of service portion, the Tribunal emphasized:

"Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract."

On the inadmissibility of demand based on income tax records alone, the Tribunal noted:

"In catena of decisions, the coordinate benches of this Tribunal has held that demand based on income tax records cannot be sustained."

Ultimately, the Tribunal set aside the impugned order to the extent it upheld the service tax demand of Rs.27,91,386/- along with penalty and interest, allowing the appeal and granting consequential relief to the Appellant.

The core legal questions considered in the judgment are:

(a) Whether the appellant was eligible for exemption from payment of service tax under entry No.29(g) of Notification No.25/2012 dated 20.06.2012 for services provided to banking companies;

(b) Whether the appellant had appropriately paid service tax on services provided to Rajcomp Info Services Ltd.;

(c) Whether the extended period of limitation was invokable for raising the service tax demand;

(d) Whether penalties and late fees imposed under various provisions of the Finance Act, 1994 and Service Tax Rules, 1994 were maintainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility for Exemption under Entry No.29(g) of Notification No.25/2012

Legal Framework and Precedents: Entry No.29(g) of Notification No.25/2012 exempts services by a business facilitator or business correspondent to a banking company with respect to accounts in its rural area branch. This entry underwent multiple substitutions:

• From 01.07.2012, exemption was for business correspondents in a rural area.
• From 21.10.2015, exemption was limited to business correspondents with respect to Basic Savings Bank Deposit Accounts under Pradhan Mantri Jan Dhan Yojana (PMJDY) in rural branches.
• From 12.01.2017, exemption was again broadened to business correspondents with respect to accounts in rural area branches.

The Court relied on the Supreme Court's interpretation in Government of India Vs. Indian Tobacco Association (2005), which held that substitution means replacement of the original entry and that such amendments apply retrospectively. The Madras High Court and Tribunal decisions were also cited to support this interpretation.

Court's Interpretation and Reasoning: The Court held that the substituted entry as of 12.01.2017, which reinstates the exemption for business correspondents with respect to accounts in rural area branches, applies retrospectively for the period 01.04.2015 to 30.06.2017. The appellant's submissions and evidence, including agreements with various banks and Form 26AS data, established that services were provided as business correspondent to banks in rural branches.

Key Evidence and Findings: Sample agreements with State Bank of Bikaner and Jaipur, HDFC Bank Ltd., and others showed services rendered in rural branches. The Court noted the appellant's main activities involved opening savings accounts, cash deposits, and withdrawals in rural areas. The location and branch codes confirmed rural area branches.

Application of Law to Facts: Applying the retrospective substitution principle, the Court found the appellant eligible for exemption under entry 29(g) for services provided to banking companies in rural branches during the relevant period.

Treatment of Competing Arguments: The Revenue argued that exemption was limited to PMJDY accounts and not all rural banking services. The Court rejected this, noting the substitution restored the broader exemption retrospectively. The appellant's bona fide belief in exemption was also considered.

Conclusion: The demand of service tax and interest on services provided to banking companies in rural area branches was set aside.

Issue 2: Payment of Service Tax on Services to Rajcomp Info Services Ltd.

Legal Framework: Services provided to Rajcomp Info Services Ltd., a non-banking entity, were not exempt under entry 29(g). The appellant contended that amounts received from Rajcomp were inclusive of service tax (cum-tax price).

Court's Reasoning: The agreement with Rajcomp Info Services Ltd. specified that all parties shall pay applicable taxes arising from their business under the agreement, indicating the price was inclusive of service tax.

Key Evidence: Form 26AS data showed receipts from Rajcomp of Rs.46.2 lakhs (2015-16) and Rs.54.15 lakhs (2016-17). Calculations of tax liability at applicable rates (14.5% and 15%) yielded Rs.12,91,420 as tax payable. The appellant had paid Rs.12,97,776, exceeding the liability.

Application of Law to Facts: Since the appellant paid service tax equal to or exceeding the liability on Rajcomp services, there was no short payment.

Treatment of Competing Arguments: No dispute arose on the non-exemption of Rajcomp services; the issue was only on tax payment sufficiency, which was resolved in appellant's favor.

Conclusion: No service tax demand sustained on services provided to Rajcomp Info Services Ltd.

Issue 3: Invokability of Extended Period of Limitation

Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994 provides for a normal limitation period of one year for service tax demands, extendable to five years under certain conditions such as suppression or fraud. The appellant relied on Supreme Court and Tribunal decisions (Jaiprakash Industries Ltd., Lupin Ltd., D.N. Pandey & Co.) holding that extended limitation is not invokable in cases of bona fide belief or absence of mala fide intent.

Court's Interpretation and Reasoning: The appellant demonstrated bona fide belief in exemption under entry 29(g), supported by frequent amendments and possible confusion. The Court found no evidence of suppression, fraud, or willful misstatement by the appellant. The appellant had disclosed information and cooperated during investigation.

Key Evidence: The appellant's submissions, agreements, and tax filings indicated no concealment. The Department's demand arose from third-party information, not from appellant's suppression.

Application of Law to Facts: The Court applied the principle that extended limitation requires positive evidence of mala fide intent or suppression, which was absent. The bona fide belief and frequent amendments justified rejecting extended limitation.

Treatment of Competing Arguments: The Department argued for extended limitation due to alleged suppression. The Court rejected this on lack of evidence and appellant's bona fide belief.

Conclusion: Extended period of limitation was not invokable; the demand was barred by limitation.

Issue 4: Demand of Penalties and Late Fees

Legal Framework: Penalties were imposed under:

• Section 78 (equal penalty for evasion of service tax);
• Section 77(1)(d) (penalty for non-payment of tax electronically);
• Section 77(2) (penalty for contravention of provisions where no specific penalty is provided);
• Rule 7C of Service Tax Rules, 1994 (late fee for delayed filing of ST-3 returns).

Court's Reasoning: Since the service tax demand was set aside on merits and limitation grounds, penalty under Section 78 for evasion was unsustainable and set aside. Penalty under Section 77(1)(d) for non-payment electronically was also set aside as there was no short payment. Late fee under Rule 7C was set aside because the rule applies to delayed filing, not non-filing of returns. However, penalty under Section 77(2) for non-filing of some returns was upheld.

Application of Law to Facts: The Court distinguished between penalties linked to tax evasion and those linked to procedural contraventions. Only the latter was sustained.

Conclusion: Penalties under Sections 78 and 77(1)(d) and late fee under Rule 7C were set aside; penalty under Section 77(2) was upheld.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning includes:

"The word 'substitute' ordinarily would mean 'to put (one) in place of another'; or 'to replace'. ... When a person is held to be eligible to obtain the benefits of an exemption Notification, the same should be liberally construed."

"The substituted entry by Notification No.01/2017 dated 12.01.2017 is almost the same as it was mentioned in original Notification No.25/2012 dated 20.06.2012 and applies retrospectively."

"Extended period of limitation cannot be invoked where there is bona fide belief in exemption and no evidence of suppression, fraud or mala fide intent."

"Penalty under Section 78 for evasion cannot be sustained where demand itself is set aside on merits and limitation."

Core principles established:

• Substitution in notifications replaces the original provision retrospectively unless expressly stated otherwise.
• Exemption notifications must be liberally construed in favor of the assessee.
• Extended limitation period requires proof of suppression or mala fide intent; bona fide belief bars its invocation.
• Penalties linked to evasion fail if the tax demand is set aside; procedural penalties may still apply.

Final determinations:

• The appellant was eligible for exemption under entry 29(g) for services provided to banking companies in rural branches during 01.04.2015 to 30.06.2017.
• No short payment of service tax was found on services provided to Rajcomp Info Services Ltd.
• Extended period of limitation was not invokable; demand was barred by limitation.
• Penalties under Sections 78 and 77(1)(d) and late fee under Rule 7C were set aside; penalty under Section 77(2) was upheld.

The core legal questions considered in the appeal are:

- Whether the imposition of penalty under Section 77(1) of the Finance Act, 1994 for failure to produce documents within a reasonable time upon summons issued by a Central Excise Officer is sustainable.

- The reasonableness of the delay period of 710 days in submission of documents for audit purposes and its impact on penalty imposition.

- The appropriateness of the quantum of penalty imposed, specifically the daily penalty rate of Rs.200 and its reduction to Rs.50 by the Commissioner (Appeals), and whether further reduction is warranted.

- The scope and discretion of the authorities in imposing penalty under Section 77(1) given the facts of the case and relevant precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Sustainability of penalty under Section 77(1) for failure to produce documents on summons

Relevant legal framework and precedents: Section 77(1) of the Finance Act, 1994 provides for penalty where a person fails to furnish information, produce documents, or appear before a Central Excise Officer when summoned. The penalty may extend to Rs.10,000 or Rs.200 per day of default, whichever is higher, starting from the due date until compliance.

Court's interpretation and reasoning: The Tribunal noted that the appellant failed to submit documents despite reminders and summons, thereby violating Service Tax Rules, 1994. The Tribunal affirmed that such failure attracts penal consequences under Section 77(1). However, the penalty is intended as a compliance incentive rather than a punitive measure. The Tribunal emphasized that the penalty should be reasonable and not excessive.

Key evidence and findings: The appellant delayed submission of audit-related documents by 710 days. The appellant's claim that detailed scrutiny was completed in February 2019 was uncontested but did not preclude audit or the obligation to produce documents upon summons. The Tribunal observed that the department's decision to conduct audit after scrutiny was within its discretion.

Application of law to facts: The Tribunal applied Section 77(1) to the facts, concluding that the appellant's failure to produce documents within a reasonable time was a contravention attracting penalty. However, the extended delay of 710 days was deemed unreasonable, but the penalty rate imposed needed moderation.

Treatment of competing arguments: The appellant argued that the audit should not have been conducted after detailed scrutiny and that the delay was justified. The Tribunal rejected the argument that audit could not follow scrutiny, holding that the department's discretion to audit remained intact. The Tribunal also considered the appellant's failure to explain the delay.

Conclusions: Penalty under Section 77(1) is sustainable for failure to produce documents on summons. The appellant was liable for penalty, but the quantum and rate of penalty required adjustment to reflect the nature of the offense.

Issue 2: Reasonableness of delay and quantum of penalty imposed

Relevant legal framework and precedents: The Tribunal referred to the Service Tax Audit Manual 2011, which suggests that taxpayers whose returns have been scrutinized may not be subjected to audit the same year to avoid duplication. However, it does not bar audit altogether. The Tribunal also relied on a precedent from the Hon'ble CESTAT, West Zonal Bench, Mumbai, which held that the penalty of Rs.200 per day under Section 77(1) is not mandatory and the officer has discretion to reduce it depending on the case.

Court's interpretation and reasoning: The Tribunal found that a delay of 710 days was unreasonable and that the penalty imposed at Rs.200 per day was harsh. The Commissioner (Appeals) had already reduced the penalty to Rs.50 per day, which the Tribunal found more appropriate but still on the higher side. The Tribunal further reduced the penalty to a token amount of Rs.10,000 to ensure compliance without being excessive.

Key evidence and findings: The delay of 710 days in submission of documents was undisputed. No satisfactory explanation was offered by the appellant for the delay. The Tribunal noted the principle that penalty should be a token amount to ensure compliance rather than punitive.

Application of law to facts: Applying the discretion allowed under Section 77(1) and the precedent, the Tribunal balanced the need for compliance with fairness to the appellant by reducing the penalty to Rs.10,000.

Treatment of competing arguments: The appellant's request for adjournment was declined given the narrow scope of the issue and the availability of records. The Tribunal considered the appellant's contention regarding audit duplication but found it insufficient to negate the penalty.

Conclusions: The penalty rate of Rs.200 per day was excessive; reduction to Rs.50 per day by Commissioner (Appeals) was appropriate but still high. The Tribunal exercised discretion to reduce the penalty further to Rs.10,000 as a reasonable token penalty.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Penalty of Rs.200 per day not mandatory in nature - Therefore, it is discretion of officer to reduce penalty depending upon nature of case."

This principle underscores the discretionary power of authorities under Section 77(1) to modulate penalty quantum based on case specifics.

Further, the Tribunal concluded:

"The penalty in the case of delay in submission of document should be a token penalty to insure compliance with the provisions of law."

On the facts, the Tribunal reduced the penalty from Rs.35,500 (Rs.50 per day for 710 days) to Rs.10,000, emphasizing proportionality and fairness.

The Tribunal affirmed that failure to produce documents upon summons attracts penalty under Section 77(1), but the quantum must be reasonable and serve as a compliance incentive rather than a harsh punishment.

1. Whether the respondent, whose industrial unit falls within the 'negative list' as per the Government notifications, is entitled to the concessional Central Sales Tax (CST) rate of 1.5% under the notification dated 01.04.2013, or whether the standard rate of 2% applies.

2. Whether the principle established by the Supreme Court in Lloyd Electric and Engineering Limited v. State of Himachal Pradesh, that the State Government cannot adopt contradictory policies ("cannot speak in two voices"), applies to the facts of this case to entitle the respondent to the concessional CST rate despite being in the negative list.

3. The proper interpretation and application of precedents, particularly the scope and binding nature of ratio decidendi versus obiter dicta, in the context of the present dispute.

4. Whether the learned Tribunal erred in setting aside the assessment and appellate orders on the basis of the Supreme Court's decision in Lloyd Electric without properly considering the factual and legal distinctions in the present case.

5. The competence of the State to define and apply the meaning of 'negative list' from notifications issued under different statutes for the purpose of CST concessions.

Issue-wise Detailed Analysis:

Issue 1: Entitlement to concessional CST rate despite inclusion in the negative list

The relevant legal framework includes the Himachal Pradesh Industrial Policy 2004 and subsequent notifications issued under the CST Act, specifically the notification dated 01.04.2013, which provided a concessional CST rate of 1.5% for industrial units, excluding those specified in the negative list. The negative list was defined by earlier departmental notifications dated 30.03.2005 and 23.10.2009, issued under the Himachal Pradesh General Tax Act, 1968.

The Tribunal accepted the respondent's claim to the concessional rate, relying on the Supreme Court's decision in Lloyd Electric, which emphasized a uniform policy approach by the State Government. However, the Court noted that the factual matrix in Lloyd Electric was materially different. In Lloyd Electric, the issue was the extension of a concessional CST rate beyond 31.03.2009, where the policy and notification timelines overlapped, and the unit was eligible under the policy.

In contrast, the present case concerns the period after 01.04.2013, when the Government issued a fresh notification explicitly excluding industrial units in the negative list from the concessional rate. The respondent's unit was admitted to be in the negative list (Entry No. 22: Mini steel plants induction/Arc/Submerged furnaces and/or rolling mills), and thus, by the plain language of the notification dated 01.04.2013, was not entitled to the concessional rate.

The Court held that the inclusion in the negative list precludes entitlement to the concessional tax rate. The respondent's payment of CST at 1.5% instead of 2% was therefore not justified under the statutory framework.

Issue 2: Application of the principle that the State cannot speak in two voices

The Supreme Court in Lloyd Electric held that once the State government adopts a policy, all its departments must speak with one voice, and no department can take a contradictory stand. The Tribunal relied heavily on this principle to set aside the assessment and penalty imposed on the respondent.

However, the Court emphasized that the ratio of Lloyd Electric is confined to its facts, where the policy decision to extend the concessional rate was clear and undisputed, and the issue was the retrospective effect of the notification. The present case involves a subsequent policy and notification with explicit exclusion of certain industrial units from the concessional rate.

The Court observed that the Tribunal failed to appreciate this distinction and erred in mechanically applying the Lloyd Electric principle without analyzing the factual differences. The Court further clarified that the Tribunal's criticism of the assessing and appellate authorities for alleged perfunctory adjudication was unwarranted and lacked cogent reasoning.

Issue 3: Interpretation and application of precedents and ratio decidendi

The Court undertook an extensive review of principles governing the binding nature of precedents, ratio decidendi, and obiter dicta, citing authoritative decisions from the UK House of Lords and the Supreme Court of India. It reiterated the settled position that:

• A judgment is binding only for what it actually decides (the ratio decidendi) and not for every observation or logical inference that may be drawn from it.
• Judicial observations must be read in the context of the facts of the case and are not to be treated as statutory provisions.
• Extracting stray remarks or dicta and treating them as binding ratio is erroneous.
• The ratio must be ascertained by analyzing the facts, legal issues, and the court's reasoning in the judgment.

Applying these principles, the Court found that the Tribunal's reliance on Lloyd Electric was misplaced as it failed to isolate the ratio and apply it appropriately to the materially different facts of the present case.

Issue 4: Competence of the State to import meaning of 'negative list' from notifications under different statutes

The respondent argued that the negative list defined under the Himachal Pradesh General Tax Act could not be imported into the CST Act notification dated 01.04.2013, since they are different statutes.

The Court rejected this argument, stating that although ordinarily definitions from one statute do not govern another unless both are pari materia or there is express provision, the State was competent to rely on the departmental notifications defining the negative list when dealing with a cognate subject matter. The negative list's meaning was relevant and consistent with the policy intent to exclude certain industrial units from concessional CST benefits.

Issue 5: Whether the Tribunal erred in setting aside the assessment and appellate orders

The Court found that the Tribunal erred by not properly considering the factual and legal distinctions between the present case and Lloyd Electric. The Tribunal's observations that the assessment was perfunctory and lacked proper adjudication of mens rea and willful default were unsubstantiated and outside the scope of the issues before it.

The Court emphasized that the assessment was in accordance with the notifications and the law, and the respondent's inclusion in the negative list disentitled it from the concessional rate. The Tribunal's order was therefore quashed and set aside, and the assessment order affirmed.

Significant Holdings:

"The State Government cannot speak in two voices. Once the cabinet takes a policy decision ... the Excise and Taxation Department cannot take a different stand. What is given by the right hand cannot be taken by the left hand. The Government shall speak only in one voice." (Lloyd Electric, as cited by the Tribunal)

However, this principle applies only where the factual and policy matrix is consistent and undisputed. It does not permit overriding subsequent notifications that explicitly exclude certain units from benefits.

"A decision is an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically flows from the various observations made in the judgment."

"Judicial utterances made in the setting of the facts of a particular case are not to be treated as if they were legislative enactments."

"The State was well within its competence to rely upon the expression in 'Negative List' as assigned in the departmental notification ... when the notification was dealing with a cognate subject."

Final determinations:

• The respondent's industrial unit, being part of the negative list, was not entitled to the concessional CST rate of 1.5% under the notification dated 01.04.2013.
• The assessment imposing CST at the rate of 2% and associated interest and penalty was valid and rightly upheld by the assessing and appellate authorities.
• The Tribunal erred in allowing the appeal solely on the basis of the Lloyd Electric judgment without proper analysis of the facts and legal provisions applicable to the present case.
• The revision petition filed by the State is allowed, the Tribunal's order is quashed and set aside, and the assessment order is affirmed.

Issues: Whether the pre-deposit directed for the second appeal could be reduced by giving credit for the amount already deposited before the first appellate authority and whether the appeal could be restored on deposit of the reduced amount.

Analysis: The challenge arose from dismissal of the second appeal for non-compliance with the pre-deposit direction. The Court noted that the appellant had already deposited amount before the first appellate authority and had also deposited further amount before the Tribunal. In these circumstances, the earlier deposit was directed to be given credit while fixing the balance pre-deposit required for the second appeal. The Court therefore modified the Tribunal's order and granted time to deposit the reduced balance, with restoration of the second appeal on compliance.

Conclusion: The pre-deposit requirement was reduced by taking credit of the earlier deposit, and the appeal was directed to stand restored upon deposit of the balance amount within the stipulated time.

Issues: (i) Whether the courts could modify an arbitral award while exercising jurisdiction under sections 34 and 37 of the Arbitration and Conciliation Act, 1996; (ii) whether the Supplementary Agreement and Tripartite Agreement were vitiated by coercion and whether the Development Agreement remained binding without novation; (iii) whether L&T committed a fundamental breach entitling PCL to terminate the Development Agreement and whether L&T's counterclaim was liable to be rejected; (iv) whether the monetary reliefs awarded by the Tribunal, including damages, indemnity and compensation, could be sustained.

Issue (i): Whether the courts could modify an arbitral award while exercising jurisdiction under sections 34 and 37 of the Arbitration and Conciliation Act, 1996

Analysis: The limited jurisdiction under sections 34 and 37 does not permit a court to rewrite, vary or partially modify an arbitral award. The proper course is to either uphold the award to the extent sustainable or set it aside within the confines of the statute. The appellate court cannot sever the award in a manner that amounts to substantive modification of the arbitral determination.

Conclusion: The court held that an arbitral award cannot be modified in proceedings under sections 34 or 37.

Issue (ii): Whether the Supplementary Agreement and Tripartite Agreement were vitiated by coercion and whether the Development Agreement remained binding without novation

Analysis: The Supplementary Agreement was expressly contingent on fulfillment of specified conditions precedent, including replacement or takeover of bank guarantees and compliance with the tripartite funding arrangement. Those conditions were not fulfilled. The surrounding circumstances showed L&T's default in payment of EDC and its failure to discharge related obligations, which justified the finding that PCL was placed under economic pressure. The Supplementary Agreement therefore did not come into force, and the Development Agreement was not novated.

Conclusion: The court upheld the finding that the Supplementary Agreement was a non-starter, was vitiated by economic duress, and did not novate the Development Agreement.

Issue (iii): Whether L&T committed a fundamental breach entitling PCL to terminate the Development Agreement and whether L&T's counterclaim was liable to be rejected

Analysis: L&T failed to pay EDC, did not commence development work, and abandoned the project. The arbitral findings on breach were supported by the record and were within the permissible zone of review. In that setting, PCL was justified in terminating the contract, and L&T could not obtain rescission or damages on its counterclaim. The injunction protecting PCL's right to deal with the property was also justified.

Conclusion: The court sustained the finding of fundamental breach by L&T, upheld the termination by PCL, and affirmed rejection of L&T's counterclaim.

Issue (iv): Whether the monetary reliefs awarded by the Tribunal, including damages, indemnity and compensation, could be sustained

Analysis: The monetary quantification made by the Tribunal for damages, compensation in lieu of title deeds, and compensation for non-return of licences and permits was unsupported by adequate proof and was contrary to the governing measure of damages. The indemnity award for ITCREF's future claim was also held to be too remote. At the same time, the award of costs and the injunction in favour of PCL were sustained, and the reliefs relating to the Bank were treated in light of the agreed contractual framework and the limits of arbitral jurisdiction.

Conclusion: The court upheld the setting aside of the monetary awards while sustaining the non-monetary reliefs and costs that survived judicial scrutiny.

Final Conclusion: The appeals were rejected, and the operative effect of the decision was to maintain the findings on breach, coercion, non-novation, injunction and costs, while disapproving impermissible modification of the award and unsustainable monetary quantification.

Ratio Decidendi: In section 34 and section 37 proceedings, the court may not modify an arbitral award, and arbitral findings based on a plausible view of the evidence will not be interfered with unless they transgress the limited statutory grounds for challenge.

1. Whether a partner of an unregistered partnership firm can maintain a suit against another partner for recovery of money arising from a partnership agreement under the Indian Partnership Act, 1932, specifically in light of Section 69 of the Act.

2. Whether the non-commencement of partnership business affects the maintainability of such a suit.

3. The applicability and scope of Section 69(1) and (2) of the Indian Partnership Act, 1932, and the exceptions under Section 69(3) regarding suits by partners or firms.

4. Whether the suit filed by the petitioners falls within the prohibition of Section 69(1) or qualifies under any exceptions permitting suits by partners of unregistered firms.

Issue-wise Detailed Analysis:

Issue 1: Maintainability of Suit by Partner of Unregistered Partnership Firm under Section 69

Relevant Legal Framework and Precedents:

Section 69(1) of the Indian Partnership Act, 1932, states that no suit to enforce a right arising from a contract or conferred by the Act shall be instituted by any person suing as a partner in a firm against the firm or any alleged partner unless the firm is registered and the person suing is shown in the Register of Firms as a partner. Section 69(2) prohibits suits by unregistered firms against third parties. Section 69(3) provides exceptions allowing suits for dissolution and rendition of accounts.

Precedent in Seth Loonkaran Sethiya v. Ivan E. John (1977) confirmed the mandatory character of Section 69, holding that suits by partners of unregistered firms to enforce contractual rights are void and not maintainable. Similarly, the Lahore High Court judgment in Bishen Narain v. Swaroop Narain (1938) held that the fact that the partnership business had not commenced was immaterial for the purpose of Section 69.

Court's Interpretation and Reasoning:

The Court emphasized the mandatory nature of Section 69(1), which prohibits suits by partners of unregistered firms to enforce rights arising from partnership contracts. The Court observed that the suit in question was filed by partners of an unregistered firm against another partner for recovery of money, which constitutes enforcing a contractual right. The partnership deed was found to be valid and not a mere bond.

Key Evidence and Findings:

The partnership deed dated 11.12.2009 clearly established a partnership agreement with defined shares among the partners, including the respondent holding 25% and the petitioners collectively holding 75% shares. The sum of Rs. 30,00,000 was invested as capital under this deed. The Trial Court's finding that the agreement was a partnership deed and not a bond was accepted.

Application of Law to Facts:

Since the suit was filed by partners of an unregistered firm to recover money arising from the partnership agreement, it fell squarely within the prohibition of Section 69(1). The fact that the partnership business had not commenced was held immaterial, consistent with precedent.

Treatment of Competing Arguments:

The petitioners argued that the partnership business had not commenced and thus the suit should be maintainable. The Court rejected this, relying on the precedent that the commencement of business is irrelevant for the applicability of Section 69. The High Court's reliance on the Lahore High Court decision was upheld.

Conclusions:

The suit was not maintainable under Section 69(1) of the Indian Partnership Act, 1932, as it was filed by partners of an unregistered firm to enforce contractual rights against another partner.

Issue 2: Effect of Non-Commencement of Partnership Business on Suit Maintainability

Relevant Legal Framework and Precedents:

The Lahore High Court judgment in Bishen Narain v. Swaroop Narain held that non-commencement of business does not affect the applicability of Section 69. The Court reaffirmed this principle.

Court's Interpretation and Reasoning:

Despite the petitioners' contention that the partnership business had not started, the Court held that the existence of a partnership agreement and the rights arising therefrom triggered the application of Section 69. The Court reasoned that the equities do not warrant any concession based on non-commencement.

Key Evidence and Findings:

The written statement of the defendant admitted that the business was stopped in 2009, but the partnership agreement itself acknowledged the offer of partnership despite the non-working condition of the business.

Application of Law to Facts:

The non-commencement of business did not exempt the petitioners from the prohibition under Section 69(1). The partnership deed was operative and created enforceable rights among partners.

Treatment of Competing Arguments:

The Court rejected the argument that the suit was maintainable because the business had not commenced, holding that the status of the business is immaterial for the purposes of Section 69.

Conclusions:

Non-commencement of partnership business does not affect the applicability of Section 69(1), and thus does not render the suit maintainable.

Issue 3: Applicability of Exceptions under Section 69(3) for Suits by Partners of Unregistered Firms

Relevant Legal Framework and Precedents:

Section 69(3) exempts suits for dissolution of the firm and rendition of accounts from the embargo of Section 69(1). Mukund Balkrishna Kulkarni v. Kulkarni Powder Metallurgical Industries (2004) clarified that suits for declaration of partnership do not fall under Section 69(1), and suits for dissolution and accounts are permitted regardless of registration.

Court's Interpretation and Reasoning:

The Court distinguished the present suit for recovery of money from suits for dissolution or rendition of accounts. It held that the petitioners should have filed a suit for dissolution and accounts, which would have been maintainable under the exception in Section 69(3).

Key Evidence and Findings:

The petitioners did not seek dissolution or accounts but only recovery of money, which is a right arising from the partnership contract and thus barred under Section 69(1).

Application of Law to Facts:

The suit did not fall within the exception under Section 69(3) and was therefore barred. The Court noted that the petitioners' defense that the business had not commenced did not justify bypassing the registration requirement.

Treatment of Competing Arguments:

The Court rejected the argument that the suit could be maintained because the partnership business had not commenced, emphasizing that the appropriate remedy would have been a suit for dissolution and accounts.

Conclusions:

The suit for recovery of money is not saved by the exception under Section 69(3), which applies only to suits for dissolution and rendition of accounts.

Significant Holdings:

"A bare glance at the section is enough to show that it is mandatory in character and its effect is to render a suit by a plaintiff in respect of a right vested in him or acquired by him under a contract which he entered into as a partner of an unregistered firm, whether existing or dissolved, void."

"Once there is an agreement of partnership, unless it is registered, no suit can be maintained by the partners for enforcing any right accruing from such agreement."

"The right of partner to ask the dissolution of a firm is a right the enforcement of which is otherwise forbidden under Section 69(1). It is because of the exception under sub-section (3) of Section 69 that a person suing as a partner can enforce a right under the contract for dissolution of the firm and accounts."

Core Principles Established:

- Section 69(1) of the Indian Partnership Act, 1932, is mandatory and prohibits suits by partners of unregistered firms to enforce contractual rights against each other.

- The non-registration of a partnership firm bars suits for recovery of money or enforcement of contractual rights arising from the partnership agreement.

- The commencement or non-commencement of the partnership business is immaterial for the applicability of Section 69.

- Exceptions under Section 69(3) allow suits for dissolution and rendition of accounts even if the firm is unregistered.

Final Determinations:

The suit filed by the petitioners, partners of an unregistered partnership firm, against another partner for recovery of money arising from the partnership agreement is not maintainable under Section 69(1) of the Indian Partnership Act, 1932.

The High Court's order setting aside the Trial Court's decision and holding the suit non-maintainable was upheld.

The petitioners' Special Leave Petition was dismissed accordingly.

Issues: (i) whether the writ petition was maintainable; (ii) whether the allotment letters survived after execution of the lease deeds and whether cancellation of the allotment also cancelled the lease deeds; (iii) whether cancellation of the entire allotment was hit by the doctrine of proportionality and whether the cancellation was based only on non-payment or also on development defaults; (iv) whether the cancellation affected the rights of homebuyers, sub-lessees and financial institutions, and what consequential directions followed.

Issue (i): whether the writ petition was maintainable.

Analysis: The dispute arose out of a contractual and statutory arrangement with a public authority, but the challenge was to an alleged arbitrary and disproportionate cancellation by the State instrumentality. The existence of contractual remedies did not exclude judicial review where the impugned action was said to be unfair, unreasonable, or arbitrary. The matter therefore involved a sufficient public law element for the writ court to examine the legality of the cancellation.

Conclusion: The writ petition was maintainable.

Issue (ii): whether the allotment letters survived after execution of the lease deeds and whether cancellation of the allotment also cancelled the lease deeds.

Analysis: The allotment letters, reservation letter and lease deeds formed a composite transaction. Some allotment terms were repeated in the lease deeds, some were incorporated by reference, and some were modified or removed. The court held that the allotment letters did not disappear entirely on execution of the lease deeds, but continued for limited purposes where the lease deeds did not alter them. At the same time, the authority retained an independent statutory power to resume the site under the governing Act, and the lease deeds themselves preserved that wider statutory right. The cancellation order expressly referred to breach of allotment and lease conditions and to resumption of the site.

Conclusion: The allotment letters survived only to a limited extent, and the cancellation order had the effect of cancelling the lease deeds as well.

Issue (iii): whether cancellation of the entire allotment was hit by the doctrine of proportionality and whether the cancellation was based only on non-payment or also on development defaults.

Analysis: The court applied proportionality by examining the repeated defaults, notices, extensions, reschedulement, invocation of bank guarantee, escrow arrangement, and the petitioner's continued non-compliance. It also considered the scale of unpaid dues, the petitioner's financial distress, the impact on homebuyers, and the planned-development objective of the project. The authority had already adopted progressively less restrictive measures before resorting to cancellation. The court accepted that non-development was referred to, but held that the primary ground for cancellation was non-payment of dues, while development defaults and stakeholder interests were relevant supporting considerations. The cancellation was therefore not excessive or arbitrary.

Conclusion: The cancellation of the entire allotment was not violative of proportionality, and it was primarily based on non-payment of dues.

Issue (iv): whether the cancellation affected the rights of homebuyers, sub-lessees and financial institutions, and what consequential directions followed.

Analysis: The court distinguished between the main allotment and third-party interests. It held that the homebuyers' interests required protection and directed completion of their projects within fixed timelines, a committee mechanism, a zero-period treatment for the intervening period, and an exit policy. It held that sub-lessees were to be protected by direct lease arrangements with the authority on the same terms, and that financial institutions holding sub-lease interests were also to be protected by a similar mechanism. The money deposited by the petitioner pursuant to interim orders was not treated as automatically forfeited; instead, amounts paid to the authority were to be dealt with in accordance with insolvency proceedings and the directions issued.

Conclusion: The third-party interests were protected by consequential directions, and the petitioner was entitled to refund of amounts not validly forfeited, subject to the directions issued.

Final Conclusion: The impugned cancellation was sustained, but the court moulded relief to protect homebuyers, sub-lessees and financial institutions, and directed refund treatment of monies received by the authority in the manner specified.

Ratio Decidendi: Where allotment letters and lease deeds form one composite statutory transaction, the authority may still invoke an independent statutory power of resumption for breach of conditions and non-payment, and a cancellation supported by repeated defaults, prior lesser measures, and public-interest considerations will not be struck down as disproportionate merely because some lesser recovery route was available.