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The core legal questions considered by the Court in this matter are:
(a) Whether the statutory authority complied with the mandatory procedural requirement under sub-rule (1A) of Rule 142 of the CGST Rules, 2017, which mandates communication of details of tax, interest, and penalty (via Part-A of Form GST DRC-01A) before issuance of notice for assessment under Section 74 of the CGST/OGST Act;
(b) Whether the imposition of penalty under Section 122(2)(b) of the GST Act, 2017, without adherence to the procedural safeguards introduced by the amendment inserting sub-section (1A) in Section 122, is legally sustainable, particularly in respect of tax periods prior to the amendment's effective date;
(c) Whether the penal provisions under Section 122(2)(b) can be applied retrospectively to taxable events occurring before the amendment effective from 01.01.2021;
(d) The effect of non-compliance with the communication requirement under Rule 142(1A) on the validity of the assessment and penalty order;
(e) The procedural propriety and jurisdictional competence of the authority in passing the impugned Order-in-Original dated 31.01.2025 imposing penalty for tax periods from July 2017 to March 2019.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Compliance with communication requirement under Rule 142(1A) of the CGST Rules, 2017
Relevant legal framework and precedents: Rule 142(1A) of the CGST Rules, 2017, as amended by G.S.R. 639(E) dated 15.10.2020, mandates that before issuing a notice for proceeding with determination of tax liability under Section 74, the officer must communicate the details of tax, interest, and penalty ascertained to the person in Part-A of Form GST DRC-01A. This procedural safeguard ensures transparency and affords the taxpayer an opportunity to respond before initiation of assessment proceedings.
Court's interpretation and reasoning: The Court noted that prior to the amendment, such communication was a mandatory precondition. The petitioner contended that the authority failed to comply with this mandatory requirement, which goes to the root of the validity of the assessment order.
Key evidence and findings: The petitioner pointed out the absence of communication of the particulars of tax, interest, and penalty before the notice was issued, which was a statutory requirement under the amended Rule 142(1A).
Application of law to facts: The Court observed that failure to comply with this procedural requirement would vitiate the assessment process and render the order liable to be quashed.
Treatment of competing arguments: The Opposite Parties sought time to obtain instructions on this issue, indicating the complexity and necessity of detailed examination.
Conclusions: The Court recognized the importance of compliance with Rule 142(1A) and indicated that non-compliance could invalidate the assessment and penalty order.
Issue (b) and (c): Legality and retrospective application of penalty under Section 122(2)(b) of the GST Act after amendment inserting sub-section (1A)
Relevant legal framework and precedents: Section 122(2)(b) of the GST Act empowers the authority to impose penalty for certain offences. The Finance Act, 2020, inserted sub-section (1A) into Section 122, effective from 01.01.2021, introducing procedural safeguards for imposition of penalty. The amendment was notified via Notification No. 92/2020-Central Tax dated 22.12.2020.
Court's interpretation and reasoning: The petitioner argued that the penal provision being substantive in nature cannot be applied retrospectively to taxable events prior to the amendment's effective date. The Court acknowledged that imposing penalty under the amended provision for tax periods from July 2017 to March 2019, i.e., prior to 01.01.2021, would be erroneous.
Key evidence and findings: The impugned order imposed penalty under Section 122(2)(b) for tax periods predating the amendment, without authority to do so.
Application of law to facts: The Court recognized that retrospective application of substantive penal provisions is generally impermissible unless explicitly provided by legislature. The amended sub-section (1A) could not be invoked for taxable events preceding its commencement.
Treatment of competing arguments: The Opposite Parties sought instructions on the sustainability of penalty imposition under the amended provision for pre-amendment periods, indicating a nuanced legal question.
Conclusions: The Court indicated that penalty imposition under Section 122(2)(b) as amended could not be sustained for tax periods prior to 01.01.2021.
Issue (d): Effect of non-compliance with communication of GST DRC-01A on validity of assessment and penalty order
Relevant legal framework and precedents: The procedural safeguard under Rule 142(1A) aims to ensure that the taxpayer is adequately informed of the tax, interest, and penalty details before notice issuance, upholding principles of natural justice.
Court's interpretation and reasoning: The Court emphasized that failure to communicate the details as mandated would constitute a procedural irregularity affecting the tenability of the assessment and penalty order.
Key evidence and findings: The petitioner demonstrated non-communication of the requisite details prior to notice issuance.
Application of law to facts: The Court found that such non-compliance would render the order vulnerable to challenge and liable to be set aside.
Treatment of competing arguments: The Opposite Parties did not dispute the procedural requirement but sought further instructions.
Conclusions: The Court upheld the importance of strict adherence to procedural mandates and indicated that non-compliance would invalidate the order.
Issue (e): Jurisdictional competence and procedural propriety of the authority in passing the impugned Order-in-Original dated 31.01.2025
Relevant legal framework and precedents: The authority's jurisdiction to impose penalty under Section 122(2)(b) is subject to compliance with procedural safeguards under the GST Act and Rules. The amendment introducing sub-section (1A) in Section 122 is a substantive change affecting penalty imposition.
Court's interpretation and reasoning: The Court scrutinized the authority's jurisdiction to impose penalty for periods prior to the amendment and noted the absence of compliance with Rule 142(1A).
Key evidence and findings: The impugned order imposed penalty for tax periods July 2017 to March 2019, without communication of details as per Rule 142(1A) and before the amendment's effective date.
Application of law to facts
Mandatory communication under Rule 142(1A) - communication of details in Part-A of Form GST DRC-01A - determination of tax liability under Section 74 - imposition of penalty under Section 122(2)(b) - effect of amendment to Section 122(1A) - interim deposit and restraint on coercive action
Interim deposit and restraint on coercive action - interim direction for deposit of a portion of determined tax and stay of coercive measures on compliance - HELD THAT: - The Court, on the request by the Junior Standing Counsel to obtain instructions on the sustainment of the order under challenge and consequences of non-compliance of Rule 142(1A), directed an interim arrangement to preserve the parties' positions pending further hearing. As an interim measure the petitioner was directed to deposit 20% of the amount of tax as determined in the impugned Order-in-Original dated 31.01.2025 within two weeks and to furnish evidence of such deposit to the authority. Upon such deposit, the Opposite Parties were restrained from taking coercive measures to enforce the demand raised in the impugned order until the next listed date. The direction was granted to enable consideration of the substantive contentions without immediate coercive enforcement. [Paras 7]
Petitioner to deposit 20% of the tax determined within two weeks and, upon proof of deposit, Opposite Parties restrained from coercive action until the next date.
Mandatory communication under Rule 142(1A) - communication of details in Part-A of Form GST DRC-01A - imposition of penalty under Section 122(2)(b) - effect of amendment to Section 122(1A) - determination of tax liability under Section 74 - challenge to the validity of the Order-in-Original on ground of non-compliance with Rule 142(1A) and contention that penalty under Section 122(2)(b) could not be imposed for earlier tax periods pending instruction and consideration - HELD THAT: - The Court noted the petitioner's contention that the assessing authority failed to comply with the requirement to communicate details of tax, interest and penalty in Part-A of Form GST DRC-01A before issuing a notice for determination under Section 74, and that penalty under Section 122(2)(b) could not be imposed in respect of taxable events prior to the amendment inserting sub-section (1A) in Section 122. The Junior Standing Counsel sought time to obtain instructions on the sustainability of invoking the amended penal provision for the tax periods in question and on consequences of non-compliance with Rule 142(1A). The Court did not adjudicate the merits of these contentions; instead it recorded that instructions were sought and listed the matter for further hearing, thereby leaving the substantive challenge for final determination after the Opposite Parties obtain instructions. [Paras 2, 3, 4]
Substantive challenge regarding non-communication under Rule 142(1A) and imposition of penalty under Section 122(2)(b) for the periods in question is left open for consideration after the Opposite Parties obtain instructions; no final adjudication on merits was made.
Final Conclusion: The Court granted interim relief: petitioner to deposit 20% of the tax determined within two weeks and, on proof of deposit, Opposite Parties restrained from coercive enforcement until the next date; the substantive objections regarding non-communication under Rule 142(1A) and imposition of penalty under Section 122(2)(b) for the periods July, 2017 to March, 2019 remain undecided and are to be considered after Opposite Parties obtain instructions.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of the SCN issuance in light of limitation period under Section 73 of CGST Act, 2017
Relevant legal framework and precedents: Section 73 of the CGST Act, 2017 prescribes the limitation period for issuing a show cause notice for recovery of tax not paid or short paid, or erroneously refunded, typically within three years from the relevant date. The limitation period is a substantive safeguard to prevent stale claims. The Court noted that the Financial Year under scrutiny was 2019-20, and ordinarily, the limitation period for issuing the SCN would have expired in 2023.
Court's interpretation and reasoning: The Court observed that the limitation period was extended by a statutory notification No. 56/2023-Central Tax dated 28th December 2023, which effectively revived or extended the time frame for issuance of SCNs beyond the original limitation period. The Court held that this extension legally enabled the Department to issue the SCN dated 31st May 2024.
Key evidence and findings: The SCN itself was scrutinized, revealing that discrepancies were noted between returns filed under GSTR-3B, GSTR-1, and GSTR-2B, indicating potential under-reporting of tax liability or excess claim of Input Tax Credit (ITC). The Department relied on data available on the GST portal to issue the SCN under Section 73 with interest and penalty demands.
Application of law to facts: The Court found that the extension notification was a valid legislative act that extended the limitation period, thereby rendering the issuance of the SCN within the extended limitation period permissible.
Treatment of competing arguments: The Petitioner contended that the SCN was issued after the lapse of the original limitation period and thus was invalid. The Court rejected this argument based on the extension notification.
Conclusion: The issuance of the SCN was held to be legally valid due to the statutory extension of limitation.
Issue 2: Whether the Petitioner was afforded a proper opportunity to be heard before passing the impugned order
Relevant legal framework and precedents: Principles of natural justice and procedural fairness require that a person affected by a quasi-judicial order must be given a reasonable opportunity to present their case before adverse orders are passed. Section 75(4) of the CGST Act mandates personal hearing before passing an order based on the SCN.
Court's interpretation and reasoning: The Court noted that the Petitioner had not filed any reply to the SCN and was not given an adequate opportunity to be heard before the impugned order was passed. The Petitioner's representative submitted that due to the advanced age of the company's proprietor and the lapse of time, the SCN was effectively missed and no chance to respond was provided.
Key evidence and findings: The record indicated that the Petitioner had not responded to the SCN and that the impugned order was passed without any further reference to the Petitioner. The Court found this to be a violation of the principles of natural justice.
Application of law to facts: The Court held that since no reply was filed and no personal hearing was conducted, the impugned order could not stand. The failure to provide a proper hearing was a procedural infirmity warranting interference.
Treatment of competing arguments: The Department argued that the SCN and opportunity to appear were issued as per procedure. The Court found that mere issuance of SCN and direction to appear did not suffice if the Petitioner was not effectively heard before passing the order.
Conclusion: The impugned order was set aside on grounds of denial of opportunity to be heard, and the matter was remanded for fresh adjudication after affording the Petitioner a proper hearing.
Issue 3: Appropriate remedy and directions going forward
Relevant legal framework and precedents: The Court is empowered under Article 226 of the Constitution to quash orders passed without following due process and to issue directions for fresh adjudication.
Court's interpretation and reasoning: Considering the lapse of time and the Petitioner's willingness to respond, the Court directed that the Petitioner be granted time till 10th July 2025 to file a reply to the SCN. The Adjudicating Authority was directed to issue a personal hearing notice thereafter and consider the Petitioner's submissions before passing a fresh order.
Key evidence and findings: The Court took note of the Petitioner's submission regarding the proprietor's age and the delay in issuance of SCN, which justified a lenient approach in granting time and opportunity.
Application of law to facts: The Court balanced the Department's right to recover tax with the Petitioner's right to be heard and procedural fairness, thereby ensuring compliance with natural justice.
Treatment of competing arguments: The Department's interest in timely recovery was acknowledged, but procedural fairness was held paramount.
Conclusion: The matter was remanded with clear directions for fresh adjudication after hearing the Petitioner, with all rights and remedies preserved for both parties
Show cause notice and right to be heard (audi alteram partem) - limitation under the Central Goods and Services Tax Act, 2017 - extension of limitation by notification - remand for fresh adjudication due to lack of opportunity - access to electronic portal for filing reply and notices
Show cause notice and right to be heard (audi alteram partem) - remand for fresh adjudication due to lack of opportunity - Impugned order set aside and matter remanded for fresh adjudication on account of failure to provide the petitioner a proper opportunity to reply to the SCN. - HELD THAT: - The Court found that the petitioner had not been afforded a proper opportunity to respond to the SCN and no reply had been filed. In view of the lapse of time between the assessment period and issuance of the SCN and the petitioner's submissions seeking an opportunity to reply, the Court set aside the impugned order and remanded the matter to the Adjudicating Authority for fresh consideration. The Adjudicating Authority was directed to issue a notice for personal hearing upon receipt of the petitioner's reply and to consider the reply and submissions made at personal hearing before passing a fresh order. [Paras 6, 7, 8, 10]
Impugned order set aside; matter remanded for fresh adjudication with directions to provide personal hearing and consider petitioner's reply.
Limitation under the Central Goods and Services Tax Act, 2017 - extension of limitation by notification - access to electronic portal for filing reply and notices - Limitation for issuing the SCN would originally have lapsed but was extended by a notification, and the petitioner is to be provided access to the GST portal to file the reply and receive notices. - HELD THAT: - The Court noted that, for Financial Year 2019-20, the limitation under the Central Goods and Services Tax Act, 2017 for issuing a SCN had lapsed in 2023. However, it recorded that Notification No. 56/2023-Central Tax dated 28th December, 2023 extended the limitation period and thereby enabled issuance of the present SCN and impugned order. In the interests of fair adjudication, the Court directed that the petitioner be given access to the GST Portal to enable uploading of the reply and to receive notices and related documents. [Paras 3, 4, 11]
Acknowledged extension of limitation by notification permitting issuance of SCN; directed provision of GST portal access to the petitioner for filing reply and receipt of notices.
Final Conclusion: Writ petition disposed by setting aside the impugned order and remitting the matter to the Adjudicating Authority for fresh adjudication; petitioner granted time till 10 July 2025 to file reply, to be afforded personal hearing, and to be provided access to the GST portal; all rights and remedies left open.
Regarding the limitation period under Section 107 of the CGST Act, the Court noted that the statutory timeline for filing an appeal is three months from the date of communication of the order, extendable by one month. The Appellate Authority dismissed the Petitioner's appeal as time-barred since it was filed well beyond this period. The Court acknowledged this limitation framework as the relevant legal standard governing appeals against GST orders.
However, the Petitioner contended that the SCN and the documents forming the basis of the cancellation order were never served upon it, thereby depriving it of knowledge and opportunity to participate in the proceedings. This raised the issue of violation of natural justice principles, which require that a person be given notice and an opportunity to be heard before adverse orders are passed. The Court examined earlier precedents, including a recent judgment involving similar facts, where it was held that if the Petitioner did not have knowledge of the SCN and was thus denied an opportunity to file a reply or attend a hearing, the limitation period would not commence, and the appeal should be heard on merits.
The Court emphasized that the retrospective cancellation from 1st July 2017, without prior notice or hearing, compounded the injustice. Such retrospective effect without affording an opportunity to contest the allegations is contrary to the principles of fairness and natural justice. The Court found merit in the Petitioner's submission that non-service of the SCN and lack of participation in proceedings rendered the limitation bar inapplicable in the circumstances.
In applying the law to facts, the Court relied on its prior decision in a case where the Petitioner similarly lacked knowledge of the SCN and was not afforded a hearing. There, the Court exercised its writ jurisdiction under Article 226 to allow the appeal to be filed within 30 days despite delay, directing the Appellate Authority to decide the matter on merits. The Court reasoned that such exercise of discretion was necessary to prevent miscarriage of justice and uphold the rule of law, especially where the statutory limitation period had not effectively commenced due to non-communication of the order.
The Court also considered the competing argument that the Petitioner should have been vigilant and that the address on record was outdated. While noting this, the Court held that such factors do not override the fundamental requirement of service and opportunity to be heard. The Court underscored that the statutory limitation period begins only upon communication of the order to the concerned person.
Consequently, the Court exercised its writ jurisdiction to set aside the impugned order dismissing the appeal as barred by limitation and directed that the Petitioner's appeal be restored and heard on merits. The Petitioner was directed to pay costs of Rs. 20,000/- to the Department of Trade & Taxes, GNCTD, as a condition for such relief. The Court left the rights and contentions of both parties open for adjudication by the Appellate Authority.
Significant holdings of the Court include the following:
"Under Section 107 of the Act, the limitation prescribed for challenging an order is three months from the date on which the said decision or order is communicated to the concerned persons."
"Since the grounds for seeking permission to file the appeal against the order was that the Petitioner did not have knowledge of the SCN and the subsequent proceedings arising therefrom, this Court, while exercising jurisdiction under Article 226 of the Constitution of India is of the opinion that an opportunity ought to be afforded to the Petitioner to assail the order on merits."
"If the same is filed within 30 days it shall not be dismissed on the ground of being barred by limitation. The adjudication thereon shall take place on merits and in accordance with law."
The Court established the core principle that limitation for filing an appeal under Section 107 of the CGST Act commences only upon communication of the order to the aggrieved party, and non-service of the SCN and non-participation in proceedings can justify condonation of delay. The retrospective cancellation of GST registration without notice violates natural justice and warrants judicial intervention. The writ jurisdiction under Article 226 can be invoked to restore the appeal for merits adjudication despite limitation bars, subject to payment of costs.
In final determination, the Court set aside the order dismissing the appeal as barred by limitation, directed restoration of the appeal to its original number, and mandated hearing on merits by the Appellate Authority. The Petitioner was directed to appear before the Appellate Authority on a specified date and pay costs, while the substantive rights and contentions remain open for adjudication.
Limitation for filing an appeal under Section 107 - No opportunity to file a reply of SCN or participate in the proceedings - Cancellation of the GST registration retrospectively violation of principles of natural justice - HELD THAT:- Following the decision of this Court on similar facts, in theMs Blackmelonadvance Technology Company Pvt Ltd V. Commissioner Of State Goods And Services Tax Delhi & Anr. [2025 (4) TMI 1511 - DELHI HIGH COURT]
Accordingly, exercising writ jurisdiction under Article 226 of the Constitution of India, the Petitioner’s appeal is directed to be heard on merits, subject to payment of Rs. 20,000/- as costs with the Department of Trade & Taxes, Government of National Capital Territory of Delhi.
The proof of costs shall be placed before the Appellate Authority and the appeal shall be restored to its original number. The appeal shall be heard by the Appellate Authority on merits in accordance with law.
The petition is disposed of.
Issues: Whether the order cancelling GST registration deserved to be set aside and the matter remanded on account of non-supply of the field visit report and denial of a proper opportunity of hearing.
Analysis: The cancellation was founded on the allegation that the principal place of business was not found during field visit. The petitioner had not filed a reply to the show cause notice, while the impugned order recorded a reply that was not in fact filed. The field visit report forming the basis of the action had also not been supplied. In these circumstances, the petitioner had not been afforded a proper opportunity to respond to the notice and place its case before the adjudicating authority.
Conclusion: The cancellation order was set aside and the matter was remanded to the adjudicating authority for fresh consideration after supply of the field visit report, filing of reply, and grant of personal hearing.
Cancellation of GST registration - Natural justice / opportunity to be heard - Supply of field visit report - Remand to Adjudicating Authority - Retrospective cancellation - Access to GST Portal for filing reply
Cancellation of GST registration - Natural justice / opportunity to be heard - Remand to Adjudicating Authority - Retrospective cancellation - Validity of the impugned order cancelling GST registration in view of absence of adequate opportunity to be heard and alleged incorrect recording of a reply. - HELD THAT: - The Court found that the petitioner was not afforded a proper opportunity to be heard and that the impugned order incorrectly records that a reply had been filed when no reply was served; the field visit report forming the basis of the showcause notice was not provided to the petitioner. In light of these deficiencies, the Court set aside the impugned order cancelling registration (which had been made with retrospective effect) and remanded the matter to the Adjudicating Authority for fresh consideration. The petitioner was granted a fixed period to file a reply to the showcause notice and the Adjudicating Authority was directed to issue a notice for personal hearing and to consider the reply and oral submissions before passing a fresh order on merits. [Paras 2, 3, 5, 6, 7]
Impugned cancellation set aside; matter remanded for fresh adjudication after affording opportunity to file reply and personal hearing.
Supply of field visit report - Access to GST Portal for filing reply - Natural justice / opportunity to be heard - Procedural directions regarding provision of documents, timeline for filing reply, personal hearing notice and electronic access to enable compliance. - HELD THAT: - The Court directed that the field visit report forming the basis of the showcause notice be supplied to the petitioner within two weeks. The petitioner was granted time until 10th July 2025 to file a reply to the showcause notice; upon filing, the Adjudicating Authority must issue and communicate a notice for personal hearing to the petitioner at the specified contact details. The Adjudicating Authority is to consider the reply and submissions made at the personal hearing and pass a fresh order. Further, the Court directed that access to the GST Portal be provided to the petitioner to enable uploading of the reply and access to notices and related documents. [Paras 4, 6, 8]
Field visit report to be furnished; time and mechanism fixed for filing reply and personal hearing; access to GST Portal to be provided.
Final Conclusion: The writ petition is disposed of by setting aside the impugned order of cancellation and remanding the matter to the Adjudicating Authority with directions to furnish the field visit report, allow the petitioner to file a reply by 10th July 2025, provide a personal hearing and portal access, and thereafter pass a fresh order after considering the submissions.
Outcome: The writ petition was withdrawn with liberty to the petitioner to approach the appropriate authority under the GST /statutory framework.
Availability of alternative remedy under GST - challenge to assessment under Section 74 CGST/OGST - disallowance of input tax credit on account of alleged bogus suppliers - writ petition withdrawal and liberty to pursue statutory remedy
Availability of alternative remedy under GST - writ petition withdrawal and liberty to pursue statutory remedy - Petitioner's challenge to the assessment was not entertained and the petitioner was granted liberty to pursue the statutory remedy under the CGST/OGST Act; the writ petition was disposed of as withdrawn. - HELD THAT: - The petition impugns an order dated 4th February, 2023 passed under Section 74 of the Central Goods and Services Tax Act, 2017/the Odisha Goods and Services Tax Act, 2017 for the period July, 2017 to March, 2018, alleging disallowance of input tax credit on account of supplies from a nonexistent supplier. The State respondents submitted that the statute provides an effective and efficacious alternative remedy and that the authorities under the GST Acts are competent to adjudicate the factual disputes and reappreciate evidence. The petitioner sought withdrawal of the writ petition in order to approach the appellate authority/forum under the CGST/OGST Act. Having regard to the availability of the statutory remedy and the petitioner's request, the Court granted liberty to the petitioner to approach the appropriate authority under the CGST/OGST Act and accordingly allowed the petition to be withdrawn. [Paras 8, 9]
Liberty granted to the petitioner to approach the appropriate authority under the CGST/OGST Act; writ petition disposed of as withdrawn.
Final Conclusion: The writ petition challenging the assessment order for July, 2017 to March, 2018 under Section 74 CGST/OGST was disposed of as withdrawn, with liberty to the petitioner to pursue the statutory remedies available under the CGST/OGST Act.
Issues: Whether the rejection of the statutory appeal on the ground of delay of 37 days was liable to be interfered with and the appeal directed to be entertained on merits.
Analysis: The delay was explained as arising from the petitioner's efforts to remit the balance tax amount before the Block Development Officer, and the explanation was found satisfactory. In view of the circumstances placed before the Court, a liberal approach was warranted in considering the delay in filing the appeal.
Conclusion: The order rejecting the appeal for delay was set aside and the appellate authority was directed to entertain the appeal without reference to delay and decide it on merits in accordance with law.
Condonation of delay - rejection of appeal for delay - exercise of appellate discretion - entertainment of appeal despite delay - decision on merits after remand
Condonation of delay - rejection of appeal for delay - exercise of appellate discretion - Validity of the first respondent's rejection of the petitioner's appeal for delay of 37 days. - HELD THAT: - The petitioner attributed the delay to steps taken to remit the balance tax by approaching the Block Development Officer, whose response indicated a dispute as to the applicable tax rate; the affidavit furnished a satisfactory explanation for the 37-day delay. The High Court found that, in view of the explanation and the circumstances, the Appellate Authority ought to have adopted a liberal approach instead of rejecting the appeal for delay. The court exercised supervisory jurisdiction to set aside the rejection order and directed that the appeal be entertained without reference to the delay. [Paras 5]
The impugned order of the first respondent rejecting the appeal for delay is set aside and the appellant's appeal is to be entertained notwithstanding the delay.
Entertainment of appeal despite delay - decision on merits after remand - Directive as to further proceedings on the appeal following setting aside of the order rejecting it for delay. - HELD THAT: - Having set aside the first respondent's order, the Court directed the Appellate Authority to admit and consider the petitioner's appeal on merits. The authority was required to pass appropriate orders in accordance with law and to do so expeditiously, thereby remitting the substantive assessment challenge for fresh adjudication rather than deciding on procedural preclusion. [Paras 6]
The first respondent is directed to entertain the petitioner's appeal without regard to the delay and decide the appeal on merits expeditiously and in accordance with law.
Final Conclusion: The writ petition is allowed to the extent that the appellate rejection for delay is set aside; the appeal is to be admitted and decided on merits by the first respondent expeditiously and in accordance with law. No costs.
Issues: (i) Whether the rejection of the application for amendment of GST registration particulars, including the change of principal place of business, required reconsideration after the petitioner was given an opportunity to furnish the requested documents; (ii) whether any blocked Input Tax Credit was required to be unblocked.
Issue (i): Whether the rejection of the application for amendment of GST registration particulars, including the change of principal place of business, required reconsideration after the petitioner was given an opportunity to furnish the requested documents.
Analysis: The rejection was based on deficiency-related objections, including supporting documents for the principal place of business and reconciliation statements. The Court found that the petitioner should be afforded another opportunity to place the required material on record, with a fresh hearing and consideration of the application on merits.
Conclusion: The application for amendment was directed to be reconsidered after the petitioner files the documents and is granted a personal hearing.
Issue (ii): Whether any blocked Input Tax Credit was required to be unblocked.
Analysis: The Court accepted the petitioner's grievance that the blocked credit should not continue while the application is being reconsidered.
Conclusion: Any blocked Input Tax Credit of the petitioner was directed to be unblocked.
Final Conclusion: The writ petition resulted in procedural relief to the petitioner by requiring reconsideration of the GST registration amendment request and by directing release of the blocked Input Tax Credit, while leaving other pending proceedings unaffected.
Ratio Decidendi: Where a GST registration amendment is rejected on curable deficiencies, the applicant should be given a further opportunity to produce the required material and have the request reconsidered on merits.
Reconsideration of application for amendment of GST registration - opportunity of personal hearing - change of jurisdiction on account of change of principal place of business - unblocking of Input Tax Credit
Reconsideration of application for amendment of GST registration - opportunity of personal hearing - change of jurisdiction on account of change of principal place of business - Application for amendment of principal place of business to be afforded fresh consideration after opportunity to file requested documents and personal hearing; direction to decide the amendment application within a stipulated time. - HELD THAT: - The impugned order rejecting the amendment application recorded that the Department had asked for documentary proof (rent/ownership proof, property tax receipt, owner identity proofs) and reconciliation of GSTR-3B with GSTR-1 and GSTR-2A because the amendment would lead to change of jurisdiction. The Court held that the petitioner must be given another opportunity to furnish the requested documents through the portal within one month and to seek a hearing. A personal hearing shall be afforded and the application for change of the principal place of business shall be considered afresh and an order pronounced within three months. The Court thereby set aside the rejection in the sense of directing fresh consideration on the stated terms, while clarifying that other proceedings, if any, remain unaffected. [Paras 6]
Petitioner to submit documents within one month, be granted personal hearing, and the amendment application shall be reconsidered and decided within three months.
Unblocking of Input Tax Credit - If any Input Tax Credit of the petitioner has been blocked consequent to the impugned order, the same shall be unblocked. - HELD THAT: - The Court recorded the petitioner's contention that ITC liable to be credited was being blocked following the rejection of the amendment application. In the exercise of writ jurisdiction the Court directed that any such blocked Input Tax Credit shall be unblocked. This direction is without prejudice to any other proceedings pending against the petitioner or in respect of the GSTN number. [Paras 7]
Any Input Tax Credit blocked shall be unblocked, subject to other proceedings not being affected by this order.
Final Conclusion: Writ petition disposed by directing the petitioner to file the requested documents within one month, granting a personal hearing and mandating the Department to decide the amendment application within three months; any blocked Input Tax Credit to be unblocked; other pending proceedings unaffected.
1. Whether the show cause notice (SCN) dated 14th May 2024 and the consequent adjudication order dated 6th August 2024, issued under the Goods and Services Tax (GST) regime for the financial year 2019-20, were validly issued and adjudicated upon, particularly in light of procedural compliance and opportunity to be heard.
2. The vires (validity) of Notification No. 9/2023-Central Tax dated 31st March 2023 and related notifications issued under Section 168A of the Central Goods and Services Tax Act, 2017, specifically concerning the extension of limitation periods for adjudication of SCNs.
3. Whether the procedural requirements under Section 168A of the GST Act, including the prior recommendation of the GST Council, were complied with in issuing the impugned notifications extending limitation periods.
4. The impact of the ongoing Supreme Court proceedings on the validity of the impugned notifications and the consequential orders passed by various High Courts on the subject.
5. Whether the Petitioner was afforded a fair opportunity to file replies and participate in personal hearings before the adjudicating authority, especially given the technical issue of SCNs being uploaded under the 'Additional Notices Tab' on the GST portal, which allegedly impeded effective notice.
6. The appropriate relief and procedural directions to be granted to the Petitioner in light of the above issues, pending final adjudication by the Supreme Court.
Issue-wise Detailed Analysis:
1. Validity of Show Cause Notice and Adjudication Order
Legal Framework and Precedents: The issuance of SCNs and adjudication under the GST Act is governed by procedural fairness principles, including the right to be heard and proper service of notices. The GST portal's mechanism for issuing notices is critical for ensuring compliance with these principles. Previous judgments by this Court and others (e.g., Satish Chand Mittal, Anant Wire Industries) have emphasized that orders should not be passed ex-parte without affording the party an opportunity to respond.
Court's Reasoning and Findings: The Petitioner contended that the SCN was uploaded under the 'Additional Notices Tab' on the GST portal, which was not sufficiently visible or accessible, resulting in no knowledge of the notice and hence no reply filed. The Court noted that after 16th January 2024, the Department had rectified the portal issue by making the 'Additional Notices & Orders' tab more visible. However, in the present case, the SCN issued on 14th May 2024 was still not effectively brought to the Petitioner's notice.
The Court referred to its earlier decisions where similar procedural lapses led to remand of matters to ensure fair opportunity. It held that since the Petitioner did not get a proper opportunity to be heard, the impugned order was liable to be set aside and remanded for fresh adjudication.
Application of Law to Facts: The Court applied the principle of audi alteram partem (right to be heard), emphasizing that technical glitches or procedural lacunae in notice issuance vitiate the adjudication process. The Petitioner was entitled to file a reply and be heard before any order was passed.
Treatment of Competing Arguments: The Respondent-Department argued that the portal issue had been rectified and notices were properly issued post-rectification. The Court acknowledged this but found that in the present case, the Petitioner was still prejudiced due to non-visibility of the SCN, warranting remedial action.
Conclusion: The impugned adjudication order dated 6th August 2024 was set aside. The Petitioner was granted time to file replies and afforded personal hearings, with directions for improved communication (including email and mobile notifications) to ensure effective notice.
2. Validity of Notification No. 9/2023-Central Tax and Related Notifications
Legal Framework and Precedents: Section 168A of the Central Goods and Services Tax Act, 2017 mandates that any extension of limitation periods for adjudication of SCNs must be preceded by a recommendation of the GST Council. The notifications challenged purported to extend limitation periods for financial year 2019-20.
Several High Courts have taken divergent views on the validity of these notifications. The Allahabad and Patna High Courts upheld the notifications, whereas the Guwahati High Court quashed Notification No. 56 of 2023 (Central Tax). The Telangana High Court made observations regarding invalidity, which are under Supreme Court consideration in SLP No. 4240/2025.
Court's Interpretation and Reasoning: This Court noted the ongoing litigation in the Supreme Court on the issue and the conflicting High Court decisions. It observed that the validity of the impugned notifications was a substantial legal question requiring authoritative resolution by the Supreme Court.
Application of Law to Facts: Given the pendency of the Supreme Court proceedings and the judicial discipline required, this Court refrained from expressing any opinion on the validity of the notifications. It disposed of connected petitions with the direction that the outcome of the Supreme Court's decision would be binding.
Treatment of Competing Arguments: The Petitioner challenged the notifications on procedural grounds (lack of proper GST Council recommendation before issuance). The Respondents relied on the notifications' purported compliance and prior recommendations. The Court deferred the issue pending Supreme Court adjudication.
Conclusion: The Court left the question of validity of the impugned notifications open, subject to the Supreme Court's final decision.
3. Procedural Compliance and Opportunity to be Heard
Legal Framework: Principles of natural justice require that a party must be given adequate notice and opportunity to respond to allegations before adverse orders are passed. The GST portal's notice issuance mechanism must ensure effective communication.
Court's Reasoning: The Court emphasized that mere uploading of notices on an obscure or less visible tab on the GST portal does not satisfy the requirement of proper service. It noted that in earlier cases, the Court had remanded matters for fresh adjudication where notices were not properly communicated.
Application to Facts: The Petitioner had not received effective notice of the SCN and thus was deprived of the opportunity to file replies or appear for personal hearings. The Court directed that future hearing notices be communicated via email and mobile in addition to portal upload.
Treatment of Competing Arguments: The Department contended that portal issues were rectified and notices were validly issued. The Court found that despite rectification, the Petitioner was prejudiced and required remedial directions.
Conclusion: The Court ordered remand for fresh adjudication after providing the Petitioner an opportunity to file replies and be heard, with enhanced communication protocols.
4. Impact of Pending Supreme Court Proceedings
Legal Framework: Judicial discipline requires lower courts to refrain from deciding issues pending before the Supreme Court, especially where there is a division of opinion among High Courts.
Court's Reasoning: The Court acknowledged the pendency of SLP No. 4240/2025 before the Supreme Court concerning the validity of the impugned notifications and noted the conflicting High Court rulings.
Application to Facts: The Court disposed of connected petitions with a direction that the outcome of the Supreme Court proceedings would be binding and that interim orders would continue to operate.
Conclusion: The Court refrained from expressing any opinion on the validity of the notifications and left the issue open pending the Supreme Court's decision.
5. Categories of Petitions and Reliefs
The Court identified six broad categories of cases pending before it, involving challenges to the notifications and related adjudications. While the validity of the notifications was under Supreme Court consideration, the Court indicated that relief could be granted in some cases by allowing parties to file replies and pursue appellate remedies without delving into the validity issue at this stage.
The Court proposed and ultimately granted relief by remanding the matter for fresh adjudication with directions for effective notice and opportunity to be heard.
Significant Holdings:
"Be that as it may, intention is to ensure that the Petitioner is given an opportunity to file its reply and is heard on merits and that orders are not passed in default."
"Since there is no clarity on behalf of the Department, this Court follows the order dated 9th September, 2024 in Satish Chand Mittal (Trade Name National Rubber Products) vs. Sales Tax Officer SGST, Ward 25-Zone 1 as also order dated 23rd December, 2024 in Anant Wire Industries vs. Sales Tax Officers Class II/Avato, Ward 83 & Anr where the Court under similar circumstances has remanded back the matter to ensure the Noticee/Petitioners get a fair opportunity to be heard."
"The issue in respect of the validity of the impugned notification is left open. Any order passed by the Adjudicating Authority shall be subject to the outcome of the decision of the Supreme Court in S.L.P No 4240/2025."
Core principles established include the paramount importance of the right to be heard in adjudicatory proceedings under the GST regime and that procedural deficiencies, including ineffective notice due to technical or administrative lapses, vitiate orders passed in default.
The Court also underscored the necessity of judicial discipline by deferring to the Supreme Court on the substantial question of law regarding the validity of extension notifications under Section 168A of the GST Act.
Final determinations on each issue are:
Challenge to SCN and consequent demand order - challenge to N/N. 9/2023-Central Tax dated 31st March, 2023 - extension of time limits for adjudication - HELD THAT:- This Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded on ‘Additional Notices Tab’ had remanded the matter.
There is no doubt that after 16th January 2024, changes have been made to the GST portal and the ‘Additional Notices Tab’ has been made visible. However, in the present case, the writ petition was filed in the year 2024, raising issues as to the validity of the impugned notification. Under such circumstances, considering the fact that the Petitioner did not get a proper opportunity to be heard and no reply to the SCN has been filed by the Petitioner, the matter deserves to be remanded back to the concerned Adjudicating Authority.
The impugned order is set aside - petition disposed off by way of remand.
1. Whether the show cause notice (SCN) dated 16th May 2024 and the consequent adjudication order dated 19th August 2024, issued by the Department of Trade and Taxes, GNCTD, were validly issued and whether the petitioner was afforded a fair opportunity to respond and be heard.
2. The vires and validity of Notification No. 56/2023-Central Tax dated 28th December 2023, particularly whether it was issued in compliance with the procedural requirements under Section 168A of the Central Goods and Services Tax Act, 2017 (GST Act), including the necessity of prior recommendation by the GST Council before extending deadlines for adjudication.
3. The procedural fairness and adequacy of the communication mechanism employed by the Department, specifically the uploading of notices on the 'Additional Notices Tab' of the GST portal and whether this method provided effective notice to the petitioner.
4. The impact of pending Supreme Court proceedings on the adjudication of the petitioner's case and whether interim relief or directions should be granted pending the Supreme Court's decision.
Issue-wise detailed analysis:
Validity of the Impugned Notification No. 56/2023-Central Tax
The legal framework revolves around Section 168A of the GST Act, which mandates that any extension of time limits for adjudication of show cause notices and passing orders under Section 73 requires prior recommendation of the GST Council. The petitioner challenged Notification No. 56/2023 on the ground that it was issued without following the mandated procedure, with ratification by the GST Council occurring only after issuance, thereby rendering it ultra vires.
The Court noted that this issue had been extensively litigated in various High Courts with divergent opinions: the Allahabad and Patna High Courts upheld the validity of the notification, whereas the Guwahati High Court quashed it. The Telangana High Court expressed doubts about its validity, and this question is presently pending before the Supreme Court in SLP No. 4240/2025.
The Court observed that since the Supreme Court has taken cognizance of the issue and issued notice, and given the conflicting High Court decisions, the matter is sub judice at the highest judicial level. The Punjab and Haryana High Court had also refrained from expressing any opinion on the validity of Section 168A and related notifications, deferring to the Supreme Court's forthcoming judgment.
Consequently, the Court refrained from adjudicating the validity of Notification No. 56/2023 and related procedural questions, leaving the issue open pending the Supreme Court's decision.
Procedural Fairness in Issuance and Communication of Show Cause Notices
The petitioner contended that the SCN dated 16th May 2024 and subsequent hearing notices were uploaded only on the 'Additional Notices Tab' of the GST portal, which was not adequately visible or accessible, resulting in the petitioner being unaware of the notices and unable to file replies or appear for hearings. This led to ex-parte adjudication and imposition of demands and penalties without a fair opportunity to be heard.
The Department countered that after 16th January 2024, the portal was rectified to ensure visibility of notices on the 'Additional Notices Tab'. However, the petitioner's grievance pertained to notices issued prior to or around that date, when the portal's configuration was deficient.
The Court relied on precedents from this High Court, including decisions in "Neelgiri Machinery" and "Satish Chand Mittal," where similar issues arose due to notices being uploaded in less visible sections of the portal. Those precedents emphasized the fundamental principle of natural justice that no orders should be passed in default without ensuring the noticee has a fair opportunity to respond and be heard.
The Court held that the petitioner's right to be heard was compromised due to inadequate communication of notices. It remanded the matter to the adjudicating authority with directions to afford the petitioner a fresh opportunity to file replies and to conduct personal hearings. The Court further directed that hearing notices should not only be uploaded on the portal but also communicated via email and mobile phone to ensure effective notice.
Impact of Pending Supreme Court Proceedings and Interim Relief
Given the pendency of the Supreme Court's decision on the validity of the impugned notifications, the Court adopted a cautious approach. It acknowledged that while the question of validity remains open, it is imperative to ensure that the petitioner is not prejudiced by procedural lapses or ex-parte orders.
Therefore, the Court disposed of the writ petition with directions for fresh adjudication after affording the petitioner an opportunity to be heard, explicitly stating that any fresh order passed shall be subject to the outcome of the Supreme Court's decision in the related SLP.
The Court also preserved all rights and remedies of the parties, including access to the GST portal for uploading replies and accessing notices and documents.
Significant holdings and core principles established:
"Be that as it may, intention is to ensure that the Petitioner is given an opportunity to file its reply and is heard on merits and that orders are not passed in default."
The Court underscored the fundamental principle of natural justice that no adjudication order should be passed without affording the party a fair opportunity to respond and be heard, especially where procedural lapses in communication have occurred.
It was held that uploading notices only on an obscure or less visible tab on the GST portal does not constitute effective notice, and additional modes of communication such as email and mobile phone alerts are necessary to ensure fairness.
The Court explicitly refrained from deciding on the constitutional and statutory validity of Notification No. 56/2023, recognizing the ongoing Supreme Court proceedings and the conflicting High Court rulings, thereby preserving judicial discipline and avoiding conflicting judgments.
Finally, the Court directed that the impugned order be set aside, the petitioner be granted time till 10th July 2025 to file replies, and the adjudicating authority shall pass a fresh order after personal hearing, with the caveat that the validity issue remains open and subject to Supreme Court's final decision.
Challenge to SCN and consequent demand order - challenge to N/N. 56/2023-Central Tax dated 28th December, 2023 - extension of time limits for adjudication - HELD THAT:- This Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded on ‘Additional Notices Tab’ had remanded the matter.
There is no doubt that after 16th January 2024, changes have been made to the GST portal and the ‘Additional Notices Tab’ has been made visible. However, in the present case, the writ petition was filed in the year 2024, raising issues as to the validity of the impugned notification. Under such circumstances, considering the fact that the Petitioner did not get a proper opportunity to be heard and no reply to the SCN has been filed by the Petitioner, the matter deserves to be remanded back to the concerned Adjudicating Authority.
The impugned order is set aside - petition disposed off by way of remand.
1. Whether the Show Cause Notice (SCN) dated 28th May 2024 and the consequent demand order dated 17th August 2024 issued by the Sales Tax Officer are valid and sustainable.
2. The vires (constitutional validity) of Notification No. 56/2023-Central Tax dated 28th December 2023, particularly regarding the procedural compliance under Section 168A of the Central Goods and Services Tax Act, 2017 (GST Act).
3. Whether the extension of time limits for adjudication under the GST Act, as effected by the impugned notifications, was lawfully issued.
4. The procedural fairness in issuance and communication of the SCN, specifically whether uploading the SCN on the 'Additional Notices Tab' of the GST Portal without proper notification to the petitioner violated principles of natural justice.
5. The impact of pending Supreme Court proceedings on the validity of the impugned notifications and consequential orders.
Issue-wise Detailed Analysis:
Validity of the Impugned Notifications (Notification No. 56/2023-Central Tax and related notifications):
The legal framework centers on Section 168A of the Central Goods and Services Tax Act, 2017, which mandates that any extension of time limits for adjudication of show cause notices and passing orders requires prior recommendation by the GST Council.
The Court reviewed a batch of petitions challenging the impugned notification on the ground that the proper procedure under Section 168A was not followed. The notification purportedly extended deadlines without prior GST Council recommendation, instead ratifying it post-issuance, which was argued as contrary to statutory mandate.
Precedents from various High Courts were considered: the Allahabad and Patna High Courts upheld the validity of the notifications, while the Guwahati High Court quashed Notification No. 56/2023 (Central Tax). The Telangana High Court expressed reservations about the validity but did not conclusively decide, with the matter presently pending before the Supreme Court in SLP No. 4240/2025.
The Supreme Court's order acknowledged the cleavage of opinion among High Courts and issued notice for the matter, indicating the legal uncertainty surrounding the notifications' validity.
The Court refrained from expressing an opinion on the vires of the notifications, respecting judicial discipline and the pendency of the Supreme Court proceedings. It directed that interim orders and final adjudications be governed by the Supreme Court's decision.
Procedural Fairness in Issuance and Communication of Show Cause Notices:
The petitioner contended that the SCN was uploaded on the GST Portal under the 'Additional Notices Tab', which was not readily visible, resulting in lack of knowledge and opportunity to respond. The respondent countered that after 16th January 2024, the portal was rectified to make such notices visible.
The Court relied on its prior decisions where similar circumstances led to remanding matters to ensure fair opportunity to be heard. The principle established was that notices must be communicated in a manner that ensures the recipient's knowledge and ability to respond, including personal hearings, and orders should not be passed ex-parte.
In the present case, the Court found that the petitioner had not filed any reply to the SCN and had no proper opportunity to be heard, warranting remand of the matter to the adjudicating authority.
The Court ordered that the petitioner be granted time to file replies, and that hearing notices be communicated not only via the portal but also through email and mobile communication to ensure receipt and opportunity for personal hearing.
Impact of Pending Supreme Court Proceedings:
The Court acknowledged that the validity of the impugned notifications is sub judice before the Supreme Court. It accordingly left the question of validity open and clarified that any fresh orders passed by the adjudicating authority shall be subject to the Supreme Court's final decision.
The Court also noted that various High Courts, including Punjab and Haryana High Court, had disposed of connected cases by deferring to the Supreme Court's impending ruling, emphasizing judicial discipline and consistency.
Application of Law to Facts and Treatment of Competing Arguments:
The Court balanced the statutory mandate under the GST Act with the principles of natural justice. While the procedural validity of the notifications was under challenge and pending higher adjudication, the Court prioritized ensuring that the petitioner was not prejudiced by procedural lapses in notice communication.
It rejected the respondent's contention that mere uploading on the portal sufficed, given the prior lack of visibility and the petitioner's inability to file replies or attend hearings.
The Court's approach was pragmatic, allowing the petitioner to file replies and be heard afresh, without prejudging the validity of the notifications, thus preserving the petitioner's rights while awaiting the Supreme Court's authoritative ruling.
Conclusions:
The Court set aside the impugned demand orders and remanded the matter to the adjudicating authority for fresh consideration after affording the petitioner an opportunity to file replies and be heard through personal hearings.
The Court mandated improved communication of notices via email and mobile, in addition to portal uploads, to ensure effective notice and opportunity to be heard.
The validity of the impugned notifications was left open, to be decided by the Supreme Court, and all rights and remedies of the parties were preserved.
Significant Holdings:
The Court held: "The intention is to ensure that the Petitioner is given an opportunity to file its reply and is heard on merits and that orders are not passed in default."
It further stated: "The reply filed by the Petitioner to the SCN along with the submissions made in the personal hearing shall be duly considered by the Adjudicating Authority and a fresh order with respect to the SCN shall be passed accordingly."
Core principles established include the necessity of procedural fairness in tax adjudication processes, particularly the effective communication of show cause notices to enable the party's right to be heard.
The Court emphasized adherence to statutory procedures under the GST Act, while also upholding the fundamental right to fair hearing, especially in cases where portal-based communications were insufficiently accessible.
Final determinations included setting aside the impugned demand orders, granting the petitioner time to respond, remanding the matter for fresh adjudication, and reserving the question of notification validity for the Supreme Court's decision.
Challenge to SCN and consequent demand order - challenge to N/N. 56/2023-Central Tax dated 28th December, 2023 - extension of time limits for adjudication - HELD THAT:- This Court in Neelgiri Machinery through its Proprietor Mr. Anil Kumar V. Commissioner Delhi Goods And Service Tax And Others [2025 (3) TMI 1308 - DELHI HIGH COURT] under similar circumstances where the SCN was uploaded on ‘Additional Notices Tab’ had remanded the matter.
The impugned demand orders dated 23rd April, 2024 and 5th December, 2023 are accordingly set aside. In response to show cause notices dated 04th December, 2023 and 23th September, 2023, the Petitioner shall file its replies within thirty days. The hearing notices shall now not be merely uploaded on the portal but shall also be emailed to the Petitioner and upon the hearing notice being received, the Petitioner would appear before the Department and make its submissions. The show cause notices shall be adjudicated in accordance with law.
There is no doubt that after 16th January 2024, changes have been made to the portal and the Additional Notices Tab has been made visible. However, in the present case, the writ petition was filed in 2024 raising issues as to the validity of the impugned Notifications. Under such circumstances, considering the fact that the Petitioner did not get a proper opportunity to be heard and no reply to the SCN has been filed by the Petitioner the matter deserves to be remanded back to the concerned Adjudicating Authority.
The Petitioner is granted time till 10th July 2025, to file the reply to SCN. Upon filing of the reply, the Adjudicating Authority shall issue to the Petitioner, a notice for personal hearing.
The impugned order is set aside - petition disposed off.
The core legal questions considered by the Court are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 & 2: Validity of the Refund Order and Entitlement to Balance Refund
Relevant Legal Framework and Precedents: The refund claim is governed by Section 54 of the CGST Act, 2017, which deals with refund of tax, and Rule 89(5) of the Central Goods and Services Tax Rules, 2017, which provides procedural safeguards and grounds for rejection of refund claims. The petitioner's claim arose under the 'Inverted Duty Structure' provision, which allows refund of the differential tax paid on inputs vis-`a-vis outputs.
Court's Interpretation and Reasoning: The Court noted that the refund order dated 29.06.2024 partially allowed the claim amounting to Rs. 4,81,247/- and rejected Rs. 1,31,240/- based on the statutory provisions. The rejection was grounded on the interpretation of Section 54 read with Rule 89(5), indicating that the authorities found certain transactions or inputs not qualifying for refund under the law.
Key Evidence and Findings: The petitioner's pleadings indicated participation in the purchase and distribution of LPG empty cylinders and LPG gas, with the contention that empty cylinders were distributed without sale, and only the gas was sold at different GST rates (5% for domestic consumers and 18% for commercial consumers). However, the petitioner failed to furnish sufficient material evidence to substantiate the claim that the rejected portion of the refund related to transactions qualifying under the inverted duty structure.
Application of Law to Facts: The Court observed that the disputed amount related to transactions involving capital goods (gas cylinders) which were not sold by the petitioner, and hence did not qualify for refund under the inverted duty structure provisions. The statutory provisions and rules were applied to reject the claim in respect of these transactions.
Treatment of Competing Arguments: The petitioner argued entitlement to the entire refund amount based on earlier Court directions and the nature of transactions. The respondents relied on statutory provisions and rules to justify partial rejection. The Court found that the disputed issues required detailed factual and legal examination, unsuitable for adjudication under writ jurisdiction.
Conclusions: The Court concluded that the refund order was not liable to be quashed in entirety and that the petitioner's grievance regarding the rejected amount should be addressed through the statutory appellate mechanism rather than writ jurisdiction.
Issue 3: Entitlement to Interest on Delayed Refund under Section 56 of the CGST Act
Relevant Legal Framework: Section 56 of the CGST Act mandates payment of interest on delayed refunds to the claimant at the prescribed rate.
Court's Reasoning: The petitioner sought interest on delayed refund amounting to Rs. 6,12,487/-. However, since the refund claim itself involved disputed issues and partial rejection, and the petitioner had not exhausted statutory remedies, the Court did not adjudicate on entitlement to interest at this stage.
Conclusion: The Court did not grant interest relief and implicitly indicated that such claims would be more appropriately considered by the appellate authority along with the substantive refund claim.
Issue 4: Claim for Reimbursement of Expenses Incurred in Pursuing Refund
Court's Reasoning: The petitioner claimed Rs. 1,65,000/- towards expenses incurred for engaging professionals, re-processing refund applications, and filing writ petitions. The Court did not find any legal basis under the GST Act or procedural rules for awarding such costs in the context of refund claims.
Conclusion: The claim for reimbursement of expenses was not entertained.
Issue 5: Costs for Respondents' Alleged Bad Conduct and Willful Disregard of Court Orders
Court's Reasoning: The petitioner contended that the respondents willfully disregarded the Court's earlier directions dated 29.02.2024, causing undue delay in refund. The Court noted the petitioner's grievance but emphasized that such allegations do not warrant interference under writ jurisdiction without exhausting statutory remedies.
Conclusion: No costs were awarded against the respondents for alleged bad conduct.
Issue 6: Requirement of Exhaustion of Statutory Remedies
Relevant Legal Framework: The principle of exhaustion of statutory remedies mandates that a party aggrieved by an administrative order must first seek redressal through the prescribed statutory appellate mechanisms before approaching the High Court under writ jurisdiction.
Court's Interpretation and Reasoning: The Court observed that the petitioner had earlier approached the High Court in CWJC No. 18609 of 2023, which was disposed of on 29.02.2024, but that order did not exempt the petitioner from exhausting the remedy of appeal before the appellate authority. The current writ petition was filed without filing the statutory appeal against the refund order dated 29.06.2024.
Application of Law to Facts: The Court held that the issues raised involved disputed questions of fact and law, which are better suited for adjudication by the appellate authority. The petitioner was therefore directed to file a memorandum of appeal within eight weeks, and the appellate authority was directed to decide the appeal within four months.
Conclusion: The Court declined to entertain the writ petition on merits and relegated the petitioner to the statutory appellate remedy.
3. SIGNIFICANT HOLDINGS
The Court's key legal determinations include:
"The remaining amount of Rs. 1,31,240/- has been rejected in the light of section 54 of Central Goods and Services Tax Act, 2017 read with Rule 89(5) of the Central Goods and Services Tax Rules, 2017. Therefore, it is a disputed issue which cannot be adjudicated under Article 226 of the Constitution of India."
"The petitioner is relegated to the appellate authority in the event of filing memorandum of appeal before the appellate authority within a period of eight weeks from today."
"The concerned appellate authority is hereby directed to take note of and decide the memorandum of appeal to be filed on behalf of the appellant within a reasonable period of four months from the date of receipt of such appeal."
The Court established the core principle that disputed factual and legal issues arising under the GST refund provisions must be resolved through the statutory appellate process and are not amenable to writ jurisdiction under Article 226. The petitioner's failure to exhaust statutory remedies barred the Court from granting relief on merits.
Final determinations on each issue were as follows:
Exhaustion of statutory appellate remedy - Writ jurisdiction under Article 226 - Refund claim arising from inverted duty structure - Applicability of Section 54 of the Central Goods and Services Tax Act, 2017 read with Rule 89(5) of the Central Goods and Services Tax Rules, 2017 - Relegation to appellate authority for disputed factual and legal issues
Exhaustion of statutory appellate remedy - Writ jurisdiction under Article 226 - Maintainability of the writ petition without first availing the statutory appellate remedy - HELD THAT: - The Court held that the petitioner approached the High Court by way of writ despite not exhausting the statutory remedy of appeal before the appellate authority. The earlier coordinate-bench order disposing CWJC No. 18609 of 2023 did not contain any observation dispensing with the requirement to pursue the statutory appellate remedy. The impugned refund order dated 29.06.2024 involves disputed questions of fact and law (including partial rejection of the refund claim), which are not appropriate for adjudication under Article 226 without first invoking the prescribed statutory forum. In these circumstances the petitioner cannot bypass the appellate mechanism. [Paras 2, 4, 5]
Writ petition is not maintainable; petitioner must first file the statutory appeal before the appellate authority.
Refund claim arising from inverted duty structure - Applicability of Section 54 of the Central Goods and Services Tax Act, 2017 read with Rule 89(5) of the Central Goods and Services Tax Rules, 2017 - Relegation to appellate authority for disputed factual and legal issues - Entitlement to the balance refund and applicability of Section 54 read with Rule 89(5) are disputed and require determination by the appellate authority - HELD THAT: - The original authority allowed part of the refund and rejected the balance sum on the basis of Section 54 read with Rule 89(5), indicating a contested application of law to the facts (for example, whether the purchases related to capital goods or whether LPG empty cylinders were treated as non-sales). The High Court observed that material and factual aspects were not furnished by the petitioner before the authority and that prima facie the statutory provision would apply. Given these disputed factual and legal questions, the Court declined to decide the merits and directed relegation to the appellate authority for resolution. The Court imposed a procedural timetable: the petitioner to file the memorandum of appeal within eight weeks and the appellate authority to decide the appeal within four months from receipt. [Paras 5, 6, 7]
Merits of the partial rejection are not decided; matter is relegated to the appellate authority for fresh consideration in accordance with law, subject to the prescribed timelines.
Final Conclusion: The writ petition is disposed of by relegating the petitioner to file a statutory appeal against the refund order dated 29.06.2024 within eight weeks; the appellate authority is directed to decide the appeal within four months of receipt. The High Court did not adjudicate the merits of the partial refund rejection and refused to exercise writ jurisdiction in view of the disputed factual and legal questions.
The core legal questions considered by the Court include:
- Whether the impugned order dated 05.10.2023 passed under Section 74(9) of the CGST/KGST Act, 2017, confirming the tax demand on the petitioner, is liable to be quashed on grounds of non-communication and denial of opportunity to the petitioner to contest the proceedings.
- Whether the Show Cause Notices and pre-intimation notices issued under Rule 142(1A) and Section 74 of the CGST/KGST Act, 2017, were duly communicated to the petitioner and whether failure to receive or respond to such notices can justify setting aside the ex-parte order.
- Whether the petitioner's claim of bona fide reasons, unavoidable circumstances, and sufficient cause for non-submission of replies to the notices warrants interference with the impugned order and grant of an opportunity to be heard.
- Whether the recovery proceedings initiated under Section 79(1)(c) of the CGST/KGST Act, 2017, including attachment of bank accounts, can be sustained in view of the alleged procedural lapses.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity and communication of Show Cause Notices and pre-intimation notices under CGST/KGST Act, 2017
The legal framework governing issuance and communication of notices in GST proceedings is primarily derived from the CGST/KGST Act, 2017, and the CGST/KGST Rules, 2017. Rule 142(1A) mandates issuance of pre-intimation notices before initiating proceedings under Section 74 (which deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed). Section 74(9) empowers the authority to pass orders after considering replies and evidence.
Precedents emphasize the importance of proper communication of notices to ensure the principles of natural justice and fair hearing are adhered to. The Court noted that the first respondent issued a pre-intimation notice dated 30.03.2023 under Rule 142(1A), to which the petitioner replied on 10.04.2023. However, the respondent issued another show-cause notice and pre-intimation notice dated 14.06.2023, which the petitioner contended were not served or communicated physically or effectively, thereby depriving him of the opportunity to respond.
The respondent argued that notices were communicated electronically by uploading on the GST portal and by email, which, according to the respondent, sufficed for valid service under the GST procedural regime.
The Court acknowledged the undisputed fact that the petitioner did not submit any reply to the show-cause notice or pre-intimation notice dated 14.06.2023, nor contested the proceedings, which culminated in the ex-parte order dated 05.10.2023. However, the petitioner asserted that such non-submission was due to bona fide reasons and unavoidable circumstances, primarily non-receipt or non-awareness of the notices.
Issue 2: Effect of non-submission of reply and ex-parte order under Section 74(9)
Section 74(9) of the CGST/KGST Act, 2017, empowers the authority to pass an order after considering the reply to the show-cause notice or in the absence of such reply, an ex-parte order. The Court observed that the impugned order dated 05.10.2023 was passed ex-parte due to the petitioner's failure to respond.
The petitioner's contention was that the ex-parte order was passed without affording him a reasonable opportunity to be heard, as he was unaware of the notices dated 14.06.2023. The Court recognized that the principles of natural justice require that a party should be given a fair chance to present their case before adverse orders are passed.
While the respondent maintained that electronic communication sufficed, the Court found merit in the petitioner's assertion that physical copies were not served and the petitioner was unaware of the notices, which prevented him from submitting replies or contesting the proceedings.
Issue 3: Justification for setting aside the impugned order and granting opportunity to the petitioner
Considering the petitioner's claim of bona fide reasons and sufficient cause for non-submission of replies, the Court adopted a justice-oriented approach. It held that despite the procedural provisions allowing ex-parte orders, the failure to effectively communicate the notices and the petitioner's consequent inability to respond warranted interference.
The Court set aside the impugned order dated 05.10.2023 and remitted the matter back to the first respondent for fresh consideration. The petitioner was granted liberty to submit replies and documents, and the first respondent was directed to provide sufficient and reasonable opportunity to the petitioner to be heard and proceed in accordance with law.
The Court further clarified that if the petitioner failed to appear on the specified date, the order setting aside the impugned order would stand automatically recalled, and the petition would be revived without further orders.
Issue 4: Validity of recovery proceedings under Section 79(1)(c)
Section 79(1)(c) of the CGST/KGST Act empowers the authority to attach bank accounts for recovery of tax dues. The petitioner challenged the notice dated 01.06.2024 issued under this provision, contending that recovery proceedings were premature and unjustified due to procedural irregularities in the preceding adjudication.
The Court, by setting aside the impugned order under Section 74(9), implicitly held that the recovery notice and attachment of bank accounts could not be sustained without proper adjudication and opportunity to the petitioner. The matter was thus remitted for fresh adjudication before any recovery action could proceed.
3. SIGNIFICANT HOLDINGS
- "Though several contentions have been urged by both sides as regards to the petitioner not having received the pre-intimation notice and show-cause notice and his inability and omission to contest the proceedings, it is a matter of record and an undisputed fact that the petitioner did not submit his reply to the show-cause notice or pre-intimation notice nor contested the proceedings, which culminated in the impugned ex-parte order."
- "Having regard to the specific assertion on the part of the petitioner that his inability and omission to submit replies and contest the proceedings was due to bona fide reasons, unavoidable circumstances and sufficient cause, I deem it just and appropriate to adopt a justice oriented approach and provide one more opportunity to the petitioner by setting aside the impugned order dated 05.10.2023 and remitting the matter back to the first respondent for reconsideration of the matter afresh in accordance with law to the stage of petitioner submitting reply to the impugned show-cause notice."
- The Court established the principle that even in statutory proceedings where ex-parte orders are permissible, the failure of effective communication of notices and bona fide non-response justifies setting aside such orders and granting an opportunity to be heard to uphold the principles of natural justice.
- The final determination was to allow the petition, set aside the impugned order under Section 74(9), direct the petitioner to appear before the authority on a specified date without awaiting further notice, and permit the petitioner to submit replies and documents. The authority was directed to provide reasonable opportunity and proceed in accordance with law.
Ex-parte order - opportunity to be heard / audi alteram partem - service of notice via GST portal and e-mail - setting aside order under Section 74(9) of the CGST/KGST Act - remand for fresh consideration - attachment of bank accounts under Section 79 of the CGST/KGST Act
Ex-parte order - service of notice via GST portal and e-mail - opportunity to be heard / audi alteram partem - setting aside order under Section 74(9) of the CGST/KGST Act - Impugned order dated 05.10.2023 under Section 74(9) confirming demand was liable to be set aside and the matter reopened to permit the petitioner to reply - HELD THAT: - The court noted that a pre-intimation under Rule 142(1A) dated 30.03.2023 was replied to by the petitioner, and that subsequent show-cause and intimation dated 14.06.2023 were issued and uploaded on the GST portal and sent by e-mail. Although the petitioner did not submit a reply to the show-cause/intimation dated 14.06.2023 and the proceedings culminated in an ex-parte order dated 05.10.2023, he asserted bona fide reasons and unavoidable circumstances for non-participation. The respondents contended electronic communication sufficed. Finding it undisputed that no reply was filed, the court exercised a justice-oriented discretion to set aside the ex-parte confirmation order and to afford the petitioner another opportunity to be heard, directing fresh consideration in accordance with law and that the authority must provide sufficient and reasonable opportunity to the petitioner to submit replies and documents and to be heard before proceeding further. [Paras 3, 7, 8, 9]
Impugned order dated 05.10.2023 set aside; petitioner granted opportunity to appear and submit reply and the matter remitted for fresh consideration.
Remand for fresh consideration - attachment of bank accounts under Section 79 of the CGST/KGST Act - Scope and nature of remand to the first respondent and consequences if petitioner fails to appear - HELD THAT: - The court remitted the matter to the first respondent to the stage of receiving and considering the petitioner's reply to the show-cause notice, expressly directing the authority to provide reasonable opportunity and hear the petitioner before proceeding. The court ordered the petitioner to appear on the specified date without awaiting further notice. It further provided that if the petitioner fails to appear on that date, the order would stand automatically recalled/cancelled and the petition revived without further orders. The remand is for fresh consideration and adjudication in accordance with law, not merely for computation or verification. [Paras 8, 9]
Matter remitted to the first respondent for fresh consideration up to the stage of the petitioner submitting replies; directions issued for hearing and consequences specified for non-appearance.
Final Conclusion: The petition is allowed; the confirmation order dated 05.10.2023 under Section 74(9) is set aside and the matter is remitted to the first respondent for fresh consideration after affording the petitioner reasonable opportunity to appear, submit replies and be heard, subject to the court's specified directions and the consequence of automatic recall if the petitioner fails to appear.
The core legal questions considered by the Court in this writ petition include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of the adjudication orders under Section 74(9) of the GST Act
Relevant legal framework and precedents: Section 74(9) of the GST Act empowers the tax authorities to adjudicate cases of tax evasion after issuance of a show cause notice and following due process. The principles of natural justice mandate that the person affected must be given an opportunity to be heard before passing an order adversely affecting his interests. Precedents emphasize that ex-parte orders without hearing the affected party are generally unsustainable unless the party deliberately avoids participation.
Court's interpretation and reasoning: The Court noted that the petitioner had filed GSTR-3B returns for the relevant periods but did not respond to the show cause notices issued by the respondent. The respondent proceeded to pass adjudication orders ex-parte on the basis of discrepancies between GSTR-3B and GSTR-2A forms. However, the Court observed that the petitioner asserted that the failure to respond was due to bona fide reasons and unavoidable circumstances.
Key evidence and findings: The material on record showed that the petitioner did not submit any reply to the show cause notices dated 31.01.2023. The impugned orders dated 31.05.2023, 06.01.2024, and recovery notices dated 06.06.2024 were passed without the petitioner's participation. The petitioner contended non-receipt of the show cause notices and reliance on Circular No. 183/15/2022-GST was not considered by the respondent.
Application of law to facts: The Court held that since the petitioner's non-participation was claimed to be for sufficient cause and bona fide reasons, and the orders were passed ex-parte, the principles of natural justice were not complied with. The failure to consider the relevant Circular also vitiated the orders.
Treatment of competing arguments: The respondent argued that the petitioner did not exercise due diligence and thus the ex-parte orders were justified. The Court, however, favored a justice-oriented approach, giving weight to the petitioner's explanation and the need for adherence to natural justice.
Conclusions: The Court concluded that the impugned orders were liable to be set aside for non-compliance with natural justice and non-consideration of relevant Circulars.
Issue 2: Whether the matter should be remitted for fresh adjudication
Relevant legal framework and precedents: It is well-established that when procedural irregularities are found in adjudication proceedings, the appropriate remedy is often to set aside the impugned orders and remit the matter for fresh consideration in accordance with law and after affording a reasonable opportunity of hearing.
Court's interpretation and reasoning: The Court, adopting a justice-oriented approach, deemed it appropriate to set aside the impugned orders and remit the matter back to the respondent to reconsider the case afresh. The Court emphasized the need to consider the Circular No. 183/15/2022-GST dated 27.12.2022, which was not taken into account earlier.
Key evidence and findings: The petitioner's assertion of bona fide reasons and unavoidable circumstances for non-response, coupled with the absence of any hearing before passing the ex-parte orders, justified a fresh opportunity.
Application of law to facts: The Court ordered that the petitioner should appear before the respondent on a specified date to submit his reply and relevant documents. The respondent was directed to provide a reasonable opportunity of hearing and proceed thereafter in accordance with law.
Treatment of competing arguments: The respondent's contention that the petitioner's inaction disentitled him to relief was rejected in favor of ensuring procedural fairness and adherence to natural justice.
Conclusions: The Court ordered setting aside the impugned orders and remitting the matter for fresh adjudication after hearing the petitioner.
3. SIGNIFICANT HOLDINGS
The Court held:
"It is an undisputed fact that the petitioner did not respond/reply to the show cause notice and the impugned ex-parte orders have been passed without hearing the petitioner. Under these circumstances, in view of the specific assertion on the part of the petitioner that his inability and omission to submit the reply to the show cause notice and participate in the proceedings was due to bona fide reasons, unavoidable circumstances and sufficient cause, by adopting a justice oriented approach and in order to provide one more opportunity to the petitioner, I deem it just and appropriate to set aside the impugned orders and remit the matter back to the respondent for reconsideration afresh in accordance with law by issuing certain directions."
Core principles established include:
Final determinations on each issue:
Ex parte order - setting aside orders for non-hearing - quashing of adjudication order - remand for fresh consideration - opportunity of hearing - application of Circular No.183/15/2022-GST - justice oriented approach
Ex parte order - setting aside orders for non-hearing - remand for fresh consideration - opportunity of hearing - application of Circular No.183/15/2022-GST - Impugned adjudication, summary and recovery orders in respect of F.Y. 2018-19 and F.Y. 2019-20 were set aside and the matters remitted for fresh consideration with directions to afford opportunity to the petitioner and to bear in mind Circular No.183/15/2022-GST dated 27.12.2022. - HELD THAT: - The Court noted it is undisputed that the petitioner did not respond to the show cause notices and that the impugned orders were passed without hearing the petitioner. Having accepted the petitioner's assertion that non-participation was due to bona fide reasons and unavoidable circumstances, the Court adopted a justiceoriented approach and concluded that the ex parte orders should be set aside. The matter was remitted for fresh consideration in accordance with law, with an express direction that the respondent shall afford the petitioner a reasonable opportunity to submit a reply and be heard. The respondent is further directed to bear in mind and apply Circular No.183/15/2022-GST dated 27.12.2022 while reconsidering the matter. The Court fixed a date for the petitioner to appear and submit his reply and provided a consequence - automatic recall of the order and revival of the petition - if the petitioner fails to appear on the specified date. [Paras 6, 7]
Impugned orders at Annexures E1, E2, F1, F2, H1 and H2 are set aside; matter remitted for fresh consideration with directions to afford hearing and to consider Circular No.183/15/2022-GST; petitioner to appear and submit reply on 28.04.2025; failure to appear will recall this order and revive the petition.
Final Conclusion: Writ petition allowed; ex parte adjudication, summary and recovery orders for F.Y. 2018-19 and F.Y. 2019-20 set aside and remitted for fresh consideration with directions to afford opportunity to the petitioner and to apply Circular No.183/15/2022-GST; procedural timetable and consequence for non-appearance specified.
The core legal questions considered by the Court include:
- Whether the petitioners are entitled to refund of unutilized Input Tax Credit (ITC) of GST compensation Cess paid on inputs (coal) used in the manufacture of goods exported on payment of Integrated Goods and Services Tax (IGST).
- The interpretation and applicability of Circular No.125/44/2019-GST dated 18/11/2019 and para-5 of Circular No.45/19/2018-GST dated 30/05/2018 issued under Section 168 of the Central Goods and Services Tax Act, 2017 (GST Act) regarding refund of compensation Cess ITC in cases of zero-rated supplies made on payment of IGST.
- The interplay between the provisions of Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the GST (Compensation to States) Act, 2017 (Cess Act) in determining the entitlement to refund of compensation Cess ITC.
- Whether the proviso to Section 11(2) of the Cess Act, which restricts utilization of compensation Cess ITC only towards payment of Cess on outward supplies, applies to zero-rated supplies made on payment of IGST.
- The correctness of the respondent authorities' rejection of refund claims based on the above circulars and provisions.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to refund of unutilized Input Tax Credit of compensation Cess paid on inputs used for manufacture of exported goods on payment of IGST
Relevant legal framework and precedents:
- Section 54(3) of the CGST Act allows refund of unutilized input tax credit at the end of any tax period subject to conditions, including that no refund of unutilized ITC shall be allowed except in cases of zero-rated supplies made without payment of tax or inverted duty structure.
- Section 16 of the IGST Act defines zero-rated supply as export of goods or services and provides that a registered person making zero-rated supply shall be eligible to claim refund of unutilized input tax credit on supply of goods or services without payment of integrated tax under bond or Letter of Undertaking (LUT).
- Section 11(2) of the Cess Act provides that the provisions of the IGST Act apply mutatis mutandis to levy and collection of compensation Cess on inter-State supplies, but input tax credit of Cess shall be utilized only towards payment of Cess on outward supplies.
- Circular No.45/19/2018 and Circular No.125/44/2019 clarify that refund of unutilized ITC of compensation Cess is available when zero-rated supplies are made without payment of tax (under bond or LUT), but not when zero-rated supplies are made on payment of IGST.
Court's interpretation and reasoning:
The Court noted that the petitioners had paid compensation Cess on coal used as input for manufacture of exported goods, which themselves are exempt from compensation Cess. The petitioners exported goods on payment of IGST and claimed refund of unutilized ITC of compensation Cess paid on inputs.
Respondent authorities rejected the refund claims relying on the circulars which state that refund of compensation Cess ITC is not admissible where zero-rated supplies are made on payment of IGST, as compensation Cess ITC can only be utilized for payment of Cess on outward supplies.
The Court analyzed the statutory provisions and circulars and observed that Section 54(3) of the CGST Act permits refund of unutilized ITC only in cases of zero-rated supplies made without payment of tax or inverted duty structure. However, the circulars clarify that when zero-rated supplies are made on payment of IGST, refund of compensation Cess ITC is not allowed because the Cess ITC cannot be utilized for payment of IGST.
Nevertheless, the Court found that in the present case, the petitioner had not paid any compensation Cess at the time of export since the finished goods are exempt from compensation Cess. Therefore, the compensation Cess ITC on inputs remained unutilized and was not utilized for payment of any tax on outward supplies.
The Court held that the proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies is not applicable where no Cess is leviable on the outward supplies (i.e., exported goods exempt from Cess). Hence, the petitioner is entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used for manufacture of goods exported on payment of IGST.
Key evidence and findings:
- The petitioner paid compensation Cess on coal used as input.
- The exported goods were exempt from compensation Cess and exported on payment of IGST.
- The petitioner received refund of IGST paid on export from Customs authorities.
- The petitioner's refund claim pertains solely to unutilized ITC of compensation Cess on inputs.
Application of law to facts:
The Court applied the provisions of Section 54(3) of the CGST Act, Section 16 of the IGST Act, and Section 11(2) of the Cess Act, along with circular clarifications, to conclude that refund of unutilized compensation Cess ITC is admissible where the outward supply is zero-rated on payment of IGST but exempt from compensation Cess, as the Cess ITC remains unutilized and cannot be applied to IGST payment.
Treatment of competing arguments:
The respondents argued that the circulars are binding and deny refund of compensation Cess ITC in cases of zero-rated supplies on payment of IGST, relying on the proviso to Section 11(2) of the Cess Act and Section 54(3) of the CGST Act.
The Court distinguished the facts by noting that the circulars pertain to cases where compensation Cess is leviable on the outward supply and the petitioner's goods are exempt from Cess, thus the proviso does not apply.
Conclusions:
The petitioner is entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used in manufacture of goods exported on payment of IGST where no compensation Cess is payable on the exported goods.
Issue 2: Interpretation and applicability of Circular No.125/44/2019 and Circular No.45/19/2018
Relevant legal framework and precedents:
The circulars clarify the treatment of refund claims of unutilized compensation Cess ITC in zero-rated supplies, distinguishing between supplies made under bond or LUT without payment of tax and supplies made on payment of IGST.
Court's interpretation and reasoning:
The Court observed that the circulars permit refund of unutilized compensation Cess ITC only when zero-rated supplies are made without payment of tax (under bond or LUT). When zero-rated supplies are made on payment of IGST, the circulars deny refund of compensation Cess ITC on the basis that such ITC can only be utilized for payment of Cess on outward supplies.
However, the Court found that the circulars' reliance on the proviso to Section 11(2) of the Cess Act applies only when Cess is leviable on the outward supply. In the present case, the exported goods are exempt from compensation Cess, so no Cess is payable outwardly, and the petitioner cannot utilize compensation Cess ITC for payment of IGST.
Therefore, the circulars were held to be misapplied by the respondent authorities in rejecting the refund claims of the petitioner.
Key evidence and findings:
- Circular No.45/19/2018 para-5 clarifies refund eligibility of compensation Cess ITC on inputs when final product is not subject to compensation Cess.
- Circular No.125/44/2019 para-42 reiterates that refund of compensation Cess ITC is allowed only when zero-rated supplies are made without payment of tax.
Application of law to facts:
The Court applied the circulars in light of statutory provisions and facts, concluding that the circulars do not bar refund of compensation Cess ITC where the outward supply is exempt from compensation Cess, even if IGST is paid on export.
Treatment of competing arguments:
The respondents contended that the circulars are binding and deny refund of compensation Cess ITC when IGST is paid on exports. The Court rejected this broad application, emphasizing the exemption of compensation Cess on the exported goods.
Conclusions:
The circulars do not preclude refund of unutilized compensation Cess ITC on inputs used in manufacture of goods exported on payment of IGST where the exported goods are exempt from compensation Cess.
Issue 3: Application of proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies
Relevant legal framework and precedents:
Section 11(2) of the Cess Act states that input tax credit in respect of compensation Cess shall be utilized only for payment of Cess on outward supplies.
Court's interpretation and reasoning:
The Court held that this proviso applies only when compensation Cess is leviable on outward supplies. In the present case, since the exported goods are exempt from compensation Cess, no Cess is payable on outward supplies, rendering the proviso inapplicable.
Therefore, the petitioner cannot utilize compensation Cess ITC for payment of IGST on exports, and the ITC remains unutilized, entitling the petitioner to refund.
Key evidence and findings:
- The exported goods are not subject to compensation Cess.
- The petitioner paid IGST on export and claimed refund of unutilized compensation Cess ITC on inputs.
Application of law to facts:
The Court applied the proviso narrowly, limiting its scope to cases where compensation Cess is payable on outward supplies.
Treatment of competing arguments:
The respondents argued for broad application of the proviso to deny refund. The Court rejected this, emphasizing the exemption status of the goods.
Conclusions:
The proviso to Section 11(2) of the Cess Act does not bar refund of unutilized compensation Cess ITC where the outward supplies are exempt from compensation Cess.
3. SIGNIFICANT HOLDINGS
The Court held:
"As per the provision of Section 54(3) of the GST Act read with Section 16(3) of the IGST Act and Section 11(2) of the Cess Act, the petitioner can claim the refund of unutilized input tax credit for purchase of coal used for manufacture of goods exported being zero rated supply. The petitioner has paid IGST on the goods exported by it, however, the petitioner was not required to pay any compensation cess as the goods manufactured by the petitioner are exempted from the levy of compensation cess. Therefore, while applying the above provisions, admittedly the compensation cess was not paid at the time of export of goods by the petitioner, the petitioner, therefore, is entitled to refund of input tax credit of the compensation cess paid on purchase of the coal utilized for the purpose of manufacture of the goods which are exported as zero rated supply on payment of IGST by the petitioner."
"Reliance placed by the respondent on para-42 of the Circular No.125/44/2019 dated 18/11/2019 is misplaced because the said circular was issued clarifying the eligibility to claim refund of unutilized input tax credit of compensation cess paid on input, where the zero rated final product is not leviable with compensation cess. However, the circular refers to the provision of Section 16(2) of the IGST Act that the registered person making zero rated supply of aluminum products under bond or LUT may claim refund of unutilized credit including that of compensation cess paid on coal. The circular further clarifies that when the registered person make a zero rated supply of product on payment of integrated tax, they cannot utilize the credit of the compensation cess paid on coal for payment of Integrated tax in view of the proviso to Section 11(2) of the Cess Act, as the said proviso allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. However, when the petitioner has paid the IGST under Section 16(3) of the IGST Act on the zero rated supply and refund is claimed by the payment of such IGST, the petitioner admittedly would not be able to utilize input tax credit of cess as cess is not payable on the zero rated supply. Therefore, proviso to Section 11(2) of the Act would not be applicable in the facts of the case and the petitioner would be entitled to refund of the unutilized input tax credit on cess paid on purchase of coal utilized for the purpose of manufacture of goods which are exported."
Core principles established include:
- Refund of unutilized input tax credit of compensation Cess is admissible on inputs used in manufacture of goods exported on payment of IGST where the exported goods are exempt from compensation Cess.
- The proviso to Section 11(2) of the Cess Act restricting utilization of compensation Cess ITC only towards payment of Cess on outward supplies does not apply where no Cess is leviable on the outward supply.
- Circulars clarifying refund eligibility must be read in context of the statutory provisions and factual matrix, and cannot be applied rigidly to deny refund where provisions permit it.
Final determinations on each issue are:
- The petitioners are entitled to refund of unutilized input tax credit of compensation Cess paid on inputs used for manufacture of goods exported on payment of IGST.
- The respondent authorities' rejection of refund claims based on Circular No.125/44/2019 and Circular No.45/19/2018 is set aside.
- The refund orders rejecting claims are quashed and the orders sanctioning refund are restored.
Refund of unutilised input tax credit of compensation cess - zero rated supply on payment of integrated tax (IGST) - interaction of Section 54(3) of the CGST Act, Section 16 of the IGST Act and Section 11(2) of the Cess Act - interpretation and application of CBIC circulars regarding refund of compensation cess
Refund of unutilised input tax credit of compensation cess - zero rated supply on payment of integrated tax (IGST) - Section 54(3) of the CGST Act - Section 16(3) of the IGST Act - Section 11(2) of the Cess Act - Entitlement to refund of unutilised input tax credit of compensation cess paid on inputs used in manufacture of exported goods where exports were effected on payment of IGST - HELD THAT: - The Court examined the statutory scheme governing refund of unutilised input tax credit under Section 54(3) of the CGST Act read with the definition and refund provisions for zero rated supplies in Section 16 of the IGST Act and the mutatis mutandis application in Section 11(2) of the Cess Act. The respondents relied upon circulars which distinguish between (a) zero rated supplies made without payment of tax (eligible for refund of unutilised ITC of compensation cess) and (b) zero rated supplies on payment of IGST (where utilization of cess credit for payment of integrated tax is disallowed by the proviso to Section 11(2)). The Court held that in the present facts the goods exported were not leviable to compensation cess at export and the petitioner had paid IGST which was refunded by Customs under Section 54(3) read with Section 16. Because no compensation cess was payable on the exported goods, the proviso to Section 11(2) (which restricts utilization of cess credit towards payment of cess on outward supplies) did not operate to deny refund of the unutilised cess credit that remained attributable to inputs used for the zero rated supply. The circulars relied upon were thus held to have been misapplied by revenue authorities in the petitioner's case, and the statutory provisions entitle the petitioner to claim refund of the unutilised input tax credit of compensation cess in the circumstances described. [Paras 21]
Petitioner entitled to refund of unutilised input tax credit of compensation cess paid on inputs used in manufacture of exported goods, despite exports being made on payment of IGST, because no cess was payable on the exported goods and the proviso to Section 11(2) does not bar refund in these facts.
Quashing of appellate order - restoration of order sanctioning refund - Validity of appellate authority's order withdrawing the refund and relief consequential to successful challenge - HELD THAT: - The appellate order which allowed respondents' appeal and directed withdrawal of the refund was examined in light of the Court's conclusion that the refund of unutilised cess credit was admissible. The Court found the appellate authority's order to be contrary to the statutory interpretation adopted and therefore quashed that order. The original sanction of refund was restored. [Paras 22, 23]
Order of the Commissioner (Appeals) dated 28/07/2023 is quashed and set aside and the order sanctioning the refund is restored; respondents directed to process and sanction the refund applications.
Final Conclusion: Petitions allowed: refund of unutilised input tax credit of compensation cess paid on inputs used in manufacture of exported goods ordered to be sanctioned despite exports having been made on payment of IGST; appellate order withdrawing the refund quashed and sanction restored; respondents directed to process the refund applications.
Regarding the validity of the provisional attachment under Section 83, the Court scrutinized the factual matrix and procedural history. The petitioner's bank account was initially frozen by an order dated 12 May 2020, which was quashed on 28 October 2024 due to the provisional attachment exceeding the statutory one-year limit without a fresh order. Subsequently, a fresh provisional attachment order dated 26 December 2024 was challenged. The respondents justified this fresh attachment on the grounds that the petitioner failed to respond to the Show Cause Notice (SCN), did not attend hearings, and that the adjudicating authority had imposed penalties exceeding Rs. 1 crore. However, the Court found that these reasons were insufficient to satisfy the statutory threshold under Section 83.
Section 83 of the CGST Act authorizes the Commissioner to provisionally attach any property, including bank accounts, belonging to a taxable person during the pendency of certain proceedings, if the Commissioner is of the opinion that such attachment is necessary to protect the interest of government revenue. The attachment is provisional and must cease after one year. The Court emphasized that the power under Section 83 is "draconian" and must be exercised sparingly, strictly adhering to statutory conditions.
The Court extensively relied on the Supreme Court's decision in Radha Krishnan Industries, which laid down the legal framework for exercising powers under Section 83. The Supreme Court held that: (i) the power to attach provisionally must be exercised only during the pendency of proceedings under specified sections of the CGST Act; (ii) the Commissioner must form a bona fide opinion that attachment is necessary to protect government revenue; (iii) such opinion must be based on tangible and credible material, not on vague or speculative grounds; (iv) the necessity must be real, not merely expedient; (v) the attachment should not be used to harass the assessee or cause irreversible harm to their business; and (vi) procedural safeguards, including the right to be heard and to submit objections, must be observed.
The Court highlighted that the formation of opinion by the Commissioner must bear a "proximate and live nexus" to the protection of revenue and must be supported by "tangible material" indicating a reasonable apprehension that the assessee may default on payment or dispose of property to defeat recovery. The Court noted that mere non-cooperation or failure to respond to notices does not satisfy this stringent requirement.
In applying these principles to the facts, the Court found that the respondents failed to produce any material evidencing a reasonable apprehension that the petitioner would default on payment or dissipate assets. The only reasons cited were the petitioner's non-response to notices and non-attendance at hearings, which the Court held do not constitute sufficient grounds for provisional attachment under Section 83. The Court observed that the respondents did not demonstrate any "due material change of circumstances" or any credible basis to justify the attachment as necessary to protect revenue interests.
The Court also referred to other High Court decisions emphasizing the limited scope of Section 83, including the requirement that proceedings must be pending against the taxable person whose property is attached, and that the attachment must be linked to specific statutory proceedings. The respondents' failure to establish this nexus further undermined the validity of the attachment.
On procedural safeguards, the Court reiterated that Rule 159(5) of the CGST Rules mandates that the person whose property is attached must be given an opportunity to object and be heard, and the Commissioner must pass a reasoned order dealing with such objections. The Court found no compliance with these safeguards in the present case, rendering the attachment illegal.
In conclusion, the Court held that the respondents' exercise of power under Section 83 was without the requisite formation of opinion based on tangible material, was arbitrary, and violated statutory and constitutional principles. The attachment was therefore quashed, and directions were issued for the immediate de-freezing of the petitioner's bank account.
The significant holdings and principles established include the following verbatim excerpts and core determinations:
"The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account... The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the government revenue."
"The expression 'necessary so to do for protecting the government revenue' implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment... Necessity postulates a more stringent requirement than a mere expediency."
"The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached."
"The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue."
"The power under Section 83 should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee."
"The attachment of bank account and trading assets should be resorted to only as a last resort or measure."
"There has been a breach of the mandatory requirement of Rule 159(5) and the Commissioner was clearly misconceived in law in coming into conclusion that he had a discretion on whether or not to grant an opportunity of being heard."
Final determinations on each issue are: (i) the provisional attachment order dated 26 December 2024 was invalid and quashed; (ii) the respondents failed to form a valid opinion based on tangible material justifying the attachment; (iii) the attachment was not necessary to protect government revenue; (iv) procedural safeguards under the CGST Act and Rules were not complied with; and (v) the petitioner's bank account must be de-frozen forthwith.
Provisional attachment of the petitioner's bank account - Section 83 of the Central Goods & Services Tax Act, 2017 - Fresh attachment since the initial (previous) attachment order was quashed - failure to render cooperation in the disposal of those show cause proceedings - HELD THAT:- Section 83 of the CGST Act mandates that provisional attachment may be exercised in situations where the Commissioner is of the opinion that “for the purpose of protecting the interest of Government revenue” such an action “is necessary so to do”. The Supreme Court in Radha Krishnan also recognised the triumvirate conditions embodied in the provision, which is that the attachment of property is intended to be provisional, i.e., “in aid of something else”, the purpose of such attachment must be to protect the interests of the Revenue and that the conditions as laid down within the provision must be met in order for such attachment to be deemed as a valid exercise of power.
The respondents, in clear contravention of the requirements laid down in Radha Krishnan [2021 (4) TMI 837 - SUPREME COURT] have been unable to demonstrate any reasonable apprehension that the writ petitioner herein was at risk of defaulting on payment of any demands that may come to be imposed. On the contrary, the only reasons adduced by the respondents for the initiation of Section 83 proceedings was that the writ petitioner had failed to file any response to the DRC-01 or the SCN, did not attend the hearing of the adjudicating authority and allegedly refused to cooperate with the respondents during the adjudication of show cause proceedings - such reasoning abjectly fails to meet the thresholds as engrafted within the provision, of the respondents being required to form an opinion that it is necessary to provisionally attach the property so as to protect the interest of government revenue.
As observed by the Supreme Court in Radha Krishnan, the draconian nature of the provision and the grave consequences that are suffered by a person whose property is provisionally attached necessitates that the criterion for valid initiation of Section 83 actions are met. This requires the production of cogent and credible material basis which the respondents could have reasonably come to form an opinion that a provisional attachment is necessary and essential for the purposes of securing the interests of government revenue. It surely cannot be justified on the basis of vague apprehensions or a failure to cooperate or provide responses to notices.
Conclusion - The respondents' exercise of power under Section 83 was without the requisite formation of opinion based on tangible material, was arbitrary, and violated statutory and constitutional principles. The attachment was therefore quashed, and directions were issued for the immediate de-freezing of the petitioner's bank account.
The impugned order of provisional attachment dated 26 December 2024 set aside - petition allowed.
Issues: Whether the High Court was justified in interfering with the manner in which witness statements were recorded in remand proceedings before the Assessing Officer and in directing the course of proceedings pending before the Commissioner of Income Tax (Appeals).
Analysis: The order held that the choice of questions to be put to witnesses in remand proceedings lay within the discretion of the appellate authority or the Assessing Officer conducting the remand, while the assessee retained the right to cross-examine and raise relevant objections. It was noted that cross-examination had already been completed, the remand report had been submitted, and the objections filed by the respondent remained pending before the appellate authority. The appellate authority was directed to deal with those objections and proceed in accordance with law without being influenced by the High Court's impugned observations and directions.
Conclusion: The High Court's interference was held unsustainable, and the appellate authority was left free to decide the pending objections and continue the appellate proceedings according to law.
Denial of cross-examination process of witness - Importance of cross examination of the witnesses whose statements have been utilized by the Assessing Officer in the assessment order - ACIT restricted cross examination process by denying the questions asked by the Petitioner during cross examination - As decided by HC [2023 (6) TMI 94 - JHARKHAND HIGH COURT] as gone through the directions in the remand order wherein he has allowed the appellant, cross examination of the witnesses whose statements have been utilized by the AO in the assessment order. There is no ambiguity in the said directions.
We hereby direct the petitioner to file petition for recall of the witnesses who have been cross-examined and discharged, to put them the question which have been initially discarded by the AO.
HELD THAT:- We are clearly of the opinion that the impugned judgment/order of HC is unsustainable and should not have been passed.
The High Court ought not to have interjected and interfered in the manner in which the statements of witnesses were being recorded by the Assessing Officer to submit a remand report.
It is the discretion of the appellate authority, that is CIT (A) before whom the appellate proceedings or the assessing officer before whom the remand proceedings are pending to decide the questions to be put the witnesses. Of-course the assessee is entitled to put cross questions on the statement made and other relevant aspects.
We are informed and it is recorded in the order [2024 (7) TMI 1637 - SC ORDER] that the cross-examination of witnesses on behalf of the respondent was completed, and the remand report has been submitted by the Assessing Officer to the appellate authority. It is stated that the objections filed by the respondent, Madhu Korah, are pending before the appellate authority.
The objections filed by the respondent, Madhu Korah, will be dealt with by the CIT(A).
We hereby record that the appellate authority, that is, the CIT(A) will be at liberty to proceed in accordance with law without being influenced by any observations and directions in the impugned judgment/order of HC.
Unexplained money u/s 69A - deposit made after the demonetization notification on 8th November 2016 - HC [2024 (12) TMI 1346 - ORISSA HIGH COURT] held explanation offered by assessee was no explanation at all. Nature or source of acquisition of the money not explained could only invite opinion of the AO of unexplained money.
HELD THAT:- Having heard the learned counsel appearing for the petitioner and having gone through the materials on record, we see no reason to interfere with the impugned order passed by the High Court.
Special Leave Petition is, accordingly, dismissed.
1. Whether the orders passed under Section 148A(d) of the Income Tax Act, 1961, and the subsequent notice under Section 148, are legal, valid, and sustainable in law.
2. Whether the Assessing Officer complied with the mandatory requirement of recording reasons before issuing a notice under Section 148 after issuing a notice under Section 148A(d).
3. Whether the failure to record reasons amounts to denial of justice and renders the impugned orders liable to be quashed.
4. The extent and nature of the legal obligation on quasi-judicial authorities, including income tax authorities, to record reasons in support of their decisions, especially when such decisions adversely affect the assessee.
Issue-wise Detailed Analysis
Issue 1: Legality and validity of orders under Section 148A(d) and notice under Section 148
The relevant legal framework includes Sections 147, 148, and 148A of the Income Tax Act, 1961. Section 148 empowers the Assessing Officer to issue a notice for reassessment if income chargeable to tax has escaped assessment. Section 148A prescribes a preliminary inquiry procedure before issuing such notice, with subsection (d) requiring the Assessing Officer to record reasons and obtain prior approval before issuing a notice under Section 148.
The petitioner challenged the orders dated 29.02.2024 and the notice under Section 148 on grounds of illegality and arbitrariness, particularly emphasizing the absence of recorded reasons for the conclusion that income had escaped assessment exceeding Rs. 50,00,000/-.
The Court noted that while normally courts are reluctant to interfere with such notices, the peculiar facts of this case warranted judicial intervention due to the Assessing Officer's failure to provide any reasons supporting the issuance of the notice under Section 148.
The Assessing Officer's order, though detailed, did not specify the basis for concluding that escaped income exceeded Rs. 50,00,000/-. Instead, the Assessing Officer merely stated that the case was at a preliminary stage and that the petitioner's contentions required detailed examination.
The Court held that such an approach is impermissible. The Assessing Officer is obligated to decide the matter on the material available, including the assessee's reply, and record reasons before issuing a notice under Section 148. Simply deferring the decision without reasons is not acceptable.
Issue 2: Obligation to record reasons before issuing notice under Section 148
The Court extensively examined the jurisprudence on the requirement of recording reasons in administrative and quasi-judicial decisions. It emphasized that recording reasons is a fundamental principle of natural justice and an indispensable component of a sound judicial system.
The Court relied on authoritative precedents, including a landmark judgment which summarized the principles governing the recording of reasons:
The Court cited multiple Supreme Court decisions reinforcing these principles, including rulings that administrative authorities exercising quasi-judicial functions must record reasons irrespective of whether the decision is subject to appeal or revision.
It was further emphasized that the requirement to record reasons is not merely a procedural formality but serves the wider principle that justice must not only be done but also appear to be done.
Issue 3: Application of law to facts and treatment of competing arguments
The petitioner had responded to the notice under Section 148A(d) with supporting documents, clarifying that the immovable property purchased was valued at Rs. 1,31,63,935/- rather than Rs. 1,21,00,000/-. Despite this, the Assessing Officer failed to address these submissions with any reasoned order and proceeded to issue the notice under Section 148 without recording reasons.
The Assessing Officer's contention that the case was at a preliminary stage and required detailed examination was rejected by the Court as an abdication of statutory responsibility. The Court clarified that the inquiry under Section 148A must culminate in a reasoned decision on whether to issue a notice under Section 148.
The Court underscored that issuing a notice under Section 148 has serious civil consequences and cannot be done lightly or without recorded reasons. The absence of such reasons effectively denies the assessee the opportunity to understand the basis of the action and to challenge it effectively.
Issue 4: Principles governing recording of reasons and natural justice
The Court undertook an extensive review of the doctrine of natural justice and the jurisprudence on the requirement of recording reasons. It highlighted that reasons are the "live links between the minds of the decision-taker and the controversy," substituting subjectivity with objectivity.
The Court quoted that "the right to reason is an indispensable part of a sound judicial system" and that "a pretence of reasons or 'rubber stamp reasons' is not to be equated with a valid decision-making process."
The Court also referred to international jurisprudence, including Strasbourg decisions, emphasizing that adequate and intelligent reasons must be given for judicial decisions as part of the right to a fair trial.
It was noted that the recording of reasons ensures judicial accountability, transparency, and fairness, and helps maintain litigants' faith in the justice delivery system.
Conclusions
The Court concluded that the order passed by the Assessing Officer under Section 148A(d) and the subsequent notice under Section 148 are illegal and unsustainable due to the failure to record reasons.
The Court set aside the impugned orders and remanded the matter to the Assessing Officer with clear directions to decide the case afresh in accordance with law and to record detailed reasons if the notice under Section 148 is to be issued.
The Court also directed that the decision be taken expeditiously, preferably by 31.08.2025.
Significant Holdings
"Failure to give reasons amounts to denial of justice. Reasons are live links between the minds of the decision-taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity."
"The Assessing Officer cannot shirk away from his responsibility of deciding the case on the material available on record by simply observing that 'at the preliminary stage, the contention of the assessee is not acceptable and the same requires a detailed examination'.
"Notice under Section 148 does have serious civil or evil consequences and cannot be passed so lightly and reasons for the same have to be recorded in the order itself."
"The right to reason is an indispensable part of a sound judicial system."
"Recording of reasons is the principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected."
"An order which does not contain any reason is no order in the eyes of law."
"The requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review."
These principles collectively establish that the issuance of a notice under Section 148 must be preceded by a reasoned order under Section 148A(d), failing which the notice is liable to be quashed. The decision underscores the fundamental requirement of reasoned decision-making as an essential safeguard against arbitrariness and for upholding the rule of law.
Reopening of assessment u/s 147 - mandatory requirement of recording reasons - HELD THAT:- In Pankaj Garg vs. Meenu Garg & Anr. [2013 (2) TMI 924 - SUPREME COURT] reiterated the settled position of law holding that an order, which does not contained any reason, is no order in the eyes of law.
Since the order passed by the AO is bereft of any cogent or plausible reasons, the same is set aside. The matter is remanded back to the AO to decide the same afresh in accordance with law. If the AO still comes to the conclusion that notice u/s 148 is necessary, then he shall record detailed reasons for arriving at such conclusion. AO is directed to decide the case as expeditiously as possible and in no event later than 31.08.2025.
Issues: Whether the period of one year could be excluded under the limitation provision for completion of assessment where the Revenue's request for exchange of information under the Indo-Swiss DTAA related to years prior to 01.04.2011, and whether such a request was a valid reference made in terms of the treaty so as to extend the time limit for assessment.
Analysis: The exclusion under the limitation provision applies only where the reference for exchange of information is made in terms of an agreement referred to in Section 90 or Section 90A of the Income-tax Act, 1961. The amended Indo-Swiss DTAA governed exchange of information only for fiscal years beginning on or after 01.04.2011. The earlier exchange-of-information provision stood deleted and replaced by the Amending Protocol, and no saving clause preserved the earlier provision for pre-01.04.2011 years. Since the request related to a period outside the temporal scope of the amended treaty, it was not a valid treaty reference and could not trigger the exclusion of time.
Conclusion: The reference was invalid and the Revenue was not entitled to exclusion of time under the limitation provision. The issue is answered against the Revenue and in favour of the Assessee.
Ratio Decidendi: Exclusion of time for assessment on account of foreign information exchange is available only when the reference is made validly under the operative treaty provision; an invalid or time-barred treaty reference does not extend limitation.
Validity of assessment orders - Period of limitation u/s 153B - ‘Exchange of Information - Indo-Switzerland Double Taxation Avoidance Agreement [Indo-Swiss DTAA] - whether the period of one year is required to be excluded for the purpose of computing the period of limitation for passing the assessment order?
HELD THAT:- There is no dispute that if the said period is excluded from the time available u/s 153B for making the assessment / reassessment order on account of the Revenue making a reference in terms of the Agreement u/s 90 assessment orders were passed within the period of limitation. AO had passed the assessment order on 04.03.2015 and the time period of passing the assessment order was available till 31.03.2015.
Decision of Supreme Court In Sahara India (Firm), Lucknow v. CIT & Anr. (2016) 12 SCC 32 considered. [2008 (4) TMI 4 - SUPREME COURT] - It is apparent from the above, that but for the specific directions issued by the Supreme Court to treat this decision as settling the law prospectively – the effect of which was to save the orders issued under Section 142(2A) of the Act that were issued prior to the court handing down its ruling – the assessments made would have to be set aside as fresh assessments would be barred by limitation. It is in the aforesaid view that the learned ASG had made a request for prospective ruling, which was acceded to by the Supreme Court. It is implicit that if the directions issued under Section 142 (2A) of the Act were held to be invalid, the benefit of exclusion of the period under Clause (ii) of the Explanation to Section 153B of the Act would not be available.
On a plain reading of Clause (ix) of the Explanation to Section 153B of the Act, the exclusion of time taken for obtaining the information (or one year) for completion of the assessment under Section 153A of the Act is applicable only if a reference for exchange of information has to be made as per the Agreement under Section 90/90A of the Act. It is necessary that reference be made in terms of the agreement. In this case, the benefit of exclusion of time by virtue of Explanation (ix) of Section 153B of the Act would, thus, be available only if the reference was made in terms of Indo-Swiss DTAA. However, as noted above, the request as made was not in terms of the Indo-Swiss DTAA. It was contrary to the limitations as expressly specified under Article 14 of the Amending Protocol.
Questions to law as framed are answered against the Revenue and in the negative; that is, against the Revenue and in favour of the Assesses.
1. Whether the income tax demand raised for Assessment Year (AY) 2007-08 can be deleted by taking into account the Tax Deducted at Source (TDS) certificate submitted by the petitioner.
2. Whether the Assessing Officer (AO) was justified in rejecting the credit for TDS claimed by the petitioner despite the submission of detailed TDS certificates and confirmation from the deductor regarding deposit of TDS to the government.
3. Whether the AO's refusal or failure to process the petitioner's application for rectification under Section 154 of the Income Tax Act, 1961, was legally sustainable.
4. The extent and manner in which verification of TDS credits can be conducted when records are not available on the TRACES portal for the relevant financial year.
5. The appropriate course of action when the Revenue is unable to locate or verify records on its portal but the deductor provides detailed evidence of TDS deduction and deposit.
Issue-wise Detailed Analysis:
Issue 1: Deletion of Income Tax Demand by Accounting for TDS Certificate
Legal Framework and Precedents: The Income Tax Act, 1961, mandates that tax deducted at source must be credited to the deductee's account and reflected in their tax computation. Section 143(1) governs processing of returns, and Section 154 provides for rectification of mistakes apparent from the record. Section 221(1) relates to recovery of tax demand. The deductee is entitled to credit for TDS if valid certificates are produced and the tax has been deposited with the government.
Court's Interpretation and Reasoning: The petitioner filed its return for AY 2007-08 declaring income and claimed credit for TDS as per Form 16A issued by Sigma Freudenberg NOK Pvt. Ltd. The AO, however, rejected this credit in the intimation under Section 143(1), leading to a demand. The petitioner's subsequent application under Section 154 for rectification was not processed. The Court noted that the AO's rejection was solely because the TDS credit was not reflected in the TRACES portal data for FY 2006-07.
Key Evidence and Findings: The petitioner submitted detailed TDS certificates from Sigma Freudenberg NOK Pvt. Ltd., which included comprehensive particulars of payments, TDS deducted, surcharges, education cess, dates, cheque numbers, bank branch codes, and deposit dates. Sigma also confirmed by communication to the AO that the TDS was deducted and deposited to the government's credit.
Application of Law to Facts: Despite the AO's inability to verify the TDS credit on the TRACES portal (which only had data from FY 2007-08 onwards), the Court found that the detailed documentary evidence provided by the deductor was sufficient to establish that TDS had been deducted and deposited. The AO's failure to process the rectification application on the ground of portal data unavailability was not justified.
Treatment of Competing Arguments: The Revenue argued that verification was not possible due to lack of records on the TRACES portal and ITR information for the relevant period. The Court rejected this as a complete bar to verification, noting that physical verification from banks and other records could be undertaken. The AO had not initiated such an exercise.
Conclusion: The Court held that the income tax demand raised without accounting for the TDS certificate was erroneous and directed the AO to accept the TDS credit as claimed, unless it finds otherwise after due verification beyond the portal data.
Issue 2: Validity of AO's Non-Processing of Rectification Application under Section 154
Legal Framework and Precedents: Section 154 of the Income Tax Act allows rectification of mistakes apparent from the record. The AO is duty-bound to consider such applications and pass orders expeditiously.
Court's Interpretation and Reasoning: The petitioner filed an application under Section 154 in 2016, which remained unprocessed for several years. The Court observed that the AO's inaction was indefensible, especially given the petitioner had supplied all relevant documents and the deductor had confirmed TDS deduction and deposit.
Key Evidence and Findings: The petitioner's reminder dated 14.01.2018 and subsequent communications were ignored. The AO only issued a recovery notice under Section 221(1) in 2020 without resolving the rectification application.
Application of Law to Facts: The Court emphasized the AO's statutory obligation to process rectification applications and found that the failure to do so violated the petitioner's rights and statutory provisions.
Treatment of Competing Arguments: The Revenue's argument that verification was pending was not accepted as a justification for inaction over a prolonged period.
Conclusion: The Court directed the AO to process the rectification application promptly, taking into account the deductor's confirmation of TDS deduction and deposit.
Issue 3: Verification of TDS Credits in Absence of Portal Data
Legal Framework and Precedents: The TRACES portal is a tool for verification of TDS credits but does not constitute the sole repository of proof. Documentary evidence and confirmations from deductors are valid means to establish TDS credits.
Court's Interpretation and Reasoning: The AO's communication with the Deputy Commissioner of Income Tax (TDS) revealed that TRACES data was available only from FY 2007-08, not for FY 2006-07. The Court held that inability to verify on the portal does not preclude verification by other means such as bank records and deductor confirmations.
Key Evidence and Findings: Sigma Freudenberg NOK Pvt. Ltd.'s detailed tabular statement and certification of TDS deduction and deposit were accepted as credible evidence. The Court noted no contradiction or denial from the AO regarding these facts.
Application of Law to Facts: The Court found that the AO's failure to undertake alternate verification was a procedural lapse. It directed the AO to rely on the deductor's communication unless proven otherwise.
Treatment of Competing Arguments: The Revenue's reliance on TRACES portal data as the only source of verification was rejected.
Conclusion: The Court mandated that the AO accept the deductor's detailed confirmation as correct for crediting TDS, subject to any contrary finding after due verification.
Issue 4: Direction for Expeditious Disposal of the Petitioner's Claim and Refund
Legal Framework and Precedents: The Income Tax Act requires timely processing of refunds and rectification claims. Prolonged delay violates principles of natural justice and statutory mandates.
Court's Interpretation and Reasoning: The petitioner's refund claim had been pending for over a decade and a half. The Court referred to a prior coordinate bench order directing the Revenue to act on the deductor's information to reach a conclusive finding.
Key Evidence and Findings: The Court noted that the Revenue had not controverted the deductor's communication and had only cited record unavailability as a reason for delay.
Application of Law to Facts: The Court found it necessary to direct the AO to process the petitioner's request expeditiously and preferably within eight weeks from the date of the order.
Treatment of Competing Arguments: The Revenue's inability to locate records was not accepted as an excuse for further delay.
Conclusion: The Court disposed of the petition with directions for the AO to consider the deductor's response as correct unless proven otherwise, and to process the petitioner's claim without undue delay.
Significant Holdings:
"If the respondent/revenue is unable to locate the record, then the information given in Annexure P-8 by Sigma should be worked on to reach a conclusive finding qua deduction of tax at source as claimed by the petitioner."
"In the peculiar circumstances of this case, it would be necessary to accept the said communication as correct."
"The AO is directed to consider the response furnished by Sigma Freudenberg NOK Pvt. Ltd. as correct, unless it determines otherwise, and process the petitioner's request on the aforesaid basis as expeditiously as possible and preferably within a period of eight weeks from date."
The Court established the principle that detailed documentary evidence and confirmation from the deductor regarding TDS deduction and deposit must be accepted by the AO as valid proof for crediting TDS, even if electronic records on the TRACES portal are unavailable for the relevant period.
Further, the Court emphasized the AO's duty to process rectification applications under Section 154 expeditiously and not to allow technical or procedural lacunae to delay justice.
On the final determinations:
- The income tax demand for AY 2007-08 raised without accounting for the TDS certificate was held to be unsustainable.
- The AO was directed to delete the demand after crediting the TDS as per the deductor's communication.
- The petitioner's application under Section 154 was to be processed promptly.
- The Revenue was directed to complete verification and refund proceedings within eight weeks.
Credit for tax deducted at source - intimation under Section 143(1) of the Income Tax Act - application under Section 154 of the Income Tax Act - notice under Section 221(1) of the Income Tax Act - verification of TDS from TRACES and alternative documentary verification - acceptance of thirdparty/deductor's certified particulars - direction to Assessing Officer to process rectification and grant refund
Credit for tax deducted at source - verification of TDS from TRACES and alternative documentary verification - acceptance of thirdparty/deductor's certified particulars - Whether the Assessing Officer could refuse to grant TDS credit merely because the TRACES portal did not contain records for FY 2006-07, despite the deductor furnishing detailed certified particulars and proof of deposit. - HELD THAT: - The Court found that Sigma Freudenberg NOK Pvt. Ltd. furnished detailed particulars of TDS deducted and of deposits made to the Central Government, including cheque numbers, bank branch/BSR details and deposit dates. Although the AO sought verification from TRACES, the revenue's internal communication recorded that TRACES data commences from FY 2007-08 and therefore did not show records for FY 2006-07. The Court held that absence of portal records does not absolve the AO from verifying the deductor's particulars by alternative means (for example, by obtaining verification from the concerned banks) and does not justify rejecting the TDS certificate. In the factual matrix, the AO had not controverted the deductor's submissions and no positive material was placed to impeach them; accordingly, it was necessary in the peculiar circumstances to accept the deductor's communication as correct unless shown otherwise. [Paras 5, 6, 9]
The AO cannot refuse TDS credit solely because TRACES lacks records for FY 2006-07; the deductor's certified particulars are to be acted upon and, if required, verified by alternative means.
Application under Section 154 of the Income Tax Act - direction to Assessing Officer to process rectification and grant refund - notice under Section 221(1) of the Income Tax Act - Whether the petitioner's Section 154 rectification application and refund claim relating to AY 2007-08 should be processed on the basis of the deductor's response and what directions should be given to the AO. - HELD THAT: - The Court recorded that the petitioner filed an application under Section 154 which remained unprocessed and that a recovery notice under Section 221(1) had been issued because TDS credit had not been accounted for. Given that the AO did not controvert Sigma's detailed response to verification and, in view of the coordinate-bench direction that the deductor's information be worked upon where records could not be traced, the Court directed the AO to consider Sigma's response as correct unless it determines otherwise after any required verification. The AO was directed to process the petitioner's request and pass an appropriate order expeditiously, and preferably within eight weeks from the date of the order. [Paras 3, 8, 10, 11]
The AO is directed to treat the deductor's response as correct unless shown otherwise and to process the Section 154 rectification and attendant refund claim expeditiously, preferably within eight weeks.
Final Conclusion: The petition is disposed of by directing the Assessing Officer to accept and act upon the deductor's certified particulars of TDS (unless after verification they are shown to be incorrect) and to process the pending Section 154 rectification and refund claim in respect of AY 2007-08 expeditiously, preferably within eight weeks.
(a) Whether the Income Tax Appellate Tribunal (ITAT) erred in not considering that the entire transactions were stage-managed to enable the assessee to convert unaccounted income into fictitious Long Term Capital Gains (LTCG) and claim bogus exemption;
(b) Whether the ITAT was justified in not acknowledging that the assessee manipulated share prices of a penny stock, M/s. Tuni Textile Mills Ltd., to record fictitious LTCG;
(c) Whether the ITAT failed to consider evidence establishing manipulation of share prices as a colourable device to generate fictitious LTCG for tax evasion;
(d) Whether the ITAT erred in holding that "tangible information" for reassessment under Section 147 cannot include "borrowed information" from the investigation wing, and whether the Assessing Officer's (AO) satisfaction based on such information can be said to be "borrowed satisfaction"; and
(e) Whether the ITAT ignored the Supreme Court's ruling that the AO's "reason to believe" under Section 147 requires only cause or justification to suppose income has escaped assessment, not conclusive legal proof.
On the first three issues concerning the genuineness of transactions and manipulation of share prices, the Tribunal had found that the AO did not apply his mind but merely acted mechanically on information from the investigation wing. The Tribunal relied heavily on the Central Board of Direct Taxes (CBDT) instruction dated 10th January 2018, which prescribes a standard procedure for recording satisfaction under Section 147. It held that the AO failed to independently examine the return and details before reopening the assessment after four years, and thus the reopening was bad in law.
Regarding the fourth issue on the nature of "tangible information" and "borrowed satisfaction," the Tribunal took the view that information received from the investigation wing cannot be treated as tangible information unless the AO forms his own independent satisfaction. It distinguished "borrowed information" from "borrowed satisfaction," implying that relying solely on investigation reports without independent application of mind is impermissible.
On the fifth issue, the Tribunal did not fully consider the Supreme Court's authoritative interpretation in Assistant CIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2008) 14 SCC 208, which clarified that the AO's "reason to believe" is a subjective satisfaction based on cause or justification to suppose income has escaped assessment, and need not be based on conclusive legal evidence.
In analyzing these issues, the Court first clarified the legal status of the CBDT instruction. It held that the instruction is merely a guiding note for the AO and does not constitute a binding rule, regulation, or mandatory direction. Therefore, the Tribunal erred in elevating the instruction to a status that binds the assessee or invalidates the AO's action solely because the instruction was not strictly followed.
The Court then extensively examined the AO's assessment order dated 25.09.2021. The AO had set out the information received from the investigation wing, which implicated the assessee among others. The AO had scrutinized the return filed by the assessee, the contract notes, share certificates, and other transaction details. He observed that the shares of M/s. Tuni Textile Mills Ltd. had appreciated abnormally-about 4.5 times in a little over a year-resulting in significant LTCG claimed as exempt under Section 10(38).
The AO further analyzed the company's financials, including profit and loss accounts, balance sheets, and cash flow statements, and concluded that the company's fundamentals were weak. The abnormal price rise was thus artificial and manipulated. The AO issued a show cause notice, considered the assessee's replies, and found no new evidence to rebut the allegations. He concluded that the transactions were pre-arranged accommodation entries orchestrated by a group of operators and shell companies to convert unaccounted money into bogus LTCG. The AO applied the "test of human probabilities" as established in Supreme Court precedents (CIT v. Durga Prasad More and Sumati Dayal v. CIT), which supported his conclusion.
The Court found that the Tribunal's conclusion that the AO had not applied his mind was factually incorrect. The AO had conducted a detailed examination and formed a reasoned opinion. The Court also noted that the appellate authority (National Faceless Appeal Centre) had re-examined the facts, considered the assessee's grounds and submissions, and upheld the AO's findings, including the finding that the assessee was a beneficiary of accommodation entries used to claim bogus LTCG/STCG exemptions.
Regarding the issue of "borrowed satisfaction," the Court held that the AO's reliance on information from the investigation wing did not amount to borrowed satisfaction because the AO independently examined the return and other materials before recording his reasons for reopening. The Court emphasized the Supreme Court's interpretation that "reason to believe" is a subjective satisfaction based on cause or justification, not a conclusive legal finding, and that the AO is entitled to act on relevant material even if it is initially received from an investigation wing.
The Court concluded that the Tribunal committed a serious factual and legal error by invalidating the reopening on the ground that the AO did not apply his mind and by elevating the CBDT instruction to a binding status. The Court quashed the Tribunal's order and allowed the revenue's appeal, answering the substantial questions of law in favor of the revenue.
Significant holdings include the following verbatim reasoning:
"The word 'reason' in the phrase 'reason to believe' would mean cause or justification; if the assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the assessing officer should have finally ascertained the fact by legal evidence or conclusion."
"The CBDT instruction is a guiding note for the assessing officer and not for the assessee... the Tribunal committed an error too by elevating the status of an instruction which is issued for the guidance of the assessing officer to be taken as a rule or a regulation which would also be binding on the assessee."
"The assessing officer has applied his mind by examining the return, contract notes, share certificates, financial statements of the company and other materials before recording reasons for reopening. The transactions were found to be pre-arranged accommodation entries to convert unaccounted income into bogus LTCG."
Core principles established include:
- The AO's "reason to believe" under Section 147 is a subjective satisfaction based on cause or justification, not conclusive proof.
- Information from the investigation wing can constitute tangible information if the AO applies independent mind before reopening assessment.
- CBDT instructions are guiding notes and do not bind the assessee or override the AO's statutory powers.
- Reopening of assessment after four years requires the AO to form an independent opinion based on relevant material, which can include investigation reports.
Final determinations on the issues are that the reopening of the assessment was validly made by the AO based on sufficient cause and justification, the transactions were rightly characterized as fictitious accommodation entries to evade tax, and the Tribunal erred in setting aside the reopening on procedural grounds without appreciating the AO's detailed examination and application of mind.
Reopening of assessment - numerous individual assessees have taken entry to LTCG by paying its unaccounted money - HELD THAT:- AO has verified the contract note and the share certificate submitted by the assessee and other details of the transactions done by the assessee as well as the details furnished in the return of income and then has stated that the facts and circumstances surrounding the transaction of shares of M/s. Tuni Textiles Mills Ltd. and subsequent earning of exempt LTCG by the assessee through the transaction in the said shares clearly indicate that the claim of the assessee regarding earning of significant LTCG exempt under Section 10 (38) requires deeper investigation and analysis to uncover the real nature of the alleged regular/prudent transaction. Thereafter, the assessing officer has taken note of the background of the investigation done by the department, discussed about the background of the company namely M/s. Tuni Textiles Mills Ltd. and taken note of the profit and loss account of the said company and its balance sheet, asset dt. March 31, 2012, statement of cash flow for the year ended 31.03.2012 and come to the conclusion that the fundamentals of the company are very weak and it clearly indicates that abnormal price rise in the shares of the company is not natural or normal but artificially manipulated.
AO took into consideration the stand taken by the assessee in their reply and has recorded reasons to hold that the assessee has failed to discharge the onus and, therefore, the only escapable conclusion is that numerous individual assessees have taken entry to LTCG by paying its unaccounted money.
Furthermore, that the transaction in shares of M/s. Tuni Textiles Mills Ltd. by the assessee was a pre-arranged transaction in the form of accommodation entry managed through collusive transactions by group of entry operators and shell entities.
Tribunal committed an error in coming to a conclusion that the assessing officer has not applied his mind for reopening the assessment u/s 147 of the Act.
Tribunal has not examined the reasons set out by the appellate authority which has re-examined the factual position, taken note of the grounds raised by the assessee and their oral submissions and has in detail discussed about the lowering of funds and how the funds reached the concerned beneficiaries and has factually found that the assessee is one of the beneficiaries who received accommodation entry which was used to avail bogus LTCG/STCL.
Tribunal committed a serious factual error in coming to the conclusion that there was no application of mind of the assessing officer and erroneously elevated the status of CBDT which is meant as a guiding note of the assessing officer to have an effect of regulation. Therefore, the order impugned in this appeal deserves to be quashed. Decided against assessee.
The core legal questions considered by the Court in this matter are:
(i) Whether the Tribunal erred in not deleting the transfer pricing adjustment made to the intra group services payments by the Assessee to its Associated Enterprises (AEs).
(ii) Whether the Tribunal's order is perverse, unlawful, or illegal for not adhering to the principle that the Transfer Pricing Officer (TPO) cannot substitute the Assessee's transfer pricing study unless the conditions under Section 92C(3) of the Income Tax Act, 1961 (the Act) are satisfied.
(iii) Whether the Tribunal erred in not deleting the transfer pricing adjustment made by arbitrarily applying the Comparable Uncontrolled Price (CUP) method and declaring the Arm's Length Price (ALP) of intra group services as nil without proper application of the prescribed methods under the Act.
(iv) Whether the Tribunal erred in remanding the matter instead of conclusively deleting the ad hoc 50% ALP adjustment determined by the Commissioner of Income Tax (Appeals) [CIT(A)] for intra group services.
(v) Whether the Tribunal's remand of the ALP determination of intra group services was perverse in light of the material and submissions on record.
Issue-wise Detailed Analysis
1. Validity of Transfer Pricing Adjustment to Intra Group Services
Legal Framework and Precedents: The relevant provisions are Section 92C of the Act which governs the computation of ALP in international transactions, and Section 92CA which empowers the TPO to determine ALP. The Supreme Court and High Courts have consistently held that the TPO's jurisdiction to substitute the Assessee's transfer pricing study is circumscribed by the conditions enumerated in Section 92C(3). The TPO cannot reject the Assessee's transfer pricing study without satisfying these statutory conditions.
Court's Interpretation and Reasoning: The Court noted that the TPO rejected the Assessee's transfer pricing study on intra group services and applied the CUP method to determine ALP as nil, on the premise that the Assessee failed to prove receipt of any tangible benefits or services. However, both the CIT(A) and the ITAT concurrently found that the Assessee did receive intra group services, and thus the ALP could not be nil. The Tribunal remanded the matter to the TPO to reconsider the ALP afresh.
Key Evidence and Findings: The TPO's rejection was based on the absence of documentary evidence such as a cost-benefit analysis, functional analysis (FAR), and specific demonstration of benefits derived from the services. The Assessee had relied on its transfer pricing study using the Transactional Net Margin Method (TNMM) with operating profit margin as the Profit Level Indicator (PLI), benchmarking against comparable companies. The TPO critiqued the Assessee's selection of comparables and filters applied.
Application of Law to Facts: The Court emphasized that the TPO must establish satisfaction of any of the grounds under Section 92C(3) before rejecting the Assessee's transfer pricing study. Since the TPO's fundamental premise-that no services were received-was rejected by the CIT(A) and ITAT, the TPO's order was not sustainable. The remand was appropriate to allow the TPO to reconsider the ALP taking into account the Assessee's transfer pricing study and the concurrent findings of receipt of services.
Treatment of Competing Arguments: The Assessee argued that the TPO failed to apply the statutory conditions under Section 92C(3) and arbitrarily applied the CUP method to declare ALP as nil. The Revenue contended that the Assessee failed to substantiate the intra group services and that the TPO's filters and methodology were appropriate. The Court found merit in the Assessee's contention regarding statutory safeguards and the necessity of reassessment by the TPO.
Conclusion: The Court upheld the ITAT's remand directing the TPO to reconsider the ALP determination for intra group services, ensuring compliance with Section 92C(3) safeguards and proper application of transfer pricing principles.
2. Appropriateness of Comparable Companies and Filters Used for ALP Determination
Legal Framework and Precedents: The selection of comparables and the filters applied in transfer pricing benchmarking are critical to determining ALP. The Act and judicial precedents require that comparables be functionally similar and economically comparable to the Assessee's transactions.
Court's Interpretation and Reasoning: The TPO rejected certain comparables identified by the Assessee based on criteria such as availability of financial data, accounting year alignment, turnover thresholds, revenue composition, loss-making status, related party transactions, and export revenue. The CIT(A) and ITAT upheld the inclusion and exclusion of comparables as determined by the TPO.
Key Evidence and Findings: The TPO's show cause notice detailed the rationale for rejecting or accepting comparables, emphasizing the need for functional similarity and reliable data. The Court found that the TPO's filters were appropriate and that the CIT(A) and ITAT did not err in their concurrent findings.
Application of Law to Facts: The Court observed that the TPO's rejection of some comparables and acceptance of others was based on sound commercial and accounting principles. The Assessee's challenge to the exclusion of certain comparables was not upheld.
Treatment of Competing Arguments: The Revenue supported the TPO's filters as necessary for selecting appropriate comparables, while the Assessee contended that some exclusions were unwarranted. The Court sided with the Revenue on this issue.
Conclusion: The Court affirmed the Tribunal's decision regarding the selection of comparables and the filters applied by the TPO.
3. Legality of Arbitrary 50% Ad Hoc Adjustment by CIT(A)
Legal Framework and Precedents: The CIT(A) had reduced the TPO's adjustment for intra group services to 50% on an ad hoc basis, citing the absence of third-party documentation. The law mandates that transfer pricing adjustments be based on reliable data and proper benchmarking rather than arbitrary reductions.
Court's Interpretation and Reasoning: The ITAT faulted the CIT(A)'s ad hoc 50% reduction and remanded the matter to the TPO for fresh determination of ALP. The Court found no error in the ITAT's approach as the CIT(A)'s direction lacked a basis in the evidentiary record or transfer pricing principles.
Key Evidence and Findings: The CIT(A) acknowledged the TPO's error in treating ALP of intra group services as nil but lacked sufficient data to quantify the adjustment, hence the 50% reduction. The ITAT held that such an approach was unsatisfactory and required fresh examination.
Application of Law to Facts: The Court agreed that a transfer pricing adjustment must be grounded in a proper economic analysis and cannot be arbitrarily fixed. The remand was justified to ensure adherence to the statutory framework.
Treatment of Competing Arguments: The Assessee contended that the CIT(A)'s 50% adjustment was arbitrary and unjustified, while the Revenue supported the CIT(A)'s approach as a pragmatic solution. The Court favored the Assessee's position.
Conclusion: The Court upheld the ITAT's remand and disapproved the CIT(A)'s arbitrary 50% adjustment.
4. Application of Section 92C(3) Safeguards in Transfer Pricing Adjustments
Legal Framework: Section 92C(3) of the Act provides specific grounds on which the Assessing Officer or TPO may reject the Assessee's transfer pricing study and determine ALP. These include non-compliance with documentation requirements, unreliable data, or failure to furnish information.
Court's Interpretation and Reasoning: The Court emphasized that the TPO must satisfy the conditions under Section 92C(3) before substituting the Assessee's transfer pricing study. The TPO's show cause notice and order indicated that the filters and comparables used by the Assessee were inadequate, thus satisfying the statutory conditions.
Key Evidence and Findings: The TPO issued a detailed show cause notice identifying deficiencies in the Assessee's benchmarking study, including inappropriate comparables and lack of documentation for intra group services. This formed the basis for rejecting the Assessee's transfer pricing study.
Application of Law to Facts: The Court found that the TPO had complied with the procedural safeguards by issuing a show cause notice and providing an opportunity to the Assessee. The remand order directs the TPO to reconsider the ALP with proper application of these safeguards.
Treatment of Competing Arguments: The Assessee argued that the TPO failed to meet the statutory threshold under Section 92C(3). The Court, however, found that the TPO's findings on the inadequacy of the Assessee's study and lack of documentation justified the rejection.
Conclusion: The Court held that the TPO's actions were in accordance with Section 92C(3) and that the remand was appropriate.
Significant Holdings
"The transfer pricing study of the Assessee could not be rejected unless the conditions as set out in Section 92C (3) of the Act are satisfied."
"The TPO's fundamental premise that the Assessee had not received any services has been rejected by the CIT(A) and the learned ITAT. Therefore, the matter was remanded to the TPO for fresh consideration of the ALP of intra group services."
"An arbitrary ad hoc reduction of 50% by the CIT(A) without a proper basis is unsustainable and the matter requires fresh consideration by the TPO."
"The filters and criteria applied by the TPO for selecting comparable companies are appropriate and the Tribunal did not err in upholding the same."
"The TPO must comply with the procedural safeguards under Section 92C(3) before rejecting the Assessee's transfer pricing study and making any transfer pricing adjustment."
"In absence of satisfaction of the conditions under Section 92C(3), the TPO cannot proceed to determine ALP on a basis different from the Assessee's transfer pricing study."
Final Determinations
The Court dismissed the appeal filed by the Assessee, finding no substantial question of law. It upheld the ITAT's decision to remand the matter to the TPO for fresh determination of ALP on intra group services, ensuring compliance with Section 92C(3) safeguards and proper application of transfer pricing principles. The Court affirmed the appropriateness of the TPO's filters for comparables and disapproved the CIT(A)'s arbitrary 50% ad hoc reduction. The TPO was directed to reconsider the transfer pricing adjustment in light of the concurrent findings that intra group services were indeed received by the Assessee.
Arm's length price - Transfer pricing study rejection and the conditions under Section 92C(3) - Remand to the Transfer Pricing Officer for fresh determination - Receipt of intragroup services - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM)
Transfer pricing study rejection and the conditions under Section 92C(3) - Arm's length price - Receipt of intragroup services - Remand to the Transfer Pricing Officer for fresh determination - Validity of remanding determination of ALP for intragroup services to the TPO where the TPO had held ALP as nil without accepting the assessee's transfer pricing analysis - HELD THAT: - The Court accepted the concurrent findings of the CIT(A) and the ITAT that the Assessee had received intragroup services and therefore the TPO's fundamental premise that no services were received was untenable. Because the TPO had not examined the Assessee's transfer pricing study in that factual context, the ITAT rightly remanded the matter to the TPO for fresh consideration. The Court emphasised that the TPO may not reject the assessee's transfer pricing analysis unless one or more of the statutory conditions specified in Section 92C(3) are satisfied, and directed that on remand the TPO must first consider whether those conditions are met before making any transfer pricing adjustment. The Court therefore found no infirmity in the ITAT's exercise of remand power and required the TPO to reexamine the matter afresh in light of the findings that services were received. [Paras 31, 32, 33]
ITAT's remand to the TPO for fresh determination of ALP of intragroup services upheld; TPO to consider the assessee's transfer pricing study and the applicability of the conditions under Section 92C(3) before making any adjustment.
Remand to the Transfer Pricing Officer for fresh determination - Arm's length price - Whether any substantial question of law arises requiring this Court's interference with the ITAT order - HELD THAT: - Having upheld the ITAT's remand and directed the TPO to reconsider the matter in accordance with law (including the requirements of Section 92C(3)), the Court concluded that no substantial question of law remained for its determination. The Court therefore declined to entertain the Assessee's challenge to the ITAT's order on the merits and found no ground to set aside the remand. [Paras 33, 34]
No substantial question of law arises; the appeal is dismissed.
Final Conclusion: Appeal dismissed. The ITAT's remand to the TPO for fresh determination of the arm's length price of intragroup services is upheld; on remand the TPO must reexamine the assessee's transfer pricing analysis and satisfy itself on the applicability of the conditions under Section 92C(3) before making any adjustment.
The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, relate primarily to the validity and correctness of additions made by the Assessing Officer (AO) and subsequently deleted or sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT). The key issues include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 & 2: Validity of CIT(A)'s deletion of additions on liabilities and ITAT's finding of mechanical acceptance
The legal framework involves the principles of assessment under the Income Tax Act, 1961, particularly the treatment of unexplained liabilities and cash credits under Sections 68 and 143(3), and the appellate powers of CIT(A) and ITAT. Precedents emphasize the need for verification and independent inquiry before making or deleting additions.
The AO initially made an addition of Rs. 4,44,12,989/- on account of liabilities reflected in the Assessee's books towards three banks, which were not confirmed by the banks on notice under Section 133(6). The CIT(A) admitted additional evidence produced by the Assessee and deleted this addition, accepting the Assessee's explanation that the liabilities represented "book overdrafts" arising from cheques issued but not presented to banks.
The ITAT, however, found that the CIT(A) had mechanically accepted the Assessee's explanation without independent inquiry or waiting for the AO's verification report. The AO had not submitted any report despite reminders, and the CIT(A) had only a duty to grant reasonable opportunity under Rule 46A(3) of the IT Rules. The ITAT partly restored the addition, disallowing Rs. 4,39,22,918/- as liabilities towards Bank of Baroda and Punjab National Bank, finding that the Assessee failed to establish the genuineness of these liabilities.
The Court observed that the question of genuineness of liabilities is a question of fact. The CIT(A) had examined evidence and found the liabilities genuine, but the ITAT found the evidence insufficient. The Court held that the ITAT's decision was not perverse or illegal, as the Assessee failed to prove the existence and genuineness of the liabilities beyond the cheques not presented. The Court noted that the liabilities reflected were not bank overdrafts but "book overdrafts" and that the bank accounts did not show such overdrafts.
Issue 3: Violation of principles of natural justice and Article 14 due to non-grant of opportunity
The Assessee contended that the addition restored by the ITAT was made without invoking any specific provision of the Act and without granting opportunity, thus violating natural justice and Article 14 of the Constitution. The legal framework requires that the AO must provide an opportunity to the Assessee before making additions, especially under Section 68 or related provisions.
The Court found no merit in this contention. The AO had issued notices and sought confirmation from banks under Section 133(6). The CIT(A) had admitted additional evidence and given opportunity to the AO to verify, but the AO failed to submit any report. The ITAT's restoration of the addition was based on the absence of evidence to establish the liability. The Court held that the procedural requirements and principles of natural justice were complied with, and no violation of Article 14 was made out.
Issue 4 & 5: Conflict with precedents regarding additions under Section 68 and treatment of notional entries
The Assessee relied on two key precedents: the Delhi High Court's ruling that additions under Section 68 do not arise once purchases and trading results are accepted, and the Calcutta High Court's ruling that notional entries without actual receipt of money cannot be treated as unexplained cash credits under Section 68.
The Court observed that the present case did not involve additions under Section 68 on unexplained cash credits but additions on account of liabilities reflected in the books without bank confirmation. The question was whether the liabilities were genuine or bogus credits. The Court noted that the Assessee's books showed liabilities towards banks which were not supported by bank statements or actual overdrafts, and the cheques were not presented, indicating the liabilities were not genuine.
The Court found that the precedents cited were distinguishable as they dealt with different factual and legal scenarios. The present case involved a factual dispute about the existence of liabilities, not merely unexplained cash credits or notional entries. Hence, the ITAT's decision to restore the addition was not contrary to the law laid down by the High Courts.
Additional factual findings and application of law
The Assessee's explanation that the liabilities arose from cheques issued but not presented was scrutinized. The Court noted that the Punjab National Bank account was an escrow account, which could not have a negative balance, and the liabilities reflected were inconsistent with the bank's nature and usage. The Assessee's claim that it returned materials purchased and recovered cheques was not supported by documentary evidence. The ITAT's finding that the Assessee failed to establish the genuineness of the liabilities was upheld.
The Court emphasized that the genuineness of transactions and liabilities is a question of fact. The absence of documentary proof and bank confirmation weighed against the Assessee. The AO's addition was thus justified, and the ITAT's partial restoration of the addition was appropriate.
3. SIGNIFICANT HOLDINGS
The Court held: "The question whether the debts reflected as payable to the banks are genuine or fictitious is a pure question of fact."
It further held that the ITAT's decision was neither perverse nor illegal, as the Assessee failed to establish the liabilities with sufficient evidence, and the CIT(A)'s deletion was based on acceptance of explanation without adequate proof.
The Court rejected the contention of violation of natural justice and Article 14, noting that the AO had issued notices and the CIT(A) had granted opportunity to the AO, who failed to submit verification reports.
The Court distinguished the precedents relied upon by the Assessee, holding that the facts and legal questions in those cases were materially different, and the ITAT's restoration of additions was not contrary to law.
Ultimately, the Court concluded that no substantial question of law arose for its consideration and dismissed the appeal.
Deemed Income u/s 41 - Outstanding liability - Addition of the amounts reflected as payable to two banks - Assessee earnestly contended before this Court that the liabilities were reflected in its books of account as “book overdraft” and not “bank overdraft” - AO concluded that the outstanding balance, as reflected, was not genuine and, accordingly, added the same to the returned income of the Assessee. CIT(A) accepted the Assessee’s contention and deleted the said addition.
HELD THAT:- In the present case, it is conceded that the books of account reflected inflated outstanding in excess of the statement of accounts furnished by the Bank of Baroda and Punjab National Bank. The cheques claimed to have been issued by the Assessee, on account of which the Assessee’s books reflected a higher outstanding, were not presented in FY 2007-08 as well. Thus, in fact, these cheques were never presented to the concerned banks.
The account maintained with Punjab National Bank was an escrow account (and not an overdraft account) and could be utilized only for specified purposes. Therefore, the balance in the said account could not be in negative and the liability reflected in the books simply did not exist.
Assessee claimed that it is involved in real estate, was obliged to deposit a part of the consideration received from its customers in the escrow account for being used for specified purposes for development of the projects.
Assessee claimed that the cheques were issued for the purchase of materials from various vendors. However, due to the downturn in the real estate market, its customers failed to make payments, and the Assessee could not deposit the required funds into the Punjab National Bank’s escrow account.
Consequently, the Assessee returned the materials purchased in FY 2007-08 and recovered cheques issued to various suppliers. Thus, in any event, the banks could not be reflected as creditors, as they had not extended the advance as reflected by the Assessee in its books. If the Assessee’s claim is accepted, the unpaid vendors had to be reflected as sundry creditors.
ITAT did not accept the Assessee’s contention, primarily due to a lack of sufficient evidence, and there was no material on record to show that the Assessee had, in fact, received the goods, which were subsequently returned.
The impugned order also does not reflect that any documentary evidence was produced by the Assessee to establish the said transactions as claimed.
Question whether the transactions, as claimed by the Assessee, existed and were genuine are questions of fact. We are unable to find that the decision of the ITAT suffers from any perversity or patent illegality.
- Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for reopening the assessment for Assessment Year (AY) 2018-19 was valid and within the prescribed limitation period under Section 149(1)(a) of the Act.
- Whether the cumulative income alleged to have escaped assessment over multiple years (FY 2016-17 to 2022-23) can be aggregated as a "singular event or occasion" under Section 149(1A) of the Act to satisfy the threshold limit of Rs. 50,00,000/- as stipulated under Section 149(1)(b) for reopening assessments beyond the normal limitation period.
- Whether the payments made by the petitioner to its Associated Enterprises (AEs) for management and IT services, which formed the basis for reopening, were justified and at arm's length price (ALP), or whether they were a conduit for profit shifting and tax evasion.
- Whether the impugned notice and consequent proceedings should be quashed on the ground of limitation and lack of sufficient justification.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity and Limitation of Notice under Section 148
The legal framework governing reopening of assessments is primarily contained in Sections 147, 148, and 149 of the Income Tax Act, 1961. Section 148 empowers the Assessing Officer (AO) to issue a notice for reopening an assessment if there is reason to believe that income has escaped assessment. However, Section 149 prescribes the limitation period within which such reopening can be initiated. Under Section 149(1)(a), the notice must be issued within four years from the end of the relevant assessment year unless certain exceptions apply.
In the present case, the impugned notice dated 21.03.2024 was issued for AY 2018-19, which ordinarily would be barred by limitation as more than four years had elapsed. The AO invoked the exception under Section 149(1A), which allows aggregation of escaped income relating to multiple years if they arise from a singular event or occasion, to extend the limitation period.
The Court examined the nature of the alleged escaped income and found that the payments were made regularly over several years to AEs for management and IT services. These payments were not one-off transactions but recurring payments, each subject to assessment in respective years. The Court held that such recurring payments cannot be treated as a single event or occasion for the purpose of aggregating escaped income under Section 149(1A).
Precedent relied upon includes a recent decision of the same Court which held that regular payments over multiple years do not constitute a singular event for aggregation under Section 149(1A). The Court rejected the Revenue's contention that the entire quantum of payments should be aggregated to exceed the threshold of Rs. 50,00,000/-.
Accordingly, the impugned notice was held to be barred by limitation and invalid.
Issue 2: Nature and Justification of Management Fees Paid to Associated Enterprises
The AO's reasons for reopening were based on findings from a search conducted on 21.03.2023 and subsequent investigations. The AO alleged that the petitioner paid excessive management fees to Idemia France SAS and other AEs during FY 2016-17 to 2022-23, which were not commensurate with the actual services rendered, thereby facilitating profit shifting outside India.
The AO's analysis included a detailed tabulation of management fees paid year-wise, showing a total of Rs. 2.38 crores over the period. The AO compared these payments with the petitioner's total revenue and gross profit, noting that intra-group service charges ranged from approximately 2% to 6% of total revenue annually. The petitioner's business being a service concern providing biometric identity solutions domestically, the AO found these payments suspicious and disproportionate.
Further incriminating evidence included emails retrieved during the search, revealing:
No formal management service agreement was found or filed, and no methodology or cost allocation keys for the management fees were produced by the petitioner or AEs. Even top management could not justify the large payments.
The Court noted that these findings pointed to the management fees being a mere conduit for profit shifting rather than genuine payments for services. However, the Court did not finally adjudicate on the arm's length nature of these payments, as the issue before it was limited to the validity of the reopening notice.
Issue 3: Application of Law to Facts and Treatment of Competing Arguments
The petitioner argued that the notice was barred by limitation and that the AO's reliance on the exception under Section 149(1A) was misplaced as the payments were recurring and not a singular event. The petitioner also contended that the payments were disclosed in returns and had been subject to transfer pricing assessments previously.
The Revenue contended that the entire quantum of payments over multiple years should be aggregated as a singular event to meet the threshold for reopening beyond four years.
The Court considered the statutory language and judicial precedents, concluding that recurring payments over multiple years cannot be aggregated as a single occasion under Section 149(1A). The Court emphasized that the exception is meant for singular events or occasions, not a series of transactions.
Regarding the management fees, the Court acknowledged the incriminating evidence but held that the question of whether the payments were at arm's length or genuine services was a substantive issue to be decided in assessment proceedings, not at the stage of issuance of notice.
Therefore, the Court applied the law strictly to the facts and rejected the Revenue's contention on aggregation and the validity of reopening.
3. SIGNIFICANT HOLDINGS
"It is apparent that the income alleged to have escaped assessment is not based on a single occasion or an event spanning over the period in question. It is an amount that is being regularly paid by the petitioner to its AEs overseas, on account of the services which the petitioner claims to have received."
"The present case does not fall within the exception to Sub-section (1A) of Section 149 of the Act."
"The impugned notice as well as all the proceedings pursuant thereto, including an assessment order, that may have been passed, are set aside."
The Court established the core principle that recurring intra-group payments over multiple years cannot be treated as a singular event for the purpose of extending limitation under Section 149(1A) of the Income Tax Act.
The Court also clarified that the validity of reopening notices is to be judged on the basis of limitation and the nature of the alleged escaped income, and not on the merits of the substantive tax dispute regarding arm's length pricing or profit shifting, which are to be decided in assessment proceedings.
Consequently, the Court quashed the notice issued under Section 148 for AY 2018-19 and all consequential proceedings, holding them to be barred by limitation.
Reopening of assessment beyond limitation period - Amounts paid by the petitioner to its AEs - HELD THAT:- As apparent from the information enclosed with the impugned notice that the amounts that have been remitted – which the AO alleges have escaped assessment – were paid by the petitioner to its AEs for rendering of services. The question whether the services have been rendered and whether the same were at Arm’s Length Price [ALP] is a contentious issue.
However, it is apparent that the income alleged to have escaped assessment is not based on a single occasion or an event spanning over the period in question. It is an amount that is being regularly paid by the petitioner to its AEs overseas, on account of the services which the petitioner claims to have received. It is also not disputed that the payments made by the petitioner were subject matter of the assessments during various previous assessment years and reference for determining the ALP had also been made to the Transfer Pricing Officer [TPO].
In view of the above, the present case does not fall within the exception to Sub-section (1A) of Section 149 of the Act. The issue involved is squarely covered by the decision of this court in M/s. L-1 Identity Solutions Operating Company Private Limited [2025 (4) TMI 1363 - DELHI HIGH COURT]
The petition is, accordingly, allowed.
Additional subsidiary issues relevant to this core question include:
Issue-wise Detailed Analysis
1. Legality of Adjustment of Refund for AY 2014-15 Against Demand for AY 2016-17
The relevant legal framework comprises Section 245 of the Income Tax Act, 1961, which empowers the Assessing Officer to adjust refunds against outstanding demands, and the CBDT's Office Memorandum dated 31.07.2017, which sets guidelines for granting stay of demand on payment of a specified percentage (originally 15%, later modified to 20%) of the disputed demand when the matter is pending before the CIT(A).
The Office Memorandum aims to standardize the quantum of lump sum payment required as a pre-condition for stay of demand, thereby reducing hardship to taxpayers. Paragraph 3 and 4(A) of the Memorandum clarify that where the outstanding demand is disputed before the CIT(A), stay of demand shall be granted on payment of 15% (modified to 20%) of the disputed demand.
The Court noted that while the Memorandum allows for adjustment of the specified percentage of disputed demand by utilizing refunds due to the Assessee, the Assessee must comply with the condition of payment/deposit of such amount to secure stay of demand.
In this case, the Assessee had a pending appeal before the CIT(A) challenging the demand for AY 2016-17. However, the Assessee had not deposited the requisite 20% of the disputed demand amounting to Rs. 69,05,933/- (after adjusting the amount already recovered from refunds of AY 2015-16). The Assessing Officer had explicitly communicated this shortfall and requested payment by letter dated 29.04.2019.
The Court emphasized that since the Assessee did not make the deposit or adjustment of the 20% amount at the relevant time, the condition precedent for stay of demand was not satisfied. Consequently, the entire disputed demand for AY 2016-17 remained outstanding and was lawfully recoverable.
The Assessing Officer's action to adjust the refund due for AY 2014-15 against the outstanding demand and interest for AY 2016-17 was therefore held to be consistent with the provisions of the Income Tax Act and the guidelines in the Office Memorandum.
2. Effect of Pending Appeals and Orders of the ITAT
The Assessee's appeal before the ITAT against the revision order dated 29.03.2019 under Section 263 of the Act was allowed, resulting in the setting aside of the revision and the fresh assessment order dated 13.12.2019 for AY 2014-15. Pursuant to this, the Assessing Officer issued an appeal effect order on 02.01.2024 admitting a refund of Rs. 8,24,34,656/- plus interest of Rs. 1,36,39,800/-, totaling Rs. 9,60,74,456/-.
However, the refund was adjusted partially against the confirmed demand for AY 2017-18 (Rs. 40,70,155/-) and fully against the disputed demand for AY 2016-17 along with interest, as discussed above. The Assessee did not dispute the adjustment against AY 2017-18 demand.
The Court found that the pendency of the appeal challenging the demand for AY 2016-17 did not preclude the Assessing Officer from adjusting the refund, particularly since the Assessee had not complied with the stay conditions. The ITAT's order had no bearing on the outstanding demand for AY 2016-17, which remained recoverable.
3. Application of the Office Memorandum and the Requirement of Deposit
The Office Memorandum dated 31.07.2017 was issued to streamline and standardize the process for granting stay of demand. The Court highlighted that the Memorandum's instructions are mandatory for securing stay and that the lump sum payment or adjustment of 20% of the disputed demand is a mandatory pre-condition.
In the present case, the Assessee's failure to deposit the shortfall of Rs. 69,05,933/- meant that the stay was not granted, and the demand remained outstanding. The Assessing Officer's adjustment of the refund to recover the entire disputed demand and interest was therefore lawful and in accordance with the Memorandum.
The Court rejected the Assessee's contention that the entire refund should have been released without adjustment, emphasizing that the Memorandum's guidelines must be followed strictly to avail the benefit of stay.
4. Treatment of Competing Arguments
The Assessee argued that only 20% of the disputed demand should have been adjusted against the refund for AY 2014-15, with the balance amount refundable. It also relied on the Office Memorandum to assert that recovery of the disputed demand must be stayed upon payment of 20% of the demand.
The Court acknowledged the Assessee's arguments but found them untenable since the Assessee had not complied with the condition of depositing the required 20% amount at the material time. The Assessing Officer's letter dated 29.04.2019 explicitly communicated this requirement and requested payment.
The Court also noted that the Assessee had already adjusted Rs. 29,27,619/- from refunds of AY 2015-16 towards the disputed demand, leaving a shortfall of Rs. 69,05,933/- which was not paid. Therefore, the Assessing Officer was justified in adjusting the entire outstanding demand and interest from the refund for AY 2014-15.
The Court further observed that the Assessee's appeal before the CIT(A) did not entitle it to avoid payment or adjustment of the disputed demand in the absence of compliance with the stay conditions.
5. Final Conclusions
The Court concluded that the Assessing Officer's adjustment of the refund due for AY 2014-15 against the full outstanding demand and interest for AY 2016-17 was not illegal or arbitrary. It was consistent with the statutory provisions and the CBDT's Office Memorandum dated 31.07.2017.
The Assessee's failure to deposit the requisite 20% of the disputed demand as a pre-condition for stay of demand disentitled it from claiming the refund without adjustment.
The petition was accordingly dismissed.
Significant Holdings
"It is clear from the language of the Office Memorandum that the instructions contained therein were issued to streamline the process of grant of stay and to standardize the quantum, lump sum payment required to be paid by the assessee 'as a pre-condition for stay of demand disputed before CIT(A)'."
"Since the Assessee had not fulfilled the condition for securing a stay of demand, the entire demand in respect of AY 2017-18 remained outstanding. The same has since been recovered from the refund due to the petitioner for AY 2014-15 that has arisen pursuant to the appeal effect order dated 02.01.2024."
"We are unable to accept that the adjustment of the amount is contrary to the Office Memorandum dated 31.07.2017 as claimed by the Assessee."
The Court established the core principle that the benefit of stay of demand under the CBDT's Office Memorandum is conditional upon the payment or adjustment of the specified percentage of the disputed demand. Non-compliance with this condition permits lawful adjustment of refunds against the entire outstanding demand and interest.
Ultimately, the Court upheld the Assessing Officer's authority under Section 245 of the Income Tax Act to adjust refunds against outstanding demands, subject to compliance with the procedural safeguards and conditions prescribed by the CBDT.
Adjustment of refund due against the outstanding demand (pre-deposit) - pre-condition for stay of demand disputed before CIT(A) - HELD THAT:- Admittedly, the petitioner had not deposited a sum of Rs. 69,05,933/- for fulfilling the condition of 20% deposit of Rs. 4,91,67,767/- at the material time.
Although the Assessee had preferred an appeal before the CIT(A) disputing the assessments for AY 2016-17 and had also sought a stay of the demand, but it had not deposited 20% of the shortfall to cover 20% of the disputed amount being Rs. 69,05,933/- (Rs. 98,33,553/- being 20% of the disputed demand of Rs. 4,91,67,767/- less an amount of Rs. 29,27,620/- already recovered).
Since the Assessee had not fulfilled the condition for securing a stay of demand, the entire demand in respect of AY 2017-18 remained outstanding. The same has since been recovered from the refund due to the petitioner for AY 2014-15 that has arisen pursuant to the appeal effect order dated 02.01.2024. Assessee was required to make the deposit of the shortfall to cover 20% of the disputed demand either by paying the amount or by adjustment of the refund due at the material time.
We are unable to accept that the adjustment of the amount is contrary to the Office Memorandum dated 31.07.2017 as claimed by the Assessee.
(1) Whether the petitioner society, registered under The Karnataka Souharda Sahakari Act, 1997, qualifies as a "co-operative society" within the meaning of Section 2(19) of the Income Tax Act, 1961;
(2) Whether the petitioner society is entitled to exemption from deduction of tax at source (TDS) under Section 194A(3)(v) of the Income Tax Act on interest payments made to its members;
(3) Whether the show cause notice issued under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, dated 14.03.2022, for the financial years 2015-16 to 2018-19, demanding TDS from the petitioner society, is valid or liable to be quashed;
(4) Whether the petitioner is entitled to a writ of mandamus directing the respondent to drop the proceedings in view of the earlier decision of this Court for the financial year 2014-15.
Issue-wise detailed analysis:
Issue 1: Definition of "Co-operative Society" under Section 2(19) of the Income Tax Act
The legal framework revolves around Section 2(19) of the Income Tax Act, which defines "co-operative society" as a society registered under the Co-operative Societies Act, 1912, or under any law for the time being in force in any State for the registration of co-operative societies. The petitioner society is registered under The Karnataka Souharda Sahakari Act, 1997, a State law enacted to promote co-operative societies based on self-help, mutual aid, and democratic control.
The Court examined the objects and reasons of the Souharda Act, 1997, and its 2004 amendment, which emphasize recognition, encouragement, and voluntary formation of co-operatives governed by co-operative principles. The Court contrasted this with the Karnataka Co-operative Societies Act, 1959, which also promotes co-operative societies with autonomous functioning and democratic control.
The Court referred to the 97th Constitutional Amendment incorporating Part IX-B into the Constitution, which defines "co-operative societies" as societies registered under any law relating to co-operative societies for the time being in force in any State (Article 243-ZH[c]) and authorizes State Legislatures to regulate their incorporation and functioning (Article 243-ZI). The Court noted the directive principle under Article 43-B promoting co-operative societies.
Relying on the principle of harmonious construction, the Court held that both the Souharda Act and the Karnataka Co-operative Societies Act are valid State laws regulating co-operative societies and that entities registered under the Souharda Act fall within the definition of "co-operative society" under Section 2(19) of the Income Tax Act.
The Court rejected the Revenue's argument that the Souharda Act conflicts with the Central Co-operative Societies Act, 1912, and that such conflict creates repugnancy, holding that the Court was not adjudicating constitutional validity and that the amended Section 2(e) of the Souharda Act explicitly includes the Income Tax Act for its application.
In support, the Court relied on the Supreme Court judgment in Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, which emphasized that the definition of co-operative society under Section 2(19) is broad and includes societies registered under any State law for co-operative societies. The Apex Court held that the test for eligibility under Section 80P is registration under such law, without further classification.
Issue 2: Entitlement to exemption from TDS under Section 194A(3)(v)
Section 194A(3)(v) exempts co-operative societies from deducting tax at source on interest payments made to their members. The Revenue contended that the petitioner society is not a co-operative society within the meaning of Section 2(19) and therefore not entitled to this exemption. The petitioner relied on the broad definition and the Court's prior ruling to claim exemption.
The Court applied the legal framework and precedents, particularly the Division Bench decision in Govt. of India v. Karnataka State Souharda Federal Cooperative Ltd., which included the petitioner's case for earlier assessment years. That decision held that the petitioner society qualifies as a co-operative society under Section 2(19) and is entitled to the exemption under Section 194A(3)(v).
The Court emphasized that the exemption is intended to promote the co-operative movement and that denying it on hyper-technical grounds would frustrate legislative intent. The Court found the Revenue's restrictive interpretation untenable and held that the petitioner society is entitled to the exemption.
Issue 3: Validity of the show cause notice issued under Sections 201(1) and 201(1A)
The impugned show cause notice dated 14.03.2022 alleged failure to deduct TDS under Section 194A(3)(v) for the financial years 2015-16 to 2018-19. The petitioner challenged the notice as illegal, arbitrary, and without jurisdiction, relying on the earlier decision of this Court for the financial year 2014-15, which quashed a similar notice dated 11.02.2022.
The Court noted that the earlier decision had comprehensively examined the definition of co-operative society, the relevant statutes, constitutional provisions, and Supreme Court precedents, concluding that the petitioner society qualifies as a co-operative society and is exempt from TDS deduction under Section 194A(3)(v). Applying the doctrine of parity, the Court found no reason to take a different view for the subsequent financial years.
The Court rejected the Revenue's contention that the petitioner could raise its contentions only by replying to the show cause notice, holding that since the notice was without jurisdiction and contrary to law, continuing proceedings would serve no purpose.
The Court quashed the impugned show cause notice dated 14.03.2022.
Issue 4: Writ of Mandamus to drop proceedings
The petitioner sought a writ of mandamus directing the respondent to drop the proceedings in light of the earlier decision. The Court, having found the show cause notice invalid and quashed it, effectively granted the relief sought by directing cessation of the proceedings.
Significant holdings:
"No hyper technical view can be taken to exclude the entities registered under the Souharda Act as not falling under the definition of 'Co-operative Society' as defined in Section 2[19] of the Act."
"The amendment by substitution relates back to the date of original enactment unless specified from a particular date. In the absence of any specified date mentioned, the Amended Act certainly relates back to the date of enactment."
"The factum of a Co-operative Society being registered under the 1912 Act or under the State law is the test. Co-operatives being registered under the Souharda Act, a State law, certainly comes within the ambit of Co-operative Society."
"The provisions of Section 80P offers tax deduction in respect of income of Co-operative Societies which is enacted with a laudable object of promoting Co-operating movement. Such benefit cannot be denied to the so called Co-operatives under the Souharda Act merely on hyper technicalities."
"A harmonious reading of the said provisions would indicate that Co-operative Society registered under the Co-operative Societies Act, 1959 alone is not the Co-operative Society for the purposes of the Income Tax Act, as the phrase 'or' employed with the following words 'under any other law for the time being in force in any State for the registration of Cooperative Society' if read, Co-operative Societies registered under the Souharda Act which is a State enactment would certainly be construed as Cooperative Society coming within the ambit of Section 2[19]."
Final determinations:
(i) The petitioner society registered under The Karnataka Souharda Sahakari Act, 1997, qualifies as a co-operative society within the meaning of Section 2(19) of the Income Tax Act, 1961;
(ii) The petitioner society is entitled to exemption from deduction of tax at source under Section 194A(3)(v) of the Income Tax Act on interest payments made to its members;
(iii) The show cause notice issued under Sections 201(1) and 201(1A) for the financial years 2015-16 to 2018-19 is without jurisdiction, illegal, and arbitrary and is quashed;
(iv) The respondent is directed to drop the proceedings pursuant to the quashed show cause notice.
TDS u/s 194A - Credit co-operative society - Interest payments made to its member as per the provisions of section 194A(3)(v) - HELD THAT:- As can be seen from the statutory provisions and the petitioner society being undisputedly Cooperative Society registered under The Karnataka Souharda Sahakari Act, 1997, the exemption for TDS under Section 194A (3) V of the IT Act, is clearly admissible in so far as the petitioner society is concerned and consequently the impugned show cause notice is clearly without jurisdiction or authority of law and the same is being illegal and arbitrary, no useful purpose would be served by continuing the service pursuant to the impugned show cause notice.
The entire claim of the respondent in the show cause notice is to the effect that the provisions of Section 194A (3)(V) were not applicable to the petitioner since the same was not a Cooperative Society within the meaning of the Section 2(19).
However, wide and expansive definition contained in Section 2(19) which includes the petitioner society which has been registered under the provisions of The Karnataka Souharda Sahakari Act, 1997, the impugned show cause notice deserves to be quashed.
In so far as the contention urged by the respondent that the petitioner would be entitled to raise all contentions by submitting a suitable reply is concerned, in the light of the finding recorded by me above that the impugned show cause notice is without jurisdiction or authority of law and that the petitioner was entitled to exemption u/s 194A (3)(V), the question of continuing further proceedings pursuant to the impugned show cause notice would not arise in the facts and circumstances of the instant case.
The core legal questions considered by the Court are:
(1) Whether the issuance of notices and orders under Sections 148A(b), 148A(d), and 148 of the Income Tax Act in the name of a deceased assessee, when the petitioner is the duly registered legal heir, is valid and sustainable.
(2) Whether the respondent authority had jurisdiction to issue such notices and pass orders against the deceased person despite the petitioner's registration as legal heir on the Income Tax portal.
(3) Whether the procedural requirements under Section 148A of the Income Tax Act, including the issuance of show-cause notice and opportunity of hearing, were complied with and whether the reopening of assessment under Section 147/148 was justified.
(4) The applicability and effect of the legal heir registration on the procedural and substantive validity of the impugned notices and orders.
(5) The scope and nature of proceedings under Section 148A as summary proceedings and the extent of judicial scrutiny permissible under Article 226 of the Constitution of India.
Issue-wise Detailed Analysis
1. Validity of Notices and Orders Issued in the Name of Deceased Person
The legal framework involves the provisions of the Income Tax Act, particularly Sections 147, 148, and the newly inserted Section 148A, which governs reopening of assessments and the procedural safeguards therein. Section 148A mandates issuance of a show-cause notice under subsection (b) and an order under subsection (d) before reopening an assessment.
Precedents cited by the petitioner include recent decisions from the Gujarat High Court and Supreme Court that emphasize the necessity of issuing notices and orders to the correct legal entity, especially where the original assessee is deceased and a legal heir is registered. These include rulings that hold notices issued to deceased persons without involving their legal heirs are without jurisdiction and liable to be quashed.
The Court noted that the petitioner had duly registered herself as the legal heir of the deceased on the Income Tax portal and had filed returns accordingly for subsequent assessment years. Despite this, the respondent issued the impugned notices and orders in the name of the deceased, Shri Yogesh Somalal Joshi.
The respondent contended that the legal heir details were not reflected on the ITBA portal at the time of issuance of notices, justifying issuance in the deceased's name. However, the Court observed that the petitioner's registration as legal heir was undisputed and that the notices issued to the deceased were not sustainable.
The Court's reasoning was that once the legal heir is registered and recognized, notices and orders must be directed to the legal heir and not to the deceased, as the deceased is no longer a legal entity capable of responding to proceedings.
The Court therefore held that the impugned notices under Section 148A(b), the order under Section 148A(d), and the notice under Section 148 issued in the name of the deceased were without jurisdiction and liable to be quashed.
2. Jurisdiction and Procedural Compliance under Section 148A
The respondent's defense relied on the fact that reopening was initiated pursuant to information received under the risk management strategy formulated by the Central Board of Direct Taxes, alleging unexplained accommodation entries in the form of bogus donations. The reopening was thus justified under Section 147 read with Section 148.
The respondent also emphasized that no response was received from the petitioner to the show-cause notice under Section 148A(b), and the order under Section 148A(d) was passed after competent authority approval. The respondent relied on a recent judgment of the Allahabad High Court which described proceedings under Section 148A as summary in nature, requiring only a brief order indicating the "fit case" for reassessment without detailed findings.
The petitioner's counsel distinguished the present case from precedents cited by the respondent, particularly noting that in those cases the assessee had responded to the show-cause notice, including informing the assessing officer about the death of the original assessee. Here, no such response was received, but the petitioner had registered herself as legal heir and had filed returns accordingly, which should have been reflected on the portal.
The Court found that the procedural infirmity of issuing notices to the deceased and not the legal heir was a fatal flaw, notwithstanding the respondent's reliance on the risk management strategy and summary nature of Section 148A proceedings. The Court observed that the legal heir's registration imposes a duty on the department to issue notices to the legal heir and not the deceased.
3. Effect of Legal Heir Registration on Proceedings
The petitioner's registration as legal heir on the Income Tax portal and filing of returns in that capacity for subsequent assessment years was a crucial fact. The Court held that this registration effectively substituted the petitioner in place of the deceased for the purposes of assessment proceedings.
The Court noted that the respondent's failure to update legal heir details on the ITBA portal did not justify issuing notices to the deceased. The legal heir's status must be recognized and notices must be issued accordingly.
The Court allowed the petition with the observation that the respondent is free to issue notices to the petitioner as the legal heir if permissible under law, thereby preserving the department's right to proceed lawfully.
Significant Holdings
"It is not in dispute that impugned notice under Section 148A(b) is issued in name of Shri Yoghesh Somalal Joshi who had already expired on 09/06/2020. The petitioner is already registered as legal heir of late Shri Yoghesh Somalal Joshi. The order under Section 148A(d) is also passed in name of the deceased Shri Yoghesh Somalal Joshi as well as the notice under Section 148 of the Act is also issued in his name. Therefore, impugned notice under Section 148A(b) and the order under Section 148A(b) as well as the notice under Section 148 of the Act are not sustainable as the same are issued against the deceased person."
Core principles established include:
(a) Notices and orders under Sections 148A and 148 of the Income Tax Act must be issued to the correct legal entity. Where the original assessee is deceased and the legal heir is registered, such proceedings must be directed to the legal heir.
(b) Issuance of notices or orders to a deceased person is without jurisdiction and liable to be quashed.
(c) Registration of legal heir on the Income Tax portal and filing of returns in that capacity effectively substitutes the legal heir in place of the deceased for assessment proceedings.
(d) The procedural safeguards under Section 148A, including issuance of show-cause notice and opportunity of hearing, are summary in nature but must be complied with in form and substance directed to the correct party.
(e) The department's failure to update legal heir details on the portal does not justify invalid issuance of notices to the deceased.
Final determinations:
The impugned notices under Section 148A(b), order under Section 148A(d), and notice under Section 148 dated 28.03.2023 and 24.04.2023 respectively, issued in the name of the deceased, are quashed and set aside. The respondent is permitted to issue notices to the petitioner as legal heir in accordance with law.
Reopening notice issued against deceased assessee - HELD THAT:- It is not in dispute that impugned notice u/s 148A(b) is issued in name of Shri Yoghesh Somalal Joshi who had already expired on 09/06/2020. The petitioner is already registered as legal heir of late Shri Yoghesh Somalal Joshi.
The order u/s 148A(d) is also passed in name of the deceased Shri Yoghesh Somalal Joshi as well as the notice u/s 148 is also issued in his name. Therefore, impugned notice u/s 148A(b) and the order u/s 148A(b) as well as the notice under Section 148 of the Act are not sustainable as the same are issued against the deceased person.
This petition is accordingly allowed.
The core legal question considered by the Court was whether the Income Tax Appellate Tribunal was correct in law in denying the special deduction under Section 42 of the Income-tax Act, 1961 to the assessee for the relevant assessment years. This central question gave rise to subsidiary issues including:
(i) Whether the assessee was entitled to special allowances under Section 42 of the Income-tax Act as per the terms of the Production Sharing Contracts (PSCs) executed with the Central Government;
(ii) Whether the Model Production Sharing Contract (MPSC) could be read as part of and incorporated into the executed PSCs;
(iii) Whether there was any intention between the contracting parties to grant the benefit of deductions under Section 42;
(iv) Whether non-inclusion of such provisions in the PSCs could be treated as an accidental or unintentional omission;
(v) Whether the Court could issue mandamus to amend the PSCs to incorporate such provisions.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Entitlement to Deductions under Section 42 of the Income-tax Act
The relevant legal framework is Section 42 of the Income-tax Act, 1961, which provides special provisions for deductions in businesses related to prospecting, extraction, or production of mineral oils. The section enumerates conditions for eligibility:
The Court emphasized that these conditions are mandatory and that the special allowances under Section 42 are otherwise inadmissible under general principles of accounting and taxation, as these allowances relate to capital expenditure or depletion of wasting assets.
In the present case, it was an admitted fact that the PSCs executed did not contain any provision making such allowances admissible. The Court noted that the Income Tax Authorities could not grant deductions in the absence of such stipulations. The Court referred to precedents establishing that the PSC constitutes an independent accounting regime that overrides general accounting principles for income tax purposes.
Thus, the Court held that the Assessing Officer was correct in denying the deductions since the mandatory conditions under Section 42, especially the existence of an agreement specifying such allowances, were not met.
Issue (ii): Incorporation of Model Production Sharing Contract (MPSC) into the PSCs
The appellant argued that the bids were invited based on the MPSC, which explicitly mentioned deductions under Section 42, and that the Ministry of Law had opined that such benefits should be extended to foreign companies to make participation viable.
The appellant sought to read the MPSC provisions into the executed PSCs, contending that the omission of such provisions was unintentional.
The Court examined the executed PSCs, particularly Article 32, which contained an entire agreement clause stating that the PSC superseded all prior agreements, understandings, or correspondence, whether oral or written. It further stipulated that amendments or modifications could only be made by written instruments signed by all parties.
The Court interpreted these clauses as manifesting a clear intention to exclude incorporation of any prior documents, including the MPSC or any previous correspondence, into the PSCs. The Court held that it was impermissible to look beyond the four corners of the PSCs to incorporate terms from the MPSC.
Accordingly, the Income Tax Authorities were justified in confining their assessment to the PSCs' provisions alone, which did not provide for deductions under Section 42.
Issue (iii): Intention Between the Parties Regarding Deductions
The Court further addressed whether there was any intention between the parties to grant Section 42 benefits despite the absence of explicit provisions in the PSCs.
Relying on Article 32.2 of the PSCs, the Court found that the contract could not be amended or supplemented except by a written instrument signed by all parties. This clause effectively negated any prior or informal understandings or intentions not incorporated into the contract.
The Court concluded that the parties did not intend to grant the deductions under Section 42, as any such intention would have to be formally incorporated in the PSCs as per the contract's terms.
Issues (iv) and (v): Accidental Omission and Court's Power to Mandate Amendment
The Court noted that since the PSCs explicitly superseded all prior agreements and required written amendments for any modifications, the non-inclusion of Section 42 provisions could not be treated as accidental or unintentional.
Moreover, the Court held that it could not issue mandamus directing the parties to amend the PSCs to incorporate such provisions, as that would infringe upon the contractual autonomy and the principle of pacta sunt servanda (agreements must be kept).
3. SIGNIFICANT HOLDINGS
The Court, relying on the Supreme Court's authoritative decision, established the following core principles:
"The Income Tax Authorities while making assessment of income of any assessee have to apply the provisions of the Income Tax Act and make assessment accordingly. The Assessing Officer is supposed to find out as to whether the assessee fulfills the eligibility conditions in Section 42 to be entitled to such deductions."
"The PSC entered into between the parties becomes an independent accounting regime and its provisions prevail over generally accepted principles of accounting that are used for ascertaining taxable income."
"Article 32 of the Agreement specifically supersedes any understanding between the parties prior to the effective date of this contract. No amendments or modifications can be made except by written instrument signed by all parties."
"It is impermissible for the appellant to take the aid of MPSC or the clauses contained therein while construing the terms of PSCs."
On the final determination, the Court answered the substantial question of law in favour of the assessee and against the revenue, thereby disposing of the appeals accordingly. This indicates that while the Income Tax Appellate Tribunal was correct in denying the deduction under Section 42 due to the absence of contractual provisions, the Court found merit in the appellant's position based on the binding effect of the PSCs and the legal framework governing such deductions.
Disallowing the special deduction u/s 42 - Business for prospecting, etc., for mineral oil - HELD THAT:- The admitted question in these appeals are no more res-integra in view of the decision of the Hon’ble Supreme Court in case of Joshi Technologies International Inc [2015 (5) TMI 521 - SUPREME COURT] as held from the nature of allowances specified in this provision, it is clear that such allowances are otherwise inadmissible on general principles, for e.g. allowances relating to diminution or exhaustion of wasting capital assets or allowances in respect of expenditure which would be regarded as on capital account on the ground that it brings an asset of enduring benefit into existence or constitutes initial expenditure incurred in setting up the profit earning machinery in motion.
It is for this reason this Section itself clarifies that the provisions of this Act would be deemed to have been modified to the extent necessary to give effect to the terms of the agreement, as otherwise, the other provisions of the Act specifically deny such deductions. A fortiorari, the PSC entered into between the parties becomes an independent accounting regime and its provisions prevail over generally accepted principles of accounting that are used for ascertaining taxable income (See Enron Oil and Gas India Limited [2008 (9) TMI 3 - SUPREME COURT].
In the present case, it is an admitted fact that conditions mentioned in Section 42 of the Act are not fulfilled. In the two PSCs, no provision is made for making admissible the aforesaid allowances to the assessee. It is obvious that the Assessing Officer could not have granted these allowances/deductions to the assessee in the absence of such stipulations, a mandatory requirement, in the PSCs.
The appellant is conscious of this position. It is for this reason the attempt of the appellant was to read the provisions of MPSC into the agreement. Decided in favour of the assessee.
The core legal questions considered by the Tribunal in this appeal are:
- Whether the addition of Rs. 14,34,500/- made under section 56(2)(vii)(b)(ii) of the Income Tax Act, 1961 ("the Act") on account of difference between the stamp duty value and the agreement value of two residential flats purchased by the assessee is justified.
- Whether the Assessing Officer ("AO") was correct in not referring the valuation matter to the Departmental Valuation Officer ("DVO") despite the assessee's request and submissions regarding deficiencies in the property and dispute over fair market value.
- Whether the learned Commissioner of Income Tax (Appeals) ("CIT(A)") erred in confirming the addition without considering the detailed submissions and affidavit filed by the assessee.
- The applicability and interpretation of the proviso to section 56(2)(vii)(b)(ii) read with section 50C(2) of the Act concerning the procedure for valuation disputes and reference to the DVO.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Justification of addition under section 56(2)(vii)(b)(ii) on difference between stamp duty value and agreement value
Relevant legal framework and precedents: Section 56(2)(vii)(b)(ii) of the Act provides that where immovable property is acquired for a consideration less than the stamp duty value by an amount exceeding Rs. 50,000/-, the difference is taxable as income from other sources. The stamp duty value is the value adopted by the stamp valuation authority as on the date of agreement.
Court's interpretation and reasoning: The Tribunal noted that the stamp duty value of the flats as on the date of agreement (Rs. 2,29,34,500/-) exceeded the agreement value (Rs. 2,15,00,000/-) by Rs. 14,34,500/-. The AO made an addition of this difference under section 56(2)(vii)(b)(ii). The Tribunal found no dispute regarding these facts.
Key evidence and findings: The AO's order and the CIT(A)'s impugned order confirmed the addition. The assessee's return declared income excluding this addition. The AO rejected the assessee's claim that the market value should be as per Ready Reckoner rates of 2012, due to lack of evidence on mode and timing of payment.
Application of law to facts: The AO correctly applied section 56(2)(vii)(b)(ii) in making the addition based on the difference between stamp duty value and agreement value exceeding Rs. 50,000/-. The Tribunal accepted that the addition prima facie falls within the scope of the provision.
Treatment of competing arguments: The Revenue relied on the absence of evidence to support the assessee's claim of payment mode and valuation. The assessee argued that the valuation adopted by the stamp duty authority was not reflective of the fair market value due to various deficiencies in the property and requested referral to the DVO.
Conclusions: The addition under section 56(2)(vii)(b)(ii) is prima facie justified on the facts, subject to resolution of valuation dispute.
Issue 2: Whether the AO erred in not referring the valuation matter to the DVO despite the assessee's request and affidavit
Relevant legal framework and precedents: The proviso to section 56(2)(vii)(b)(ii) mandates that where the stamp duty value is disputed by the assessee on grounds mentioned in section 50C(2), the AO may refer the valuation to the DVO. Section 50C(2) states that if the assessee claims that the stamp duty value exceeds the fair market value and the value has not been disputed in any appeal or revision, the AO may refer the valuation to the Valuation Officer.
Court's interpretation and reasoning: The Tribunal observed that the assessee had specifically disputed the stamp duty value on grounds such as incomplete construction, poor maintenance, lack of occupation certificate, and other deficiencies. The assessee had filed an affidavit affirming these facts and requesting referral to the DVO. The Tribunal noted that the value adopted by the stamp duty authority was not disputed in any appeal or revision, satisfying the conditions of section 50C(2).
The Tribunal held that the AO erred in not referring the valuation to the DVO as mandated by the proviso to section 56(2)(vii)(b)(ii) read with section 50C(2). The CIT(A) also failed to consider this aspect adequately and did not direct such reference despite noting the submissions.
Key evidence and findings: The affidavit sworn by the assessee detailed the deficiencies and the request for DVO valuation. The impugned order acknowledged the submissions but did not act on them by referring the matter to the DVO.
Application of law to facts: Since the assessee disputed the stamp duty value on valid grounds and no appeal or revision was pending, the AO was obligated to refer the valuation to the DVO. Failure to do so renders the addition unsustainable without proper valuation.
Treatment of competing arguments: The Revenue contended that the addition was correct as per law and no evidence was produced to show payment other than cash. However, the Tribunal emphasized that the procedural requirement to seek DVO valuation on dispute was not fulfilled, which is a mandatory safeguard for the assessee.
Conclusions: The AO and CIT(A) erred in not referring the valuation to the DVO. The matter requires de novo adjudication after obtaining a DVO report.
Issue 3: Whether the CIT(A) erred in not considering the detailed submissions and affidavit of the assessee
Relevant legal framework and precedents: Principles of natural justice require that the appellate authority consider all submissions and evidence placed before it. Failure to do so may render the order bad in law.
Court's interpretation and reasoning: The Tribunal found that although the CIT(A) recorded the assessee's submissions regarding deficiencies and request for DVO valuation, there was no substantive discussion or rebuttal of these points in the impugned order. This omission was held to be against natural justice and bad in law.
Key evidence and findings: The affidavit and submissions made during appellate proceedings were on record but not addressed in the impugned order.
Application of law to facts: The CIT(A)'s failure to consider and discuss the assessee's submissions amounted to non-application of mind and denial of opportunity to the assessee.
Treatment of competing arguments: The Revenue did not specifically counter this procedural lapse but relied on the correctness of the addition.
Conclusions: The CIT(A) erred in not considering the assessee's submissions and affidavit, rendering the order infirm.
3. SIGNIFICANT HOLDINGS
"The AO erred in not referring the valuation of the residential flats to the DVO as mandated under the proviso to section 56(2)(vii)(b)(ii) read with section 50C(2) of the Act."
"The impugned order also suffers from the same vice as despite recording submission of the assessee in this regard, no reference was made to the DVO for the valuation as per the provision of the Act."
"No order shall be passed without affording a reasonable and adequate opportunity of hearing to the assessee."
Core principles established include:
- Where the stamp duty value exceeds the consideration and the assessee disputes the stamp duty value on grounds mentioned in section 50C(2), the AO is obligated to refer the valuation to the DVO before making any addition under section 56(2)(vii)(b)(ii).
- The appellate authority must consider and address all submissions and evidence placed before it; failure to do so violates natural justice.
- In absence of DVO valuation, additions based on stamp duty value differences cannot be sustained.
Final determinations on each issue:
- The addition under section 56(2)(vii)(b)(ii) is not sustainable without proper valuation by the DVO.
- The AO and CIT(A) erred in not referring the matter to the DVO despite valid dispute and request by the assessee.
- The matter is restored to the file of the AO for de novo adjudication after obtaining DVO valuation and after affording the assessee adequate opportunity of hearing.
- The appeal is allowed for statistical purposes, setting aside the impugned order.
Addition u/s 56(2)(vii)(b)(ii) - difference between the stamp duty value and the agreement value of two residential flats purchased by the assessee - not referring the valuation matter to the Departmental Valuation Officer ("DVO") despite the assessee's request ? - whether there is evidence that the assessee paid the consideration or part thereof in a mode other than cash on or before the date of agreement for transfer of the immovable properties.
HELD THAT:- In the present case, it cannot be disputed that the value adopted by the stamp duty authority exceeds the value of the residential flats purchased by the assessee on the date of transfer and the value so adopted is also not in dispute in any appeal, revision or reference before any Authority, Court or High Court. Thus, both the conditions of section 50C(2) of the Act are fulfilled in the present case. Accordingly, we are of the considered view that the AO erred in not referring the valuation of the residential flats to the DVO.
The impugned order also suffers from the same vice as despite recording submission of the assessee in this regard, no reference was made to the DVO for the valuation as per the provision of the Act.
Accordingly,we deem it appropriate to restore this issue to the file of the Jurisdictional AO for de novo adjudication after seeking a valuation report from the DVO as per the provisions of the Act. Grounds raised by the assessee are allowed for statistical purposes.
The core legal questions considered by the Tribunal in this appeal are:
(a) Whether the addition of Rs. 17,37,775/- under section 56(2)(x) of the Income Tax Act, treating the difference between the Stamp Duty Value and the purchase consideration as income, was justified.
(b) Whether the initiation of penalty proceedings under section 270A of the Income Tax Act was proper.
(c) Whether charging interest under sections 234A, 234B, and 234C of the Income Tax Act was appropriate.
(d) Ancillary issues relating to the applicability of provisos to section 56(2)(x) concerning timing and mode of payment of consideration for immovable property.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Addition under section 56(2)(x) on difference between Stamp Duty Value and Purchase Consideration
Relevant legal framework and precedents: Section 56(2)(x) of the Income Tax Act provides that where an individual or HUF receives immovable property for a consideration less than the stamp duty value, the difference is taxable as income from other sources. The first and second provisos to this section provide relief where part or full consideration is paid by cheque or demand draft, allowing the stamp duty value as on the date of registration to be considered.
Several judicial precedents were relied upon by the assessee, including decisions from various High Courts and Tribunals, which emphasize the applicability of provisos to section 56(2)(x) where part payment is made through banking channels, and the date of agreement and registration differ.
Court's interpretation and reasoning: The Tribunal examined the factual matrix, including the date of allotment (12.03.2010), the schedule and mode of payments, and the date of registration (23.06.2017). The Tribunal noted that the stamp duty valuation had increased from Rs. 41,29,125/- at allotment to Rs. 1.13 crores at registration.
The Tribunal gave weight to the evidence furnished by the assessee, including the allotment letter, bank statements showing payments by cheque and clearance dates, and the schedule of payments. It was established that part payment of Rs. 1,51,421/- was made through banking channel in April 2010, and Rs. 3,00,000/- was paid by cheque in March 2011. Remaining payments were made just before registration in June 2017.
Applying the first and second provisos to section 56(2)(x), the Tribunal held that since part payment was made through banking channel before registration, the stamp duty value as on the date of registration should be considered for valuation.
Key evidence and findings: The Tribunal relied on the allotment letter specifying the sale consideration and payment schedule, bank statements confirming payments through cheque, and acknowledgment of earnest money payment. The assessee's share of 32.5% was undisputed.
Application of law to facts: The Tribunal found that the assessing officer erred in ignoring the part payments made through banking channels and in applying the provision retrospectively, as the relevant clause was introduced by the Finance Act 2017, effective from 01.04.2017, after the date of purchase.
Treatment of competing arguments: The Revenue contended that only a nominal part payment was made at the time of allotment and that the proviso to section 56(2)(x) was not applicable. The Tribunal rejected this, holding that Rs. 4,51,421/- was paid in financial year 2010-11, which was substantial and sufficient to attract the proviso.
Conclusions: The Tribunal allowed the appeal on this ground, holding that the addition under section 56(2)(x) was not justified in view of the part payment through banking channels and the timing of payments, and accordingly, the provisos to the section applied.
Issue (b): Initiation of penalty proceedings under section 270A
The Tribunal did not explicitly adjudicate on this issue in the judgment, as the primary ground of addition under section 56(2)(x) was decided in favour of the assessee, rendering penalty proceedings based on the addition untenable. The appeal was allowed on the principal issue, making the penalty issue academic.
Issue (c): Charging of interest under sections 234A, 234B, and 234C
Similar to penalty proceedings, the Tribunal did not separately address the interest charges. Since the addition was deleted, the consequential interest liability under these sections would not survive. Thus, the issue became academic.
Issue (d): Applicability of section 56(2)(x) retrospectively
The assessee contended that section 56(2)(x) was inserted by the Finance Act 2017, effective from 01.04.2017, after the date of purchase and allotment of the flat. Therefore, invoking this provision retrospectively was incorrect.
The Tribunal accepted this submission, noting that since the transaction and allotment predated the insertion of section 56(2)(x), the provision could not be applied retrospectively to tax the difference in value.
3. SIGNIFICANT HOLDINGS
"We find that the assessee has successfully proved the fact that he has made part payment of consideration on the date of agreement in April 2011. Therefore, the assessee is eligible for the benefit of first and second proviso to section 56(2)(x)."
"Considering the facts, we have accepted primary submissions of the ld AR of the assessee, therefore, consideration and adjudication on alternative submissions have become academic."
"The addition under section 56(2)(x) is not justified in view of the part payment through banking channel and timing of payments."
Core principles established include:
Final determinations:
Application of section 56(2)(x) of the Income-tax Act to difference between stamp valuation and consideration - first and second proviso to section 56(2)(x) - part payment through banking channel and valuation on date of registration - part payment through banking channel as triggering proviso benefit - stamp valuation authority value versus declared purchase consideration - temporal applicability of amendment effected by Finance Act 2017
Application of section 56(2)(x) of the Income-tax Act to difference between stamp valuation and consideration - first and second proviso to section 56(2)(x) - part payment through banking channel and valuation on date of registration - part payment through banking channel as triggering proviso benefit - stamp valuation authority value versus declared purchase consideration - Addition under section 56(2)(x) disallowed as provisos apply where part payment was made through banking channel before registration and valuation at date of registration is to be considered - HELD THAT: - The Tribunal found on the record that the assessee (having 32.5% share) produced the allotment letter, bank statement and evidence of earnest money and subsequent cheque payments cleared in financial year 2010-11 and a cheque of Rs.3,00,000/- in March 2011, together constituting part payment on the date of agreement. Those payments through the banking channel satisfied the condition for invoking the first and second provisos to section 56(2)(x), which permit taking stamp valuation as at the date of registration where part payment is so made. On that factual foundation the Tribunal held that the assessing officer and the CIT(A) erred in making the addition by applying clause (x) without applying the provisos. Because the primary submission that part payments were made through banking channel was accepted, alternative contention regarding the statutory amendment's effective date (Finance Act 2017) was rendered academic and was not adjudicated further. [Paras 8, 9]
Addition under section 56(2)(x) set aside and appeal allowed as assessee proved part payments through banking channel entitling him to the benefit of the provisos.
Final Conclusion: The Tribunal allowed the appeal for A.Y. 2018-19, holding that the assessee proved part payments through banking channels so as to attract the first and second provisos to section 56(2)(x); consequently the addition was deleted and alternative grounds became academic.
1. Whether the suit filed by the plaintiff is barred by limitation, given that the original transaction took place in 1988-1989 and the suit was filed in 2007.
2. Whether the suit is barred under the Benami Transactions (Prohibition) Act, 1988, specifically under Section 4 of the Act.
3. Whether the application filed under Order VII Rule 11 of the Code of Civil Procedure (CPC) to reject the plaint at the threshold was rightly rejected by the trial Court.
4. The scope and applicability of Order VII Rule 11 CPC in rejecting a plaint on grounds of limitation and statutory bar without leading full evidence.
Issue-wise Detailed Analysis
1. Limitation Bar on the Suit
Legal Framework and Precedents: The Limitation Act governs the time period within which a suit must be filed. The defendant argued that since the original sale deed was executed in 1988 and the suit was filed only in 2007, the suit is barred by limitation. The defendant relied on judgments emphasizing strict adherence to limitation periods.
Court's Interpretation and Reasoning: The Court noted the plaintiff's claim that the cause of action arose only in 2006, when the defendant No.1 executed a sale deed in favor of third parties (defendants No.2 and 3), thereby breaching the earlier understanding. The plaintiff asserted that the original transaction was based on an agreement that defendant No.1 held title in trust and that the plaintiff was the beneficial owner having paid the entire sale consideration.
Key Evidence and Findings: The plaintiff produced documentary evidence including a receipt dated 07.11.1988 (Exhibit-3/1) where defendant No.1 acknowledged receipt of the entire sale consideration from the plaintiff, and a memorandum of understanding dated 05.01.1989 (Exhibit-63) wherein defendant No.1 admitted that the plaintiff was the owner and agreed not to transfer the property to any third party. The Court observed that the breach of this understanding occurred only in 2006, which triggered the cause of action.
Application of Law to Facts: The Court held that limitation runs from the date of breach or denial of rights, which in this case was 2006, not from the date of the original sale deed. Therefore, the suit filed in 2007 was within the period of limitation.
Treatment of Competing Arguments: While the defendant argued that the suit was filed after 18 years and thus barred, the Court emphasized the plaintiff's pleadings and documentary evidence showing the breach occurred in 2006. The Court found that limitation could not be decided summarily at the threshold without evidence.
Conclusion: The limitation bar could not be established at the stage of Order VII Rule 11 application as the cause of action arose in 2006, and this was a triable issue requiring evidence.
2. Bar under the Benami Transactions (Prohibition) Act, 1988
Legal Framework and Precedents: Section 4 of the Benami Transactions Act prohibits any person from recovering property held benami. The defendant contended that the suit was barred under this Act as the property was purchased in the name of defendant No.1 but beneficially owned by the plaintiff, thus attracting benami transaction provisions.
Court's Interpretation and Reasoning: The Court observed that whether the transaction was benami or not is a question of fact and requires thorough examination of evidence. The Court noted that the plaintiff's case was based on a written agreement and acknowledgment by defendant No.1, which prima facie negated the benami nature of the transaction.
Key Evidence and Findings: The memorandum of understanding and receipt acknowledged payment and ownership rights, which the plaintiff claimed established his beneficial ownership. The Court held that the question of benami transaction could not be decided without evidence and was not amenable to summary rejection at the Order VII Rule 11 stage.
Application of Law to Facts: The Court found that the issue of whether the suit was barred under the Benami Transactions Act was a triable issue and could not be decided on the pleadings alone.
Treatment of Competing Arguments: The defendant argued that the suit was barred by law under the Benami Transactions Act and thus liable to be rejected summarily. The Court rejected this contention, stating that the issue required detailed evidence and trial.
Conclusion: The Benami Transactions Act bar was not established at the threshold and required trial for proper adjudication.
3. Application under Order VII Rule 11 CPC to Reject the Plaint
Legal Framework and Precedents: Order VII Rule 11 CPC empowers the Court to reject a plaint if it does not disclose a cause of action or the suit is barred by law. However, this power is drastic and must be exercised cautiously. The Court relied on the Supreme Court's ruling in P.V. Guru Raj Reddy v. P. Neeradha Reddy, which emphasized that rejection under Order VII Rule 11 is permissible only when it is clear from the plaint itself that the suit is barred or there is no cause of action.
Court's Interpretation and Reasoning: The Court reiterated that at the stage of Order VII Rule 11, only the plaint and documents annexed thereto are to be considered. The stand of the defendants in their written statements or applications is immaterial. The Court must read the plaint as a whole and decide if it discloses a cause of action or is barred by law on its face.
Key Evidence and Findings: The plaint disclosed a cause of action based on breach of trust and denial of ownership rights in 2006. The documents annexed supported the plaintiff's claim. The trial Court had already framed issues relating to limitation and the Benami Transactions Act, indicating the existence of triable issues.
Application of Law to Facts: The Court held that the trial Court correctly rejected the Order VII Rule 11 application, as the plaint did disclose a cause of action and was not barred by law on its face. The issues raised were triable and required evidence.
Treatment of Competing Arguments: The defendant argued that the plaint was barred by limitation and the Benami Transactions Act and thus liable to be rejected summarily. The Court disagreed, emphasizing the need for trial to resolve factual disputes.
Conclusion: The rejection of the plaint under Order VII Rule 11 was rightly refused by the trial Court, and the suit was to proceed to trial.
4. Scope and Caution in Exercising Power under Order VII Rule 11 CPC
Legal Framework and Precedents: The Court emphasized the settled principle that rejection of plaint under Order VII Rule 11 is a drastic remedy and should be exercised sparingly and only when the plaint clearly discloses no cause of action or is barred by law.
Court's Interpretation and Reasoning: The Court cited the Supreme Court's ruling that the plaint must be read holistically, and the Court cannot decide disputed questions of fact or go beyond the pleadings at this stage.
Application of Law to Facts: The Court found that the plaint contained sufficient averments and documentary evidence to disclose a cause of action and that the issues of limitation and benami nature were triable issues not fit for summary rejection.
Conclusion: The Court held that the trial Court's rejection of the defendant's Order VII Rule 11 application was correct and that the suit should proceed to trial.
Significant Holdings
"Rejection of the plaint under Order 7 Rule 11 of CPC is a drastic power conferred in the court to terminate a civil action at the threshold. The conditions precedent to the exercise of power under Order 7 Rule 11, therefore, are stringent and have been consistently held to be so by the Court. It is the averments in the plaint that have to be read as a whole to find out whether it discloses a cause of action or whether the suit is barred under any law. At the stage of exercise of power under Order 7 Rule 11, the stand of the Defendants in the written statement or in the application for rejection of the plaint is wholly immaterial. It is only if the averments in the plaint ex facie do not disclose a cause of action or on a reading thereof the suit appears to be barred under any law the plaint can be rejected. In all other situations, the claims will have to be adjudicated in the course of the trial."
The Court established that the limitation period begins from the date of breach of the agreement and not from the date of the original transaction or sale deed registration. The cause of action arose in 2006 when the defendant No.1 breached the trust by transferring the property to third parties.
The Court held that the question of whether the transaction is benami under the Benami Transactions Act, 1988 is a triable issue and cannot be decided summarily at the threshold.
The final determination was that the trial Court rightly rejected the application under Order VII Rule 11 CPC to reject the plaint, and the suit was not barred by limitation or the Benami Transactions Act on the face of the plaint. The suit was to proceed to trial for adjudication on merits.
Suit filed on the ground of limitation after 18 years - application filed under the provision of Order VII Rule 11 of Code of Civil Procedure - seeking possession of the suit premises -section-4 of Benami Transaction Act,1988 - name of the plaintiff could not be entered into in revenue record - cause of action to file the suit has arisen as the sale deed has been executed by defendant No.1 on 14.08.2006 and thereby for the first time defendant No.1 has breached the faith and trust put by the plaintiff by virtue of the understanding that was arrived at in the year 1989 - HELD THAT:- In view of the fact that the trial Court has also framed issue with respect to whether the issue of suit being hit of section-4 of Benami Transaction Act,1988 and also on the point of limitation. The fact remains that the judgments on which the learned advocate for the defendant relies are on the issue of limitation but in view of the fact that the plaintiff has categorically stated in the plaint that the plaintiff has claimed that he gained knowledge of the fact that the defendant is not ready and willing to abide by the understanding that have been arrived at between the plaintiff and defendant No.1 in the year 1988 whereby the defendant had agreed not to transfer, assign, sell the property and had also admitted the fact that the plaintiff is the owner of the property and the plaintiff has paid the entire sale consideration. In view of the said fact, the judgment on which the defendant has relied will not be of much assistance to the defendant, and therefore, when the plaintiff is alleging that the fraud has been committed by which the defendant is not ready and willing to abide by the understanding arrived at between the plaintiff and defendant and for the first time has committed the breach of the said agreement by executing the sale deed only in the year 2006, therefore, the said issue can only be decided after leading oral evidence and the said issue cannot be decided summarily and the same being triable issue the suit cannot be thrown out at the thresh hold and the defendant cannot pick up the few sentence, and therefore, from the plaint and content that the defendant had knowledge about the breach committed by the defendant.
It is true and settled law that though Court is required to be extremely careful regarding frivolous and vexatious litigations creeping in the judicial system and consequently abusing the process of law. This requires Courts to exercise their power under Order VII Rule 11 to nip such litigation in the bud.
It is therefore settled law that such a drastic step cannot be taken when upon a holistic reading of the Plaint, it does not appear to be barred by any law or discloses a cause of action (along with the other grounds of the said Rule). In such situations, the Plaint must go to trial and the Trial Court in accordance with law may allow or reject the same as deemed appropriate.
Thus, this Court does not deem it fit to take recourse of the drastic powers conferred under Order VII Rule 11 for rejection of the Plaint and accordingly, the present Civil Revision Application is dismissed. The connected Civil Application, if any, shall also stand dismissed.
1. Whether the learned District Judge (Commercial Court) had jurisdiction to initiate and continue proceedings in MISC DJ/3623/2024 after having passed a final decree in CS (COMM) 128/2023 on 19.10.2024 and consigned the file to the record room, thereby becoming functus officio.
2. Whether a court can assume jurisdiction suo moto in proceedings not part of the original lis after passing a final decree, without any statutory or inherent power to do so.
3. Whether the petition under Article 227 of the Constitution of India challenging the order dated 17.01.2025 passed by the learned Trial Court in MISC DJ/3623/2024 is maintainable.
4. The applicability of settled legal principles regarding jurisdiction, consent, waiver, and acquiescence in the context of a court's power to entertain proceedings beyond its jurisdiction.
Issue-wise Detailed Analysis:
Issue 1: Jurisdiction of the Trial Court post final decree and functus officio status
Relevant legal framework and precedents: The Court referred extensively to the principle that once a court passes a final decree and consigns the file to the record room, it becomes functus officio, losing jurisdiction to entertain further proceedings in the same matter. The Court relied on the Supreme Court rulings in Harshad Chiman Lal Modi v. DLF Universal Ltd. and Dr. Jagmittar Sain Bhagat v. Director, Health Services, which emphasize that jurisdiction is statutorily conferred and cannot be assumed or extended by consent or acquiescence.
Court's interpretation and reasoning: The Court noted that the learned Trial Court had decreed the suit in favour of the plaintiff/respondent on 19.10.2024 and ordered the file to be consigned to the record room, thereby rendering itself functus officio. Despite this, the same Court initiated separate proceedings in MISC DJ/3623/2024 suo moto and passed orders, including the impugned order dated 17.01.2025. The Court held that this was beyond its jurisdiction and amounted to an assumption of jurisdiction without statutory authority.
Key evidence and findings: The judgment and decree dated 19.10.2024, the order consigning the file to the record room, and the subsequent orders passed in MISC DJ/3623/2024 were examined. The Court observed that the new proceedings were not part of the original lis and no execution petition or fresh suit was filed to justify reopening or continuation of proceedings.
Application of law to facts: Applying the settled legal principles, the Court concluded that the Trial Court had no jurisdiction to initiate or continue proceedings in MISC DJ/3623/2024 after passing the final decree and consigning the file. The Court emphasized that jurisdiction cannot be conferred by the parties' conduct or by the Court assuming it suo moto.
Treatment of competing arguments: The petitioners contended that the Trial Court was functus officio and could not entertain the proceedings in MISC DJ/3623/2024. The Court agreed with this submission and rejected any implied consent or waiver argument that might have been raised, relying on authoritative precedents that such factors cannot confer jurisdiction where none exists.
Conclusion: The Court held that the Trial Court acted without jurisdiction in initiating and proceeding with MISC DJ/3623/2024, rendering the impugned order dated 17.01.2025 and related proceedings null and void.
Issue 2: Whether consent, waiver, or acquiescence can confer jurisdiction
Relevant legal framework and precedents: The Court cited the authoritative principles from Harshad Chiman Lal Modi and Halsbury's Laws of England, which state that jurisdiction cannot be conferred by consent, waiver, or acquiescence if the court is otherwise incompetent to try the suit. The Court also referred to Bahrein Petroleum Co. and Kiran Singh v. Chaman Paswan, which reinforce that a decree passed by a court without jurisdiction is a nullity.
Court's interpretation and reasoning: The Court reiterated that jurisdiction is a legislative function and cannot be assumed or conferred by parties or by a superior court. Even if the parties participate in proceedings or fail to object, it cannot validate a court's lack of jurisdiction over the subject matter.
Key evidence and findings: The petitioners had participated in the proceedings in MISC DJ/3623/2024 but had limited their challenge before the High Court to the order dated 17.01.2025. The Court noted that such participation does not validate the Trial Court's jurisdiction.
Application of law to facts: The Court applied the principle that jurisdictional defects go to the root of the matter and cannot be cured by consent or acquiescence. The Trial Court's assumption of jurisdiction was therefore invalid despite any participation by the petitioners.
Treatment of competing arguments: The Court acknowledged that although the petitioners had participated in the proceedings, this did not preclude the High Court from examining jurisdictional defects under Article 227. The Court rejected any argument that the petitioners' conduct amounted to waiver of jurisdictional objections.
Conclusion: Consent, waiver, or acquiescence cannot confer jurisdiction on a court otherwise lacking it. The Trial Court's orders in MISC DJ/3623/2024 are therefore non-est and void.
Issue 3: Maintainability of the petition under Article 227 challenging the order dated 17.01.2025
Relevant legal framework and precedents: The Court referenced the powers of the High Court under Article 227 of the Constitution to exercise superintendence over all courts and tribunals within its jurisdiction, including the power to correct patent errors and prevent miscarriage of justice.
Court's interpretation and reasoning: The Court acknowledged that while the power under Article 227 should not be exercised lightly, it is appropriate where there is a glaring jurisdictional error or patent perversity in the orders of a subordinate court. The Court found such an error in the Trial Court's assumption of jurisdiction post decree and functus officio status.
Key evidence and findings: The Court noted the finality of the decree dated 19.10.2024 and the subsequent unauthorized proceedings in MISC DJ/3623/2024. The petitioners had confined their challenge to the order dated 17.01.2025, which was the culmination of the unauthorized proceedings.
Application of law to facts: The Court applied the principle that the High Court must intervene to prevent injustice and uphold jurisdictional boundaries, especially when a lower court acts without jurisdiction.
Treatment of competing arguments: The Court balanced the principle of judicial restraint with the necessity of intervention in cases of clear jurisdictional overreach. It found the petition maintainable to correct the error.
Conclusion: The petition under Article 227 is maintainable and proper to challenge the impugned order dated 17.01.2025.
Issue 4: Legal effect of the Trial Court's orders and proceedings in MISC DJ/3623/2024
Relevant legal framework and precedents: The Court relied on settled law that any order or decree passed without jurisdiction is a nullity and can be set aside at any stage, including in collateral proceedings.
Court's interpretation and reasoning: The Court held that since the Trial Court had no jurisdiction to initiate or continue MISC DJ/3623/2024, all orders passed therein, including the impugned order dated 17.01.2025, are void and liable to be set aside.
Key evidence and findings: The Court reviewed the sequence of events and noted that the Trial Court's suo moto initiation of MISC DJ/3623/2024 was without any statutory backing or fresh cause of action.
Application of law to facts: The Court applied the principle that jurisdictional defects cannot be cured and declared the proceedings and orders in MISC DJ/3623/2024 as non-est and set them aside.
Treatment of competing arguments: The Court rejected any justification for the Trial Court's actions and emphasized adherence to jurisdictional limits.
Conclusion: The orders and proceedings in MISC DJ/3623/2024, including the impugned order dated 17.01.2025, are set aside as null and void.
Significant Holdings:
"Vide separate detailed judgment of even date, announced in open court, the suit is decreed in favour of plaintiff and against the defendants with cost of the suit. Decree sheet be drawn up."
"A Court which does not statutorily, or otherwise, have jurisdiction to try and entertain a proceeding, cannot suo moto confer/ assume jurisdiction upon itself by any manner and/ or any reason whatsoever."
"Neither consent nor waiver nor acquiescence can confer jurisdiction upon a court, otherwise incompetent to try the suit."
"A decree passed by a court having no jurisdiction is non-est and its validity can be set up whenever it is sought to be enforced as a foundation for a right, even at the stage of execution or in collateral proceedings."
"The learned Trial Court became functus officio after passing the decree and consigning the file to the record room and could not have proceeded with the proceedings in MISC DJ/3623/2024."
"The present petition under Article 227 of the Constitution of India is maintainable to challenge the order dated 17.01.2025 passed by the learned Trial Court in MISC DJ/3623/2024."
"The impugned order dated 17.01.2025 and all proceedings in MISC DJ/3623/2024 are set aside."
Maintainability of the petition - patent error is apparent on the face of the record - Confiscation and non-release of the counterfeit goods bearing the respondent’s/ plaintiff’s trademark/ label under consignment - learned Trial Court erred in moving ahead with suo moto commencing with the proceedings without having jurisdiction to do so - HELD THAT:- As per the settled position of law, a Court which does not statutorily, or otherwise, have jurisdiction to try and entertain a proceeding cannot suo moto confer/ assume jurisdiction upon itself in any manner and/ or any reason whatsoever.
Admittedly, even though the petitioners have participated in MISC DJ/3623/2024 before the learned Trial Court and had given up their challenge to all the orders barring that of 17.01.2025 passed therein before this Court on 02.05.2025, the same would not and in fact cannot preclude this Court to take into account the cumulative facts that the learned Trial Court is acting without any jurisdiction to try and/ or entertain the proceedings not before it and accordingly proceed for adjudication of the present petition under Article 227 of the Constitution of India which empowers the High Courts to exercise “…superintendence over all Courts and Tribunals throughout the territories in relation to which it exercises jurisdiction”.
Even though the law qua exercising the rights under Article 227 of the Constitution of India is well settled that the High Courts should not exercise its power of superintendence at the drop of a hat, however, at the same time, it is also a settled position of law that on coming across any patent perversity in the orders of any Court and/ or Tribunal which is glaringly visible, the High Courts applying the equitable principles, should exercise its power to keep strict overall administrative and judicial control over any Court and/ or Tribunal under its jurisdiction. The High Courts are required to step in, if called for, when such a situation, as above, is brought to the notice.
The present case is such wherein, the patent error is apparent on the face of the record, which if permitted to stand, shall lead to traversity of justice. The learned Trial Court cannot be allowed to proceed against the Statute and this Court has to stand by the principles of equity, justice and good conscience, more particularly, when the suit itself stood decreed on 19.10.2024 by the very same learned Trial Court.
As a result, upon a wholistical consideration of the factual matrix involved coupled with the provisions of Statute, as also the existing position of law, in the considered opinion of this Court, the present petition under Article 227 of the Constitution of India is maintainable in the present form before this Court.
Thus, the present petition is allowed and the order dated 17.01.2025 passed by the learned Trial Court in MISC DJ/3623/2024 is set aside. Resultantly, the proceedings initiated by the learned Trial Court in MISC DJ/3623/2024 and the orders passed therein are also set aside.
The present petition alongwith the pending applications stands disposed of.
The core legal questions considered by the Court are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of Goods under Customs Tariff Heading
Relevant legal framework and precedents: The classification of imported goods for Customs Duty purposes is governed by the Customs Tariff Act and is subject to interpretation under the Customs Tariff Heading (CTH) codes. Section 17(5) of the Customs Act, 1962, mandates the passing of speaking orders in respect of Bills of Entry. The classification affects the rate of duty payable and is a matter of substantial importance in Customs law.
Court's interpretation and reasoning: The Petitioner contends that the goods imported are liable to duty under CTH 85169000, while the Customs Department has classified them under CTH 85168000. The Court noted that the Department has already issued a Show Cause Notice on 15th January 2025 regarding the classification of identical goods in earlier consignments. The Court emphasized that the issue in the present petitions is essentially the same as that in the Show Cause Notice, involving identical goods and classification disputes.
Key evidence and findings: The Petitioner had paid Customs Duty under protest for the present Bills of Entry, and the Department submitted that there were earlier consignments of identical goods which were also classified incorrectly and provisionally released. The Show Cause Notice issued pertains to these earlier consignments.
Application of law to facts: The Court reasoned that since the classification issue is already under adjudication for earlier consignments through the Show Cause Notice, multiplicity of proceedings should be avoided. The adjudication of the Show Cause Notice would bind the classification for the present Bills of Entry as well.
Treatment of competing arguments: The Petitioner sought a speaking order under Section 17(5) for the present Bills of Entry, while the Department argued that the Petitioner had not disclosed all relevant facts and that the classification issue is pending adjudication in the Show Cause Notice. The Court accepted the Department's contention and directed that the Show Cause Notice proceedings continue and comprehensively cover all relevant Bills of Entry.
Conclusions: The Court directed that the classification issue be adjudicated comprehensively in the Show Cause Notice proceedings and that the decision therein shall bind the classification of all Bills of Entry, both earlier and present.
Issue 2: Obligation to Pass Speaking Orders under Section 17(5) of the Customs Act, 1962
Relevant legal framework and precedents: Section 17(5) of the Customs Act requires that the Customs authorities pass speaking orders on Bills of Entry, providing reasons for classification and duty assessment.
Court's interpretation and reasoning: The Petitioner sought directions for the Respondents to pass consolidated or separate speaking orders in respect of the specified Bills of Entry. The Court observed that since the classification issue is pending adjudication through the Show Cause Notice, the passing of a separate speaking order for each Bill of Entry at this stage would lead to multiplicity of proceedings.
Key evidence and findings: The Department had provisionally released earlier consignments and issued a Show Cause Notice covering the classification dispute. The Petitioner had paid duty under protest but no speaking order had been passed yet.
Application of law to facts: The Court found it appropriate that one comprehensive speaking order be passed after adjudicating the Show Cause Notice, covering all relevant Bills of Entry, rather than multiple orders.
Treatment of competing arguments: The Petitioner's request for immediate speaking orders was balanced against the Department's position that the Show Cause Notice adjudication would comprehensively resolve the classification issue.
Conclusions: The Court directed that the Adjudicating Authority pass one comprehensive speaking order after hearing the Petitioner on the Show Cause Notice, covering all Bills of Entry.
Issue 3: Consideration of Petitioner's Representations and Procedural Directions
Relevant legal framework and precedents: Under Article 226 of the Constitution of India, the Court has jurisdiction to direct authorities to consider representations and pass reasoned orders. The principles of natural justice require that parties be given an opportunity to be heard.
Court's interpretation and reasoning: The Petitioner filed representations on 18th March 2024 and 24th March 2025 requesting reconsideration of classification. The Court noted that the Petitioner had not yet filed a reply to the Show Cause Notice dated 15th January 2025.
Key evidence and findings: The Court recorded the Department's submission that the Petitioner had not disclosed all facts and that the reply to the Show Cause Notice was pending.
Application of law to facts: The Court permitted the Petitioner to file a reply to the Show Cause Notice within thirty days, with the condition that failure to do so would close the right to file a reply. The Court also directed that the Petitioner be given an opportunity of personal hearing, with hearing notices to be sent by usual communication and also by email and mobile number provided.
Treatment of competing arguments: The Court ensured procedural fairness by allowing the Petitioner to present all facts and arguments comprehensively in the reply to the Show Cause Notice rather than fragmenting the process.
Conclusions: The Court directed continuation of the Show Cause Notice proceedings, allowed filing of reply within a fixed timeline, and mandated a personal hearing before final adjudication.
3. SIGNIFICANT HOLDINGS
The Court held that:
"In view of the fact that the Show Cause Notice with regard to the classification of identical goods has already been issued, this Court is of the opinion that the proceedings need not be multiplied."
"Considering the fact that the issue raised in both the proceedings are same and the goods involved are also identical, the adjudication of the Show Cause Notice dated 15th January, 2025 shall bind the earlier bills of entry as also the set of present bills of entry."
"The Petitioner is permitted to file a reply within thirty days to the Show Cause Notice dated 15th January, 2025 bringing all the facts on record in respect of the earlier and the present bills of entry. The Adjudicating Authority shall comprehensively adjudicate the matter in respect of all the bills of entry and pass one comprehensive order."
Core principles established include:
Final determinations:
Seeking directions to pass a consolidated or separate speaking order(s) under Section 17 (5) of the Customs Act, 1962 - liability of goods to be charged to Customs Duty under Customs Tariff Heading - classification of identical goods - No opportunity of personal hearing - HELD THAT:- In view of the fact that the Show Cause Notice with regard to the classification of identical goods has already been issued, this Court is of the opinion that the proceedings need not be multiplied. In respect of the earlier bills of entry, provisional release has already been undertaken. In respect of the above bills of entry, as per the Petitioner, the customs duty has been paid in terms of the classification given by the Department, under protest.
Accordingly, let the proceedings in the Show Cause Notice dated 15th January, 2025 continue. Considering the fact that the issue raised in both the proceedings are same and the goods involved are also identical, the adjudication of the Show Cause Notice dated 15th January, 2025 shall bind the earlier bills of entry as also the set of present bills of entry.
An opportunity of personal hearing shall also be given to the Petitioner.
After hearing the Petitioner, the Adjudicating Authority shall take a decision in respect of the classification of the goods as to whether they would fall under CTH 85168000 and CTH 85169000.
The writ petition is disposed of in these terms.
Issues: Whether the bail order could be interfered with on the ground that the offence was allegedly non-bailable and that the respondents were implicated in possession or dealing with a larger quantity of smuggled gold.
Analysis: The only recovery shown was of 3 kg of smuggled gold, while the remaining quantity was not recovered and was referred to only in the respondents' statements. The bail order was passed after considering the overall facts, and the reference to the offence being bailable was only incidental. No subsequent circumstance was shown to justify reconsideration of the bail already granted.
Conclusion: The challenge to the bail order failed and the order granting bail was upheld.
Seeking grant of Bail - Smuggling - seizure of gold - evasion of Customs Duty - HELD THAT:- In view of recovery of 3 kg of gold, the learned Metropolitan Magistrate has rightly observed that it comes under the category of bailable offence and has rightly granted bail to the Respondents. It is submitted that there is no infirmity in the Bail Order and the present Petition is liable to be dismissed.
The allegation of remaining 8 kg of gold is concerned, there is no recovery affected from the Respondents but was mentioned by the Respondents in their statements.
The learned Metropolitan Magistrate vide impugned Order dated 09.06.2018 has considered the facts and has granted Bail. It is only incidentally mentioned that the offence disclosed is ‘bailable’, whereas the Bail has been granted considering the entire facts of the present case.
There is no infirmity in the impugned Order dated 09.06.2018. The present Petition and pending Application are accordingly dismissed.
1. Whether the confirmation of suspension of the Customs Broker licence under Regulation 16(2) of the Customs Broker Licensing Regulations, 2018 (CBLR, 2018) was justified on the facts and law.
2. Whether the suspension order adequately stated reasons for immediate suspension as required under the regulatory framework.
3. Whether the appellant Customs Broker failed in its duties regarding verification of the description, value, existence, and credentials of the exporter as alleged by the Commissioner of Customs.
4. Whether the Customs Broker can be held responsible for mis-declaration, overvaluation, or non-existence of the exporter in the context of the Customs Act and CBLR, 2018.
5. Whether the suspension of the Customs Broker licence should be revoked pending the inquiry and final decision on revocation of licence.
Issue-wise Detailed Analysis
Issue 1: Justification for Confirmation of Suspension under Regulation 16(2) of CBLR, 2018
Legal Framework and Precedents: Regulation 16(1) of CBLR, 2018 authorizes suspension of a Customs Broker licence where immediate action is necessary to prevent misuse or prejudice to revenue. Regulation 16(2) provides for confirmation of such suspension. The suspension is a preventive measure and not a final adjudication on licence revocation.
Court's Interpretation and Reasoning: The Tribunal noted that the impugned order confirmed the suspension but did not itself initiate suspension; the initial suspension order dated 9.1.2025 contained reasons. The Tribunal held that Regulation 16(2) is limited to confirmation and does not require fresh determination of necessity for immediate action at confirmation stage.
Key Evidence and Findings: The Commissioner's suspension order cited contravention of various provisions of CBLR, 2018, breach of trust, and potential prejudice to revenue as grounds for immediate suspension.
Application of Law to Facts: The Tribunal accepted the procedural correctness of confirming suspension but proceeded to examine whether the grounds cited justified suspension.
Treatment of Competing Arguments: The appellant argued absence of reasons and evidence; the Tribunal found reasons were provided in the initial order.
Conclusion: The confirmation of suspension was procedurally valid but required factual scrutiny.
Issue 2: Verification of Description and Value of Goods by Customs Broker
Legal Framework: Under the Customs Act and CBLR, 2018, Customs Brokers file Shipping Bills based on documents provided by exporters. Customs officers have authority to examine goods and verify declarations. Customs Brokers assist in documentation but have no statutory authority or responsibility to physically verify goods or their market value.
Court's Reasoning: The Tribunal clarified that Customs Brokers cannot be held liable for discrepancies found by Customs officers during examination of goods. The broker's role is limited to filing Shipping Bills as per exporter's declarations and documents.
Key Findings: The goods were found to be mis-declared in description and value by Customs officers at ICD Tughlakabad, but the Customs Broker did not have authority or responsibility to verify these aspects.
Application: Suspension on grounds of failure to verify description and value was unjustified.
Competing Arguments: The Revenue argued the broker's failure to verify contributed to misuse; the Tribunal rejected this as beyond the broker's remit.
Conclusion: Suspension on these grounds was not sustainable.
Issue 3: Verification of Existence and Credentials of Exporter
Legal Framework: Customs Brokers are expected to conduct KYC and verify exporter credentials such as PAN, IEC, GST registration. The existence of an exporter is relevant to prevent fraudulent transactions.
Court's Reasoning: The appellant produced extensive KYC documents including Aadhar, PAN, IEC, GST registration, and bank certificates. The Revenue's claim that the exporter was non-existent was based on Customs officers' verification at the premises, conflicting with official documents issued by competent authorities.
Key Evidence: The exporter filed a writ petition for release of seized goods, indicating existence. GST registration was cancelled suo moto effective 7.2.2023 but the timing of cancellation was after the transactions and after Customs' initial verification request.
Application: The Tribunal held that the appellant did verify the existence and credentials to the extent possible and cannot be faulted for subsequent cancellation of GST registration or findings of non-existence by Customs officers.
Competing Arguments: Revenue relied on Customs officers' physical verification; appellant relied on documentary evidence and subsequent legal proceedings.
Conclusion: Suspension on grounds of non-verification of exporter's existence and credentials was unjustified.
Issue 4: Effect of GST Registration Cancellation on Broker's Liability
Legal Framework: GST registration is a key credential for exporters; cancellation may indicate non-genuineness. However, the timing and knowledge of cancellation are material.
Court's Reasoning: The GST registration was cancelled suo moto effective 7.2.2023 but the Customs officers only received confirmation of cancellation on 1.2.2024 after initiating investigation. Until then, the broker and department operated under assumption of valid registration.
Key Findings: The broker had obtained GST registration details as part of KYC. The cancellation post-dated the transactions and was not known at the time of filing.
Application: The broker cannot be held liable for failure to verify a GST registration that was cancelled retroactively after the relevant transactions.
Conclusion: Suspension on this ground was not sustainable.
Issue 5: Whether Suspension Should be Revoked Pending Inquiry
Legal Framework: Suspension is a preventive measure pending inquiry and final decision on licence revocation. The Tribunal has discretion to revoke suspension if grounds are not made out.
Court's Reasoning: Since the inquiry and final decision on revocation are pending, the Tribunal limited itself to the question of justification of suspension confirmation. Having found the grounds insufficient, it ordered revocation of suspension with immediate effect.
Competing Arguments: Revenue sought continuation of suspension pending inquiry; Tribunal prioritized fairness and absence of justification for suspension.
Conclusion: Suspension was set aside; licence and related cards to be returned to appellant.
Significant Holdings
"Therefore, it appears that the continuation of business transaction by the Customs Broker would be prejudicial to the interest of the Revenue and immediate action under Regulation 16 of CBLR, 2018 is warranted to prevent further misuse of Customs Broker Licence." (Paragraph 5 of Suspension Order)
The Tribunal held that this reasoning was not supported by evidence regarding the broker's failure to verify description, value, or existence of exporter.
"Nothing in the Customs Act or the CBLR authorizes the Customs Broker to examine the goods. The Customs Broker has to file Shipping Bills as per the documents and the goods are then brought into the Customs area... Therefore, if the goods are found to be different than what is declared in the shipping bill, the Customs Broker cannot be held responsible."
"The appellant had obtained the GSTR of the exporter as a part of KYC... Until the cancellation, not only the appellant but even the department was operating under the assumption that the appellant existed."
"Considering all the above, we find that confirmation of suspension of the Customs Broker licence of the appellant in the impugned order cannot be sustained and needs to be set aside."
Core principles established include that suspension under Regulation 16 requires clear and supported grounds demonstrating immediate necessity; Customs Brokers' duties do not extend to physical verification of goods or independent valuation; KYC verification based on official documents suffices; and retroactive cancellation of credentials cannot be held against the broker if unknown at the time.
Final determinations:
- The confirmation of suspension under Regulation 16(2) was not justified on the facts.
- The appellant Customs Broker did not fail in its duties as alleged.
- Suspension of the Customs Broker licence was set aside with immediate effect.
Suspension and confirmation under Regulation 16 of CBLR, 2018 - Suspension of Customs Broker licence - Duty and responsibility of Customs Broker to verify description, value and existence of exporter - Immediate action necessary to prevent prejudice to Revenue - Show Cause Notice and inquiry for revocation of licence
Suspension and confirmation under Regulation 16 of CBLR, 2018 - Duty and responsibility of Customs Broker to verify description, value and existence of exporter - Immediate action necessary to prevent prejudice to Revenue - Show Cause Notice and inquiry for revocation of licence - Whether the confirmation of suspension of the appellant's Customs Broker licence was justified on the grounds recorded by the Commissioner - HELD THAT: - The Tribunal confined itself to the limited question of whether confirmation of suspension was justified, without adjudicating merits of the pending inquiry (paras 4, 10). The Suspension Order (reproduced at para 5) relied on an apprehension that continuation of the broker's business would be prejudicial to Revenue, invoking Regulation 16. The Tribunal examined each factual ground relied upon by the Commissioner. First, the finding that the broker had not verified the description of goods was held not to sustain suspension because neither the Customs Act nor CBLR imposes on a Customs Broker the authority or responsibility to physically examine goods; filing of Shipping Bills is based on documents and physical examination is for Customs officers (para 11). Second, the ground that the broker failed to verify FOB or market value was rejected since verification of transaction value or market price is not the broker's responsibility (para 12). Third, on the question of verification of the exporter's existence, the appellant produced KYC documents (Aadhaar, PAN, IEC, bank certificate, GST registration) and the exporter had filed writ proceedings when goods were seized; the departmental visitation finding of non-existence could not be accepted to conclude that the broker had not verified existence (para 13). Fourth, the cancellation of the exporter's GST registration was found to be unclear as to timing; the GST cancellation appears to have been effected after departmental verification and correspondence, and until cancellation the parties, including the department, operated on the assumption of existence (para 14). For these reasons the Tribunal held that confirmation of suspension could not be sustained (paras 15-16). The Tribunal expressly left the separate SCN for revocation and the inquiry to the inquiry officer and Commissioner to decide uninfluenced by its observations (paras 10, 15). [Paras 12, 13, 14, 15, 16]
Confirmation of suspension set aside; suspension of Customs Broker licence revoked with immediate effect and original licence and cards to be returned; SCN and inquiry for revocation to proceed unaffected.
Final Conclusion: The Tribunal allowed the appeal, set aside the Commissioner's order confirming suspension of the appellant's Customs Broker licence, directed restoration of the licence and cards, and clarified that the pending Show Cause Notice and inquiry for revocation shall proceed unimpaired by the Tribunal's observations.
The core legal questions considered in this judgment include:
(i) Whether the transaction value declared by the appellant for imported screws could be rejected under Rule 12 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 ("2007 Valuation Rules") on the basis of alleged undervaluation and misdeclaration.
(ii) Whether the re-determination of the value of imported goods under Rule 5 of the 2007 Valuation Rules was justified.
(iii) The admissibility and evidentiary value of electronic evidence, specifically computer printouts of emails and invoices retrieved from the email accounts of the appellant and a third party importer, in the absence of a certificate under Section 138C of the Customs Act, 1962 ("Customs Act").
(iv) The applicability and procedural requirements relating to the use of statements recorded under Section 108 of the Customs Act, including whether cross-examination of the declarant (a third party) was necessary before relying on such statements.
(v) Whether the penalty and redemption fine imposed on the appellant and its director were sustainable in the facts and circumstances.
Issue-wise Detailed Analysis
1. Rejection of Transaction Value under Rule 12 of the 2007 Valuation Rules
The legal framework governing customs valuation is primarily the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Rule 12 allows rejection of the declared transaction value if it is found to be incorrect or unreliable. The department relied on evidence including email printouts of supplier quotations and invoices retrieved from the appellant's and another importer's email accounts, along with statements recorded under Section 108 of the Customs Act, to allege undervaluation.
The department's case was that the appellant declared a flat rate of approximately $0.7 per kg for various types of screws, whereas contemporaneous invoices from a similar importer (M/s Sagar Impex) showed prices ranging between $1000 to $2000 per ton, indicating undervaluation. The appellant was unable to produce evidence to demonstrate that the goods imported by it differed in quality or composition from those imported by M/s Sagar Impex. Further, the appellant failed to produce purchase orders or contracts specifying the goods' quality or composition, and was found to have submitted forged or fabricated invoices.
The Principal Commissioner held that these factors justified rejection of the declared transaction value under Rule 12 and re-determination under Rule 5, relying on the contemporaneous values of similar goods imported by a third party. The department also held that the appellant and its director were liable for penalty under Sections 112(ii), 114A, and 114AA of the Customs Act for undervaluation and misdeclaration.
The appellant contended that the invoices and emails related to a different importer and supplier, and hence could not be relied upon to reject the declared transaction value. It argued that the statements of the third party importer were inadmissible in the present proceedings and that the electronic evidence was not admissible in the absence of a certificate under Section 138C of the Customs Act.
2. Admissibility of Statements under Section 108 of the Customs Act and Cross-examination
The department relied on statements recorded under Section 108 of the Customs Act from the appellant's director and the third party importer. The appellant sought cross-examination of the third party importer, which was rejected by the Principal Commissioner on the ground that the statement was voluntary, recorded through due legal process, and is deemed a judicial proceeding under Sections 193 and 228 of the Indian Penal Code, 1860.
The Principal Commissioner held that cross-examination was not warranted once the charges stood proved, and the statement had evidentiary value.
3. Admissibility of Electronic Evidence without Certificate under Section 138C
The appellant challenged the admissibility of computer printouts of emails and invoices retrieved from email accounts, arguing the absence of a certificate under Section 138C of the Customs Act, which prescribes conditions for the admissibility of electronic records.
The Principal Commissioner rejected this argument, observing that the printouts were taken in the presence of the appellant and the third party importer during their statements under Section 108. Neither party disowned the documents or challenged the authenticity of the devices from which the printouts were taken. Therefore, the authenticity and genuineness of the electronic evidence were not in doubt, and the provisions of Section 138C were held not applicable in the facts of this case.
4. Burden of Proof and Evaluation of Evidence
The appellant argued that the department failed to discharge the burden of proof to establish undervaluation. The department contended that the initial burden was discharged by producing contemporaneous quotations, invoices, and statements, shifting the onus to the appellant to rebut the allegations.
The Principal Commissioner accepted the department's position, finding that the appellant failed to satisfactorily explain the discrepancies in declared values, failed to produce relevant documents such as purchase orders or specifications, and gave evasive replies. These factors cumulatively justified rejection of the declared transaction value.
5. Re-determination of Transaction Value under Rule 5
Since the declared transaction value was rejected, the department re-determined the value under Rule 5 of the 2007 Valuation Rules, which allows valuation based on the value of identical or similar goods imported from other sources. The department relied on the value of goods imported by M/s Sagar Impex, adjusted for contemporaneity and similarity, to fix the assessable value of the appellant's imports.
6. Penalty and Redemption Fine
Based on findings of undervaluation and misdeclaration, the department imposed penalty and redemption fine on the appellant and its director under relevant provisions of the Customs Act. The appellant challenged the imposition of penalty and fine, arguing that the foundational findings were unsustainable.
Court's Interpretation and Reasoning
The Appellate Tribunal undertook a detailed examination of the procedural and substantive aspects of the case. It noted that the panchnama recorded at the time of search did not mention taking printouts of emails, and the only record of such printouts was in the statement of the appellant's director under Section 108, taken on a later date. The Tribunal emphasized that such printouts should have been taken during the search or in the presence of witnesses to establish their authenticity beyond doubt.
The Tribunal referred to a Division Bench decision which clarified that statements recorded under Section 108 are relevant evidence only if the declarant is examined as a witness before the adjudicating authority and an opinion is formed that such statements should be admitted in the interest of justice. The declarant must be afforded an opportunity for cross-examination. Failure to comply with this procedure renders such statements inadmissible.
In the present case, the third party importer whose statements and emails were relied upon was not examined in the appellant's proceedings, and no opportunity for cross-examination was afforded. Therefore, reliance on such statements was not permissible.
Further, the Tribunal observed that the printouts of emails pertained to quotations from suppliers different from those of the appellant and were not final prices. The appellant had denied that the goods imported by it were identical in quality or composition to those imported by the third party. The department did not produce evidence to establish similarity or contemporaneity conclusively.
Discarding the electronic evidence and statements relied upon by the department, the Tribunal found no substantial evidence to reject the declared transaction value. Accordingly, the rejection under Rule 12 and re-determination under Rule 5 could not be sustained.
Consequently, the penalty and redemption fine imposed on the appellant and its director also could not be upheld.
Significant Holdings
"The statements recorded during inquiry/investigation by officers has every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence."
"Both section 9D(1)(b) of the Central Excise Act and section 138B(1)(b) of the Customs Act contemplate that when the provisions of clause (a) of these two sections are not applicable, then the statements made under section 14 of the Central Excise Act or under section 108 of the Customs Act during the course of an inquiry under the Acts shall be relevant for the purpose of proving the truth of the facts contained in them only when such persons are examined as witnesses before the adjudicating authority and the adjudicating authority forms an opinion that the statements should be admitted in evidence. It is thereafter that an opportunity has to be provided for cross-examination of such persons."
"The printouts of the emails contain quotations of different suppliers and not to the supplier of the appellant and they are not the final prices. The printouts also relate to another importer of M/s Sagar Impex and it is stated that Khusagar Aggarwal of Sagar Impex had admitted the prices in his statement made under section 108 of the Customs Act. It was necessary for the department to have not only substantiated that screws that were imported by M/s Sagar Impex and that by the appellant were of the same quality and were made at about the same time but to have also examined Khusagar Aggarwal in the present proceedings for his statement made under section 108 of the Customs Act in some other proceedings could not have been relied upon in the present proceedings."
"If the emails and the statement of Mahesh Sabharwal are discarded, then there is absolutely no evidence for rejection of the transaction value declared by the appellant."
"The impugned order rejecting the transaction value under rule 12 of the 2007 Valuation Rules cannot be sustained. The re-determination of the transaction value, therefore, would not arise."
Core Principles Established
(i) Statements recorded under Section 108 of the Customs Act during inquiry have evidentiary value only if the declarant is examined as a witness before the adjudicating authority and an opportunity for cross-examination is provided, failing which such statements cannot be relied upon.
(ii) Electronic evidence such as computer printouts of emails must be taken in the presence of witnesses during search or inquiry to establish authenticity; mere reliance on printouts taken later without proper panchnama or certification under Section 138C is insufficient.
(iii) Reliance on statements or documents pertaining to third party importers in separate proceedings is impermissible unless the third party is examined and the evidence is properly linked and substantiated in the present proceedings.
(iv) The burden of proof initially lies on the department to establish undervaluation, but once a prima facie case is made, the burden shifts to the importer to rebut the allegations with cogent evidence.
(v) Rejection of declared transaction value and re-determination under the Customs Valuation Rules require robust and admissible evidence demonstrating undervaluation or misdeclaration.
Final Determinations on Each Issue
(i) The rejection of the transaction value declared by the appellant under Rule 12 of the 2007 Valuation Rules was not sustainable due to lack of admissible and reliable evidence.
(ii) The re-determination of the transaction value under Rule 5 of the 2007 Valuation Rules did not arise once the declared value was upheld.
(iii) The electronic evidence and statements of third parties relied upon by the department were inadmissible and could not be used to prove undervaluation.
(iv) The appellant was entitled to have the third party declarant examined and cross-examined, which was not permitted, rendering reliance on such statements improper.
(v) The penalty and redemption fine imposed on the appellant and its director were set aside as the foundational findings of undervaluation were not supported by admissible evidence.
Denial of transaction value of the goods - confiscation - payment of redemption fine - Admissibility of the computer printouts in the absence of any certificate issued under section 138C of the Customs Act - imports iron screws/ self-drilling screws from China - issuance of SCN - e-mail correspondence between another supplier and other receiver of goods - statement made under section 108 - HELD THAT:- Regarding the printout of the e-mails it needs to be noted that the two panchnamas recorded on 29.03.2017 do not refer to any printout of the e-mails having been taken. In fact, the only reference to the printouts of the e-mails having been taken is contained in the statement of Mahesh Sabharwal recorded under section 108 of the Customs Act on 14.09.2017.
The said statement does not indicate from which electronic device the printout was taken. It was absolutely necessary for the department to have taken the printouts during the process of recording of the panchnama or in the presence of witnesses. It appears that the printouts were taken on 14.09.2017, as is clear from the statement of Mahesh Sabharwal recorded under section 108 of the Customs Act.
This apart, the printouts of the emails contain quotations of different suppliers and not to the supplier of the appellant and they are not the final prices. The printouts also relate to another importer of M/s Sagar Impex and it is stated that Khusagar Aggarwal of Sagar Impex had admitted the prices in his statement made under section 108 of the Customs Act. It was necessary for the department to have not only substantiated that screws that were imported by M/s Sagar Impex and that by the appellant were of the same quality and were made at about the same time but to have also examined Khusagar Aggarwal in the present proceedings for his statement made under section 108 of the Customs Act in some other proceedings could not have been relied upon in the present proceedings.
If the emails and the statement of Mahesh Sabharwal are discarded, then there is absolutely no evidence for rejection of the transaction value declared by the appellant.
Thus, the impugned order rejecting the transaction value under rule 12 of the 2007 Valuation Rules cannot be sustained. The re-determination of the transaction value, therefore, would not arise.
Such being the position, the order for payment of redemption fine and for imposition of penalty upon the appellant and Mahesh Sabharwal cannot be sustained.
The impugned order dated 31.08.2020 passed by the Principal Commissioner is, accordingly, set aside and both the appeals are allowed.
Issues: (i) whether the declared transaction value of the imported goods could be rejected and re-determined on the basis of the importer's statement, NIDB data, and alleged undervaluation; (ii) whether the imported motorcycle inner tubes, packed in cartons of 50 pieces, were liable to countervailing duty on retail sale price basis under section 4A of the Central Excise Act, 1944.
Issue (i): Whether the declared transaction value of the imported goods could be rejected and re-determined on the basis of the importer's statement, NIDB data, and alleged undervaluation.
Analysis: The legal position governing import valuation requires acceptance of the transaction value unless it is rejected for cogent reasons in accordance with the valuation rules, and any re-determination must proceed sequentially under the prescribed framework. Mere acceptance of an enhanced value, payment of differential duty, or a statement by the importer does not by itself discharge the department's burden to prove undervaluation. The record did not show any independent enquiry establishing additional consideration, nor any reliable comparison with identical or similar unbranded goods of comparable quality, quantity, time, and origin. Reliance on NIDB data alone was held insufficient without corroborative material.
Conclusion: The declared value could not be rejected on the material relied upon by the department, and the re-determined assessable value was unsustainable.
Issue (ii): Whether the imported motorcycle inner tubes, packed in cartons of 50 pieces, were liable to countervailing duty on retail sale price basis under section 4A of the Central Excise Act, 1944.
Analysis: Section 4A applies where packaged goods are required under the relevant law to declare retail sale price on the package. The goods were imported in bulk cartons and not in individual retail packs. The circular dealing with bulk packing supported the position that retail sale price declaration was not required in such circumstances. On that footing, the goods did not fall within the retail sale price based assessment mechanism merely because they were automotive parts and components.
Conclusion: The imported goods were not liable to assessment on retail sale price basis under section 4A.
Final Conclusion: The order enhancing the value, sustaining confiscation, fine, and penalty could not stand, and the declared value had to be accepted for assessment.
Ratio Decidendi: Transaction value under customs valuation law can be displaced only on cogent evidence and by following the prescribed sequential method, and bulk-packaged imported goods are not subjected to retail sale price based assessment unless the statutory conditions for such assessment are satisfied.
Undervaluation of goods - Rejection of transaction value declared by the importer for the imported motorcycle inner tubes - discharge of burden of proving undervaluation by adducing cogent reasons and evidence justifying the rejection of the declared transaction value - to be valued as per section 4 of CEA or section 4A.
Admission and acceptance by the appellant the charge of undervaluation - HELD THAT:- It cannot be ignored that the appellant had filed B/E dated 17.02.2011 for clearance of motorcycle tubes and pursuant to an intelligence the statement of Shri Kulvinder Pal Singh was recorded on 11.03.2011 and 18.03.2011 where he admitted the price to be at Rs. 32 per piece and also paid the duty on enhanced assessable value on the date of the statement itself. Further, they also waived the requirement of show cause notice and personal hearing so as to avail early clearance of the consignment. Merely because the appellant has accepted the higher value and also made the payment of differential duty does not absolve the department from discharging their responsibility under the provisions of section 14 read with Valuation Rules.
In the present case, it is not found that the department has discharged its burden of carrying out the requisite exercise and conducting enquiry with reference to the nature of the imported goods, being ‘unbranded’ along with other factors like quality, quantity, time and country of origin etc. The goods imported by the appellant were ‘unbranded’ and it was therefore, relevant that the comparable goods should be of the same category ‘unbranded’ as there is bound to be marked difference in the valuation of ‘branded’ and ‘unbranded’ goods which is not forthcoming from the records. No such evidence has been led by the department to ascertain the price for such re-assessment.
Considering the fact of the present case, the decision of the Ahmedabad Bench of the Tribunal in CMR Nikkei India (P) Ltd. Vs. Commr. of Customs [2022 (8) TMI 114 - CESTAT AHMEDABAD] referred, where the dispute was regarding the valuation of the goods imported by the appellant and the assessing authority reassessed the imported goods at values higher than what was declared in the Bills of Entry and the importer had accepted the enhanced value by submitting the consent letter. The Tribunal was pleased to observed that 'in spite of the admission on behalf of the importer, the Revenue is required to satisfy the requirements prescribed under Section 14 of the Customs Act read with Customs Valuation Rules before any enhancement of valuation.'
Reliance has been placed on the contemporaneous imports available in NIDB data which showed the value of the impugned goods and which has been relied on by the authorities below. In the case of M/s Sedna Impex Pvt Ltd. vs. Commissioner of Excise, Mundra [2023 (3) TMI 1080 - CESTAT AHMEDABAD], the Tribunal observed that the declared value cannot be enhanced merely on the basis of the NIDB data. From series of decisions we find that the Tribunal has taken a consistent view that the declared value cannot be enhanced solely on the basis of NIDB data or in other words NIDB data cannot be made the basis for enhancement of the declared import value.
The basic allegation of the department is that the declared value of the impugned goods were found different being on the lower side as the goods were required to be subjected to countervailing duty based on RSP under section 4A of CEA - Section 4A makes it clear that it applied only in those cases where there is an allegation to print RSP on the packages of the goods under the provisions of SWMA or the Rules made thereunder. In terms of section 4A, Central Government had issued Notification No. 49/2008-CE(NT) dated 27.02.2008 and Sl. No. 108 therein refers to as “parts, components and assemblies of automobiles”.
Since in the present case the inner tubes were imported by the appellant in the packing of 50 pieces per cartons and the said tubes were not in individual package, reliance has been placed on Circular No. 625 dated 28.02.2002 which provides that in case of bulk packing there is no requirement of declaring RSP on the packages under the provisions of SWMA or the Rules made thereunder. The findings in the impugned order is that since the appellant has not shown that the inner tubes were sold only in the packing of 50 pieces per cartons the benefit of said circular is not available.
The learned counsel for the appellant has referred to a decision of this Tribunal in Titan Industries Limited vs. Commissioner of Customs, Chennai [2007 (6) TMI 357 - CESTAT, CHENNAI], where the appellant as manufacturer of Titan brand watches had imported button cells declaring them as for own use and cleared on payment of duties based on the transaction value. The adjudicating authority concluded that the impugned imports attracted assessment of CVD on RSP as provided under section 3(2) of the Customs Tariff Act, 1975 and demanded differential duty. Reliance was placed on Circular No. 625 and it was urged that the impugned goods were imported packed in thermo formed trays, each tray holding 100 button cells with 10 such trays shrink wrapped and stacked in a carton and each shipment consisted of Rs.1,50,000/- thousand button cells so packed. It was, therefore, argued that the imports were in bulk packages and did not attract MRP based assessment. In view of the clarification given in the Circular it was held that imported goods do not attract section 4A for the purpose of assessment of CVD. Considering the facts of the present case, it is opined that the decisions in the case of Titan Industries is squarely applicable as the tubes were purchased in bulk and not in retail packaging and are, therefore, not covered for assessment under the provisions of Section 4A.
Conclusion - The declared value cannot be rejected, merely on the statement of the Proprietor. The department has failed to exercise its power in conformity with the provisions of section 14 read with the Valuation Rules so as to adduce cogent reasons to establish the charge of undervaluation. Further, to re-determine the valuation of the imported goods, there are no sufficient evidence satisfying the test of equivalence in comparison to the imported goods. In the absence of requisite exercise to collect cogent evidence to arrive at reassessment, the goods have to be assessed on the basis of the declared value/transaction value.
The impugned order is unsustainable and is hereby set aside. The appeal is, accordingly, allowed.
The core legal questions considered by the Tribunal in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the alleged error constitutes a "mistake apparent from the record" under Section 35C(2)
Relevant legal framework and precedents: Section 35C(2) of the Central Excise Act, 1944 empowers the Appellate Tribunal to amend any order passed by it to rectify any "mistake apparent from the record" within six months from the date of the order. The Supreme Court has elucidated the scope of "mistake apparent from the record" in several decisions:
Court's interpretation and reasoning: The Tribunal emphasized that the alleged error involves a comparison of features of various goods imported under different Bills of Entry. Such a comparison involves detailed analysis and reasoning, which is inherently debatable and open to more than one opinion. Therefore, the Tribunal held that the alleged error is not an obvious or patent mistake apparent on the face of the record.
Application of law to facts: The appellant contended that the Tribunal erred in paragraph 14 of the impugned order by wrongly classifying goods under two tables and drawing incorrect conclusions about their similarity and commonality. However, the Tribunal observed that this issue was already considered and decided in the appeal, and the comparison does not amount to a mistake apparent from the record. The Tribunal noted that the Table One in paragraph 14 corresponds to the show cause notice, and the distinction drawn was consistent with the prior proceedings upheld by the Supreme Court.
Treatment of competing arguments: The appellant argued that the distinction was wrongly arrived at and sought rectification to correct the comparison. The Department opposed the application, contending that the grounds raised were new, not part of the pleadings earlier, and amounted to a request for re-hearing rather than rectification. The Department relied on the precedent in Commissioner of Central Excise, Calcutta v. A.S.C.U. Ltd. to assert that rectification cannot be used as a vehicle for re-hearing or reconsideration.
Conclusion: The Tribunal concluded that the alleged error is not a mistake apparent from the record but a debatable point requiring detailed reasoning. Consequently, rectification under Section 35C(2) was not warranted.
Issue 2: Whether the appellant is seeking re-hearing under the guise of rectification
Relevant legal framework and precedents: The Supreme Court in A.S.C.U. Ltd. clarified that rectification is not a substitute for appeal or re-hearing and cannot be used to re-agitate issues already decided.
Court's interpretation and reasoning: The Tribunal observed that the appellant, represented by new counsel at this stage, was attempting to revisit the merits of the appeal by raising new grounds and arguments not previously pleaded or argued. Such an attempt was viewed as an indirect request for re-hearing.
Application of law to facts: The Tribunal found that the appellant's submissions in the rectification application effectively sought to re-examine the evidence and findings on the similarity of goods, which had already been adjudicated. This was impermissible under the law governing rectification.
Treatment of competing arguments: The Department pointed out that the appellant's current counsel was not involved in the original hearing, and the new arguments were not part of the record. The Tribunal agreed with this position.
Conclusion: The Tribunal held that the application was an attempt to seek re-hearing and was therefore not maintainable under the rectification provisions.
Issue 3: Correction of typographical error in naming the authorized representative
Relevant legal framework: Rectification of typographical or clerical errors is generally permissible as such errors are apparent from the record and do not involve re-examination of substantive issues.
Court's interpretation and reasoning: The Tribunal acknowledged the typographical error in paragraph 2 of the impugned order where the name of the authorized representative was incorrectly mentioned. The Tribunal allowed correction of this error.
Conclusion: The Tribunal ordered replacement of the incorrect name with the correct name of the authorized representative.
3. SIGNIFICANT HOLDINGS
"A debatable action of law cannot constitute a mistake apparent from the record on it two opinions are considerable. Such point cannot be said to be error apparent on the face of record."
"A mistake apparent on record must be an obvious and patent mistake and should not be something which has to be established by a long drawn process of reasoning on the points on which there may conceivably be the two opinions."
"The sole ground on which the Rectification of Mistake is allowed is that the error should be apparent form the record."
"Rectification is not a substitute for re-hearing and cannot be used to re-agitate issues already decided."
"The alleged error involves a comparison of features of various goods which cannot be appreciated without a long drawn process of reasoning and is a situation where two different views are possible."
Final determinations:
Seeking Rectification of Mistake in the Final Order - wrong comparison of features of various goods - Mistake apparent from the record - correct comparison between the products involved in the impugned Bill of Entries - Tribunal concluded that the goods covered in Table One are the goods which are covered under the previous Bill of Entry dated 16.02.2018 as dealt with in previous Final Order of the Tribunal which was upheld by the Hon'ble Supreme Court in Commissioner of Central Excise, Calcutta versus A.S.C.U. Ltd. [2002 (12) TMI 87 - SUPREME COURT] and Table Two is held to mention, the goods as different from the goods in Table One.
HELD THAT:- The perusal clarifies that the sole ground on which the Rectification of Mistake is allowed is that the error should be apparent form the record. This phrase for “mistake apparent from record” was earlier explained by Hon'ble Supreme Court in the case of T.S. Balaram, Income Tax Officer versus Volkart Brothers - [1971 (8) TMI 3 - SUPREME COURT], wherein it was held that a debatable action of law cannot constitute a mistake apparent from the record on it two opinions are considerable. Such point cannot be said to be error apparent on the face of record. It further clarified that a mistake apparent on record must be an obvious and patent mistake and should not be something which has to be established by a long drawn process of reasoning on the points on which there may conceivably be the two opinions.
The impugned Final Order No. 58770 of 2024 dated 03.10.2024 is in the appeal filed before this Tribunal assailing the said order-in-appeal dated 31.10.2019. Foremost the mistake pointed out i.e. the comparison of features of various goods cannot be appreciated without a long drawn process of reasoning and is a situation where two different views are possible. Consequently, the mistake pointed out is denied to be the error apparent in the present final order. As pointed out by learned authorized representative the Table One of Paragraph 14 is same as the one mentioned in the show cause notice.
Thus, we hold that the appellant through a new Counsel, than the one who made submissions at the time of passing of the impugned final order, is trying to seek re-hearing in the present appeal under the garb of seeking Rectification of Mistake in the final Order dated 03.10.2024. It has already been held that there is no such error as is apparent on face of the impugned final order. Consequently, the application is hereby dismissed. Be consigned to the records along with the appeal, already consigned.
The core legal questions considered by the Tribunal in the appeal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement of the appellant to reliefs granted to co-accused in a related matter
Relevant legal framework and precedents: The Tribunal relied heavily on a prior decision reported in 2020 (2) TMI 644-CESTAT Ahmedabad concerning M/s. Agarwal Metal & Alloys and others, where the main accused and co-accused involved in undervaluation allegations on imported scrap were absolved of duty, interest, and penalty. The Customs Act, 1962 provisions related to valuation and penalties were central to the determination.
Court's interpretation and reasoning: The Tribunal observed that the appellant was similarly placed as the co-accused in the cited precedent, having sold consignments on a high seas basis through various parties. The Tribunal found no distinguishing facts or circumstances that would justify a different treatment. The principle of consistency and equality before law was applied, leading to the conclusion that the appellant deserved the same reliefs.
Key evidence and findings: The appellant's transactions and involvement mirrored those of the co-accused absolved in the precedent case. The Tribunal noted the absence of any contrary evidence or rationale to deny similar relief.
Application of law to facts: The Tribunal applied the precedent decision directly, holding that the appellant's penalty and demands were unsustainable given the analogous factual matrix.
Treatment of competing arguments: The learned Authorized Representative (AR) for the revenue conceded that the facts in the present appeal were not materially different from the precedent case but urged adherence to the lower authority's findings. The Tribunal rejected this submission in favor of consistency with the earlier ruling.
Conclusions: The appellant was entitled to the same reliefs as the co-accused in the precedent case, including absolution from penalty and duty demands.
Issue 2: Sustainability of reassessment or re-enhancement of customs valuation after finality of assessment
Relevant legal framework and precedents: The Tribunal referred to established principles that once an assessment order attains finality due to absence of appeal or review, reassessment or re-enhancement of value is impermissible. Supporting case law cited includes CC vs Lord Shiva Overseas (2005), Malhotra Impex vs CC (2006), CC vs Paras Electronics (2009), and the Tribunal's own earlier orders in the Sunland Metal matter.
Court's interpretation and reasoning: The Tribunal emphasized that 166 Bills of Entry had already undergone value enhancement at the time of initial assessment, which had attained finality. Therefore, any subsequent proposal to re-enhance value was not sustainable in law. The Tribunal followed the binding precedents to reject reassessment.
Key evidence and findings: The record showed that no appeal or review was filed against the initial enhancement order, confirming its finality. Additionally, in 50 Bills of Entry, the Commissioner (Appeal) had set aside the value enhancement, and the revenue's appeal against that order was dismissed by the Tribunal.
Application of law to facts: The finality of assessment barred any further valuation enhancement or reassessment. The Tribunal applied this principle strictly to the facts before it.
Treatment of competing arguments: The revenue's insistence on upholding the reassessment was rejected as inconsistent with settled law and the factual status of the prior orders.
Conclusions: Reassessment or re-enhancement of customs valuation after finality of assessment was held impermissible and unsustainable.
Issue 3: Liability to pay additional customs duty on imported scrap
Relevant legal framework and precedents: The Tribunal considered the nature of scrap as a non-manufactured product and relied on its prior ruling in the Sunland Metal case, which held that no additional customs duty is payable on scrap.
Court's interpretation and reasoning: The Tribunal reaffirmed that scrap, not being a manufactured product, does not attract additional customs duty. This principle was applied to the appellant's case, entitling him to all reliefs and exemptions associated with such assessment.
Key evidence and findings: The classification and nature of the imported goods as scrap were undisputed, and the precedent ruling was directly applicable.
Application of law to facts: The legal principle exempting scrap from additional duty was applied to negate the revenue's demand in this regard.
Treatment of competing arguments: The revenue did not successfully dispute the nature of scrap or the binding precedent.
Conclusions: The appellant was not liable to pay additional customs duty on imported scrap.
Issue 4: Penalty under Section 112(b) of the Customs Act, 1962
Relevant legal framework and precedents: Section 112(b) of the Customs Act, 1962 empowers imposition of penalty for certain contraventions. The Tribunal considered whether the penalty imposed on the appellant was sustainable in light of the findings absolving him of duty and valuation irregularities.
Court's interpretation and reasoning: Since the appellant was absolved of the primary charges of undervaluation and duty evasion, the penalty imposed under Section 112(b) could not be sustained. The Tribunal emphasized that penalty cannot be imposed without a substantive breach of duty or valuation norms.
Key evidence and findings: The appellant's conduct mirrored that of co-accused who were absolved, and no independent evidence justified penalty.
Application of law to facts: The penalty was set aside as the foundational basis for its imposition was negated by the Tribunal's findings.
Treatment of competing arguments: The revenue's position was overruled given the appellant's entitlement to relief.
Conclusions: The penalty of Rs. 2,00,000/- under Section 112(b) was quashed.
Issue 5: Issue of limitation
Relevant legal framework and precedents: Limitation provisions under the Customs Act regulate the time period within which demands and penalties may be imposed.
Court's interpretation and reasoning: The Tribunal explicitly noted that since the appeals were
Imposition of penalty under Section 112(b) of the Customs Act, 1962 - Allegation of undervaluation - scrap imported from various countries - Entitlement to the same reliefs - appellant, being a co-accused similarly placed as the main accused and other co-accused - HELD THAT:- This Court finds that issue is no more res Integra and has been decided after elaborate arguments and findings, in the in the matter of M/s. Agarwal Metal and Alloys, Vipul Agarwal, Samir Agarwal, Ramesh Kumar H. Jain Vs. C.C.-Kandla [2020 (2) TMI 644 - CESTAT AHMEDABAD], inter alia, absolved the main accused in any charge of under valuation. There can be no reason to uphold the penalty against present appellant on the basis of similarity of facts.
Thus, the appeal of the appellant on penalty is liable to succeed, the penalty of Rs. 2,00,000/- imposed on the appellant under Section 112(b) of the Customs Act, 1962 is liable to be set aside. Same is ordered, accordingly.
Appeal is allowed with consequential relief.
1. Whether the demand for service tax on transportation charges borne by the appellants and reflected in their Profit & Loss accounts is sustainable, given that the consignment agents had paid the freight and discharged the service tax liability on such freight amounts.
2. Whether the extended period of limitation for issuing the show cause notice and demanding service tax can be invoked in the present case, considering the appellants were regularly filing returns and subjected to periodic audits by the department.
3. Whether the appellant is entitled to avail Cenvat Credit on the service tax paid on GTA (Goods Transport Agency) services by their consignment agents, and if the demand for recovery of such credit is justified.
4. Whether penalty and interest imposed on the appellants are justified in the absence of any mens rea or willful suppression of facts.
Issue-wise detailed analysis:
1. Liability to pay service tax on transportation charges borne by the appellant:
The relevant legal framework includes Rule 2(1)(d)(B) of the Service Tax Rules, 1994, which defines the "person liable for paying service tax" in relation to GTA services as the person who pays or is liable to pay freight either himself or through his agent. The appellants argued that the consignment agents paid the freight and the service tax on their behalf, and the appellants merely reimbursed these expenses, recording them as expenses in their books.
The department contended that since the freight charges appeared in the appellant's invoices and consignment notes, the appellants were liable to pay the service tax. The Tribunal noted that the consignment agents paid the freight and service tax, which was subsequently reimbursed by the appellants, and that the tax was discharged in accordance with the law. The Tribunal found that there was no loss of revenue and that the service tax liability was effectively discharged by the consignment agents acting as agents of the appellants.
The Tribunal applied the law to the facts by interpreting the provisions of Rule 2(1)(d)(B) to include payment through agents and concluded that the appellants were not directly liable to pay the service tax as it was paid by their consignment agents. The department's argument that the appellants were liable due to the inclusion of freight charges in invoices was countered by the explanation that such charges were included to arrive at assessable value for excise duty purposes, not to indicate direct payment of freight by the appellants.
Competing arguments regarding liability were treated by emphasizing the statutory provisions and the actual flow of payments, with the Tribunal giving weight to the fact that the service tax was paid by the consignment agents and no revenue was lost.
Conclusion: The appellants are not liable to pay service tax on transportation charges borne by their consignment agents, as the tax was discharged by the agents on their behalf.
2. Invocation of extended period of limitation for demand:
The appellants argued that the show cause notices issued were time barred as the period of dispute related to financial years 2011-12 to 2013-14, while the notices were issued in 2016 or later. They contended that since they regularly filed returns and were audited by the department, there was no suppression of facts or intention to evade tax, and thus the extended period under the proviso to Section 73(1) of the Finance Act, 1994 could not be invoked.
The appellants relied on judicial precedents which held that extended limitation cannot be invoked where records were audited and no suppression or misstatement was found, citing cases such as MTR Foods Ltd., SDL Auto Pvt. Ltd., and Trans Engineers India Pvt. Ltd.
The department contended that the extended period was justified due to non-payment of service tax as per machinery provisions and that the case was maintainable on merits.
The Tribunal analyzed the legal framework of limitation under Section 73(1) and the proviso for extended period in cases of suppression or fraud. It found that since the appellants' records were audited and the department was aware of the transportation charges and related service tax payments, there was no concealment or suppression of facts. The Tribunal noted that the demand arose from figures extracted from the appellants' own ledger and balance sheet, which are public documents, negating any claim of suppression or intent to evade tax.
The Tribunal applied the precedents cited by the appellants, affirming that extended period cannot be invoked without evidence of suppression or fraud. The department's reliance on extended limitation was rejected.
Conclusion: The demand notices are barred by limitation, and the extended period of limitation is not invokable in the absence of suppression or fraud.
3. Availment of Cenvat Credit on GTA services paid by consignment agents:
The appellants claimed Cenvat Credit of Rs. 9,96,643/- on service tax paid on GTA services by their consignment agents and argued that since the agents did not avail credit themselves and were reimbursed by the appellants, the appellants were entitled to the credit. They submitted service tax returns of the consignment agents to support this.
The department alleged that the appellants availed credit on ineligible documents and that this was discovered during audit, justifying recovery under Rule 14 of the CCR, 2004 and Section 11A(4) of the Central Excise Act, 1944.
The Tribunal noted that Rule 9 of the CCR, 2004 specifies the documents on which Cenvat Credit can be availed, including challans evidencing payment of service tax by the service recipient. The Tribunal found that the department's allegation related to non-production of eligible documents, which cannot be verified from ST-3 returns alone.
Given the factual dispute regarding the availability of valid documents, the Tribunal remitted the matter to the adjudicating authority with liberty to the appellants to produce eligible documents within one month. The adjudicating authority was directed to decide the matter after verification within three months.
Conclusion: The question of admissibility of Cenvat Credit is remitted for fresh adjudication upon production and verification of eligible documents by the appellants.
4. Penalty and interest:
The appellants argued that there was no mens rea or willful suppression and that the service tax was discharged by their consignment agents, thus no penalty or interest should be imposed. The department did not specifically contest this argument in detail in the order.
The Tribunal observed that since no evasion or loss of revenue occurred and there was no evidence of fraudulent intent, penalty was not justified. The show cause notice was issued based on audit detection without any impeachable conduct.
Conclusion: Penalty and interest are not sustainable in the absence of mens rea or willful suppression.
Significant holdings:
The Tribunal held that "Service Tax on GTA Services are required to be paid by the person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in goods carriage." It further observed that "the consignment agents had paid the service tax in the case and therefore, there was no loss of Revenue to the Government."
On limitation, the Tribunal stated: "Since all the facts and information were available to the officers of the department, there is no question of suppression of any information from the department and, therefore, it can be safely concluded that there is no suppression of facts with intent to evade payment of service tax in the instant case and hence, the proviso to Section 73(1) of the Finance Act, 1994 relating to extended period cannot be invoked in this case."
Regarding Cenvat Credit, the Tribunal emphasized that "Cenvat credit can even be availed on mentions challan evidencing payment of service tax by the service recipient," but also held that the appellant must produce eligible documents for verification by the adjudicating authority.
In final determinations, the Tribunal allowed the appeals relating to service tax demand and limitation, set aside the impugned orders, and remitted the Cenvat Credit issue for fresh adjudication with liberty to the appellants to produce documents. The penalty was held to be unjustified and not sustainable.
Time limitation - Levy of service tax - transportation charges borne by the appellants and reflected in their Profit & Loss accounts - the consignment agents had paid the freight and discharged the service tax liability on such freight amounts - Cenvat Credit on the service tax paid on GTA (Goods Transport Agency) services by their consignment agents - HELD THAT:- Appellant were subjected to regular audits even previously and all the records were made available as is evident from final audit reports of dates 15.03.2012 and 08.03.2013. They were filing returns regularly and the department was well aware about the facts of the transportation charges not paid by the appellants and that all the information for the purposes of present show cause notices has been found out from their records only and nothing in any case was concealed. They have relied on various case laws including of MTR Foods Ltd. [2010 (10) TMI 994 - CESTAT BANGALORE], SDL Auto Pvt Ltd [2013 (8) TMI 425 - CESTAT NEW DELHI], Trans Engineers India Pvt Ltd [2015 (9) TMI 787 - CESTAT MUMBAI] for their purpose. That all facts and figures and transactions were duly reflected in their ledger accounts as well as balance sheets for the relevant year, and were called out from their available documents only.
The extended of limitation cannot be applied. Even on merits, it is not denied that the consignment agent(s) to whom they were the principal had paid the amount of freight and since, under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, the service tax can be paid either by the person who is liable to pay freight or through his agent. In the instant case, service tax as per law was paid by the consignment agent (who had paid freight on behalf of the appellant) which was later on claimed from the appellant who showed in his books as expense. It is not disputed that the consignment agent(s) had paid the service tax in the case and therefore, there was no loss of Revenue to the Government.
Cenvat Credit on the service tax paid on GTA (Goods Transport Agency) services by their consignment agents - HELD THAT:- The lower authority has confirmed demand on the ground that the appellant has not produced eligible documents. Vide written submission dated 14.05.2025, the learned Advocate has produced copy of ST-3 returns of one of their Consignment Agent M/s Yashoda Traders to show that the Consignment(s) have not taken the Cenvat credit. Still, the appellant has to produce valid/eligible documents for availing Cenvat credit as required under Rule 9 of the Service Tax Rules - It is deemed fit to remit this matter to the adjudicating authority with liberty to the appellant to produce eligible/valid documents justifying availment of Cenvat credit. The learned Adjudicating authority will decide the matter after verifying the documents and pass reasoned order within three months from the date of receipt of this order. Needles to say, the appellant shall produce eligible documents before the said authority within one month.
Conclusion - i) Service Tax on GTA Services are required to be paid by the person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in goods carriage. ii) Since all the facts and information were available to the officers of the department, there is no question of suppression of any information from the department and, therefore, it can be safely concluded that there is no suppression of facts with intent to evade payment of service tax in the instant case and hence, the proviso to Section 73(1) of the Finance Act, 1994 relating to extended period cannot be invoked in this case. iii) Cenvat credit can even be availed on mentions challan evidencing payment of service tax by the service recipient,". The appellant must produce eligible documents for verification by the adjudicating authority.
Appeal disposed off.
Another related issue is the applicability of service tax under the 'Works Contract Service' category introduced effective 01.06.2007, and whether the Appellant's payment of service tax under this category for the period post-introduction satisfies the tax liability for the relevant period.
Additionally, the question of whether partial supply of materials by the client affects the classification of the service and consequent tax liability was also considered.
Issue-wise analysis:
1. Liability to pay service tax under 'Commercial or Industrial construction service' for the period prior to 01.06.2007
The relevant legal framework involves the Finance Act, 1994, and the introduction of the 'Works Contract Service' category effective 01.06.2007. Prior to this date, the taxability of works contracts under service tax law was ambiguous, with some service tax levied under 'Commercial or Industrial construction service'. The Supreme Court judgment in Commissioner of C.Ex. & Cus., Kerala Vs. Larsen & Toubro Ltd clarified that service tax on works contracts is leviable only from 01.06.2007 under the newly introduced category.
The Tribunal interpreted this precedent as decisive, holding that the Appellant was not liable to pay service tax under 'Commercial or Industrial construction service' for the period before 01.06.2007. The Appellant had not paid service tax before this date, instead paying VAT under the works contract provisions of the Kerala General Sales Tax Rules, 1963, as evidenced by VAT returns and assessments.
The Appellant's submission was supported by documentary evidence including agreements with clients and VAT payment records. The Tribunal gave weight to the Supreme Court's ruling, which settled the issue as res judicata. The Revenue's argument that partial supply of materials by the client negated the benefit of Works Contract service was not found persuasive for this period, as the service tax law and judicial precedents clearly delineated the tax liability timeline.
Conclusion: The Appellant is not liable to pay service tax under 'Commercial or Industrial construction service' for the period prior to 01.06.2007.
2. Liability to pay service tax under 'Works Contract Service' for the period 01.06.2007 to 31.03.2009
From 01.06.2007, the Finance Act, 1994, introduced 'Works Contract Service' as a distinct taxable category to capture the service element in works contracts. The Appellant applied for and was granted registration under this category on 04.03.2008 and paid service tax accordingly for the period from 01.06.2007 to 31.03.2009.
The Tribunal noted that the impugned order confirmed the demand of service tax for the entire period under 'Commercial or Industrial construction service', thereby overlapping with the period the Appellant had already paid service tax under 'Works Contract Service'. The Tribunal held that the Appellant's payment under the correct category post 01.06.2007 satisfied their tax liability.
The Revenue's contention that partial supply of materials by the client disqualified the Appellant from claiming the benefit of 'Works Contract Service' was considered but not accepted. The Tribunal relied on the settled position in the Larsen & Toubro Ltd case and subsequent decisions which clarified that the service element in works contracts is taxable under the 'Works Contract Service' category irrespective of partial supply of materials by the client.
Conclusion: The Appellant's payment of service tax under 'Works Contract Service' for the period 01.06.2007 to 31.03.2009 is adequate, and no additional tax under 'Commercial or Industrial construction service' is payable.
3. Effect of partial supply of materials by the client on classification and tax liability
The Revenue argued that when the client partially supplies materials, the service provider cannot claim the benefit of the 'Works Contract Service' category and must be taxed under 'Commercial or Industrial construction service'.
The Tribunal, however, did not find merit in this argument. It referred to judicial precedents which established that the service element in works contracts is taxable under 'Works Contract Service' regardless of whether materials are supplied by the client or the contractor. The primary focus is on the nature of the service rendered rather than the source of materials.
Conclusion: Partial supply of materials by the client does not alter the classification of the service as 'Works Contract Service' for service tax purposes.
Significant holdings:
"Following the ratio of the judgment in CCE, Kerala VS Larsen & Toubro Ltd, service provided in relation to execution of a 'Works Contract' is liable to service tax only from 01.06.2007."
"For the period up to 01.06.2007, the appellant is not liable for payment of service tax for the execution of works contract following the ratio of the judgment of the Hon'ble High Court in the matter of Larsen & Toubro Ltd."
"The confirmation of entire demand of service tax for the period 10.09.2004 to 31.03.2009 under the category of 'Commercial or Industrial construction service' is unsustainable."
The core principle established is that the service tax liability on works contracts is governed by the introduction of the 'Works Contract Service' category effective 01.06.2007, and prior to this date, no service tax is leviable on such contracts under the 'Commercial or Industrial construction service' category. Additionally, the payment of service tax under the correct category post-introduction discharges the tax liability, and the partial supply of materials by the client does not affect this classification.
The final determination was to set aside the impugned order confirming the demand under 'Commercial or Industrial construction service' and allow the appeal with consequential relief in accordance with law.
Liability to pay service tax - Commercial or Industrial construction service - Appellant who had carried out works contracts is liable to pay service tax or not - HELD THAT:- The new category of 'works contract service' was introduced w.e.f. 01.06.2007 with an intent to tax service element in the works contract.
Following the ratio of the judgment in CCE, Kerala VS Larsen & Toubro Ltd [2015 (8) TMI 749 - SUPREME COURT], service provided in relation to execution of a "Works Contract" is liable to service tax only from 01.06.2007. It is found that appellant was paying service tax from 1.6.2007 to 31.03.2009 under Works contract service and the demand as per impugned order confirmed service tax for said period also under the category of “Commercial or Industrial construction service”. For the period up to 01.06.2007, the appellant is not liable for payment of service tax for the execution of works contract following the ratio of the judgment of the Hon'ble High Court in the matter of the Larsen & Toubro Ltd. [2015 (8) TMI 749 - SUPREME COURT]. Further, for the period 01.06.2007 to 31.03.2009 the appellant has paid service tax under 'works contract service'. Therefore, the confirmation of entire demand of service tax for the period 10.09.2004 to 31.03.2009 under the category of “Commercial or Industrial construction service” is unsustainable, hence the impugned order is set aside.
Conclusion - The service tax liability on works contracts is governed by the introduction of the 'Works Contract Service' category effective 01.06.2007, and prior to this date, no service tax is leviable on such contracts under the 'Commercial or Industrial construction service' category.
Appeal allowed.
1. Whether the data contained in a Pen Drive seized from a third party's premises can constitute sufficient and admissible evidence to establish clandestine manufacture and removal of goods by the appellant.
2. Whether the discrepancy between production figures in the Pen Drive data and statutory returns (RG-1) can be treated as proof of suppression of manufacture and duty evasion.
3. Whether the Revenue's reliance on statements recorded during investigation without allowing cross-examination of the witnesses complies with statutory procedural safeguards and can be relied upon as evidence.
4. Whether the Revenue has brought sufficient corroborative evidence beyond the Pen Drive data and recorded statements to establish clandestine removal, including investigation into raw material purchases, electricity consumption, transportation, and receipt of sale proceeds.
5. Whether the penalty imposed on the second appellant is sustainable in the absence of a proven role or culpability.
6. Whether interest and penalty on the demand amount paid prior to issuance of the Show Cause Notice are justified.
Issue-wise Detailed Analysis:
1. Admissibility and Sufficiency of Pen Drive Data as Evidence of Clandestine Removal
The legal framework includes Section 36B of the Central Excise Act, which governs the admissibility of computer printouts and electronic records as evidence. The conditions under Section 36B(2) require that the computer printout must be produced by a computer regularly used for business activities, the computer must have been operational properly, and a certificate from a responsible official must be produced under Section 36B(4) to authenticate the electronic evidence.
Precedents such as Ambica Organics and Principal Commissioner of CGST & Central Excise vs Shah Foils Ltd emphasize that electronic evidence such as Pen Drive data or computer printouts must satisfy these statutory conditions to be admissible. Mere recovery of a Pen Drive from a third party's premises without identifying the author or following proper authentication procedures does not satisfy these requirements.
The Court noted that in the present case, the Pen Drive was seized from another party (GIPL), and the Revenue failed to identify the author or produce any certificate as required under Section 36B. The data was not stored in the appellant's computer system, and the conditions for admissibility were not fulfilled. The Revenue's reliance on this data alone, without proper authentication or corroboration, was held insufficient to establish clandestine removal.
The Court also referenced the Shah Foils case, where the Tribunal held that charges of clandestine removal based solely on Pen Drive data without corroboration are not sustainable. The absence of investigation into the source or authenticity of the data, or statements from the person responsible for the Pen Drive, further weakened the Revenue's case.
2. Discrepancy Between Pen Drive Data and RG-1 Figures as Evidence of Suppression
The Revenue's case was based on the difference between production and dispatch figures recorded in the Pen Drive data and the statutory returns (RG-1). The Revenue assumed that the Kiln production figures in the Pen Drive represented actual production, while the RG-1 figures were understated, indicating suppression and clandestine removal.
The Court observed that this assumption was flawed. It was pointed out that production in Kilns includes quantities that may be rejected during quality checks and thus not recorded in RG-1 returns. The Revenue's failure to consider the possibility of wastage or rejection rendered their inference perverse and based on mere assumptions.
Precedents such as Continental Cement Co. and Arya Fibres Pvt. Ltd. emphasize that clandestine removal is a serious charge requiring concrete and tangible evidence, not mere inferences or assumptions. The Court held that the discrepancy in figures without corroborative evidence such as raw material consumption, electricity usage, or transportation records cannot conclusively establish suppression.
3. Reliance on Statements Recorded During Investigation Without Cross-Examination
Section 9D(1)(b) of the Central Excise Act requires that statements recorded during investigation before a gazetted officer must be admitted as evidence before the adjudicating authority and the witness must be made available for cross-examination, except in limited circumstances.
The appellants sought cross-examination of witnesses whose statements were recorded, but the Adjudicating Authority denied this on the ground that they were company employees and the documents were corroborated by statutory records.
The Court referred to the G-Tech Industries case, where the High Court held that failure to allow cross-examination renders such statements inadmissible as evidence. Without following this procedure, reliance on such statements is misguided and they lose evidentiary value.
4. Absence of Corroborative Evidence to Establish Clandestine Removal
Case law such as Continental Cement Co. and Nova Petrochemicals establish that to prove clandestine removal, the Revenue must investigate and produce corroborative evidence including:
In the present case, the Court found that the Revenue failed to investigate or produce such corroborative evidence. There was no inquiry into cash purchases, electricity consumption, transportation, or receipt of sale proceeds. The reliance on Pen Drive data and statements alone, without such corroboration, was insufficient.
5. Penalty Imposed on Second Appellant
The penalty on the second appellant was challenged on the basis that the primary allegations against the first appellant were unsustainable and that there was no specific role attributed to the second appellant in the Show Cause Notice or Order-in-Original.
The Court held that since the demand against the first appellant was set aside, the penalty on the second appellant also could not be sustained. The absence of any specific incriminating evidence or role of the second appellant justified setting aside the penalty.
6. Interest and Penalty on Amount Paid Prior to Show Cause Notice
The appellants had admitted and paid Rs.9,24,005 before issuance of the Show Cause Notice, primarily to close the issue. They contested the imposition of interest and penalty on this amount.
The Court noted that since the amount was paid before the SCN, no interest was payable. However, as the payment related to unaccounted clearances, penalty under law could be imposed. The Court accordingly held that no interest was payable but penalty at the prescribed rate was justified.
Conclusions on Issues:
Significant Holdings:
The Court reiterated the principle that "clandestine removal is a serious charge which has to be proved with positive evidence." It held that "charges of clandestine removal on the basis of pen drive data are not sustainable" without corroborative evidence and proper adherence to statutory procedures.
The Court emphasized the statutory safeguards under Section 9D(1)(b) regarding admissibility of statements recorded during investigation, stating:
"If this procedure, which is statutorily prescribed by plenary Parliamentary legislation, is not followed, it has to be regarded that the Revenue has given up the said witnesses, so that the reliance by the CCE, on the said statements, has to be regarded as misguided, and the said statements have to be eschewed from consideration, as they would not be relevant for proving the truth of the contents thereof."
In relation to electronic evidence, the Court quoted the conditions under Section 36B and held that failure to comply with these conditions renders computer printouts inadmissible:
"We find that none of these conditions was satisfied by the Revenue in this case... Nothing contained in the printouts ... can be admitted into evidence for non-fulfilment of the statutory conditions."
The Court also underscored the necessity of corroborative evidence beyond assumptions or inferences, stating:
"The charge of clandestine manufacture and clearances cannot be established on assumptions and presumptions. Such a charge has to be based on concrete and tangible evidence."
Accordingly, the Court set aside the confirmed demands amounting to Rs.1,47,93,516/- along with interest and penalties, and quashed the penalty imposed on the second appellant. The uncontested demand of Rs.9,24,005/- was upheld with penalty but without interest.
Clandestine removal - Seizure of Pen Drive from the premises of another party, contains the “Production & Dispatch of Sponge Iron” - Demands along with interest and penalty - difference between the Excel Sheet production figure and the RG1 figure - excess / unaccounted production of sponge iron - modus operendi - HELD THAT:- We find that apart from heavily relying on the pendrive and recorded statements, the Revenue has made no effort to bring in corroborative evidence to fortify its claim of clandestine removal. There is no discussion about procurement of materials / inputs, the input – output ratio analysis, electricity consumption, statement of purported sellers of inputs, purported buyers of the finished goods, movement of vehicles and statement of such vehicle drivers / owners. While the Revenue is not required to bring in pinpoint and precise evidence but still efforts have to be made to ensure that sufficient evidence is produced in support of their case.
From the present proceedings, we find that even within the pen-drive the Revenue claims that part of the same is accounted for in the RG 1 records and clearance has been made on payment of Excise Duty. The quantification has been done by comparing the RG 1 sales figures vis-à-vis the figures shown in the Pendrive data and admittedly the author of the Pendrive is not known and no statement has been recorded to this effect from that person. The procedure prescribed under the statutory provisions have not been followed while relying on the data contained in the pendrive.
As we have observed that entire case in respect of the all demands on different heads as observed in the table referred above, has been built up with miniscule evidence, with no corroborative evidence brought in whatsoever. Therefore, we have no hesitation to apply the ratio of the cited case laws in respect of Pendrive, non-allowing of cross-examination of the persons recording the statements, non-production of corroborative evidence, and set aside the impugned order on these counts in respect of the confirmed demands of Rs.1,47,93,916/-.
Since the demands are being set aside, the corollary interest and penalties also get aside.
The impugned Order is set aside towards the confirmed demand of Rs.1,47,93,516/- along with interest and penalty thereon. The penalty on the second appellant is set aside and appeal is allowed.
The appeals are disposed off thus.
Another key issue was whether the extended period of limitation could be invoked for the demand, given that periodic audits had been conducted without any prior objection or proceedings initiated for clandestine activity. The Tribunal also considered the admissibility and evidentiary value of statements recorded during investigation under Section 9D of the Central Excise Act, 1944, and whether the principles of natural justice were violated by denying cross-examination of witnesses.
Further, the Tribunal addressed the question of imposition of penalties on the Directors under Rule 26 of the Central Excise Rules, 2002, in the absence of proved clandestine removal of goods.
Issue-wise Detailed Analysis
1. Whether clandestine manufacture and removal of goods can be inferred solely from private records without corroborative evidence
The Tribunal referred extensively to the legal framework and precedents governing clandestine manufacture and clearance cases. It reiterated the settled principles laid down in prior decisions, including the Tribunal's own ruling in Arya Fibres Pvt. Ltd. v. Commissioner of Central Excise, Ahmedabad-II, which enumerated the fundamental criteria to establish clandestine removal. These criteria include tangible evidence such as:
The Tribunal emphasized that mere inference or assumption based on private/internal records such as notebooks, diaries, or loose slips is insufficient. Such documents must be supported by independent, cogent, and tangible evidence, including statements of purchasers, distributors, or dealers, records of unaccounted raw material purchase or consumption, and corroborative physical evidence.
Applying these principles to the facts, the Tribunal found that none of these tests were satisfied. There was no evidence of excess raw material procurement, no proof of excess electricity consumption, no identification of buyers or transporters of unaccounted goods, and no abnormal financial transactions. The private records seized were maintained in a rough manner, often relating to personal or other firms' transactions, and were not corroborated by any independent evidence. The statements of Directors and officials did not admit clandestine removal, and some statements were contradictory or retracted.
The Tribunal also noted that stock verification conducted during the search revealed no discrepancies in raw materials or finished goods. Thus, the demand based solely on private documents and uncorroborated statements was held unsustainable.
2. Admissibility and evidentiary value of statements recorded during investigation under Section 9D
The Tribunal considered the mandatory procedural safeguards under Section 9D of the Central Excise Act, which requires that statements recorded during search and seizure operations be admitted only after the person is produced before the adjudicating authority and the authority forms an opinion that admitting the statement is in the interest of justice. The Tribunal relied on the decision of the Chhattisgarh High Court in Hi Tech Abrasives Ltd. v. Commissioner of Central Excise & Customs, which held that without compliance with Section 9D, statements recorded during investigation cannot be treated as relevant evidence.
In the present case, the adjudicating authority admitted statements recorded during investigation without examining the persons or forming the requisite opinion, thus violating Section 9D. Consequently, reliance on such statements was impermissible.
3. Whether the extended period of limitation under Section 11A could be invoked
The Tribunal observed that the department had conducted periodic audits and inspections during the relevant period without raising any objection or initiating proceedings alleging clandestine removal. Since all facts were within the department's knowledge, invocation of the extended period of limitation was not justified. Therefore, the demand was barred by limitation.
4. Whether denial of cross-examination of witnesses violated principles of natural justice
The appellants contended that they were denied the opportunity to cross-examine witnesses, including those responsible for maintaining the private notebooks seized during search. The Tribunal noted that such denial amounted to violation of natural justice principles and vitiated the proceedings. The adjudicating authority failed to consider this aspect.
5. Imposition of penalty on the company and Directors under Rule 26
The Tribunal held that penalty under Rule 26 can only be imposed if clandestine removal is proved. Since the demand itself was not sustainable due to lack of corroborative evidence, the condition precedent for penalty was not satisfied. The adjudicating authority's imposition of penalty on the Directors without sufficient evidence was unjustified.
Significant Holdings
"In cases of clandestine manufacture and clearances, certain fundamental criteria have to be established by Revenue which mainly are the following: (i) There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions; (ii) Evidence in support thereof should be of raw materials in excess of that contained as per the statutory records; instances of actual removal of unaccounted finished goods; discovery of such goods outside the factory; instances of sale of such goods to identified parties; receipt of sale proceeds; use of electricity far in excess of what is necessary; statements of buyers; proof of actual transportation of goods cleared without payment of duty; links between the documents recovered during the search and activities being carried on in the factory of production."
"Reliance on private/internal records maintained for internal control cannot be the sole basis for demand. There should be corroborative evidence by way of statements of purchasers, distributors or dealers, record of unaccounted raw material purchased or consumed and not merely the recording of confessional statements."
"Statements recorded during search and seizure operations cannot be treated as relevant evidence unless the person is produced before the adjudicating authority and the authority forms an opinion that admitting the statement is in the interest of justice as mandated under Section 9D of the Central Excise Act."
"The extended period of limitation cannot be invoked where the department had knowledge of all facts from periodic audits and inspections and did not initiate proceedings within the normal limitation period."
"Denial of cross-examination of witnesses whose statements form the basis of demand amounts to violation of principles of natural justice and vitiates the proceedings."
"Penalty under Rule 26 cannot be imposed in the absence of proved clandestine removal of goods."
Applying these principles to the facts, the Tribunal concluded that the demand of Central Excise duty based solely on private documents and uncorroborated statements was not sustainable. Consequently, the penalties imposed on the company and its Directors were also set aside. The impugned orders were quashed, and the appeal was allowed.
Demand of duty - Clandestine manufacture - demand with interest and various penalties - solely on the basis of private records found during the course of investigation -satisfying the tests laid down in the case of Arya Fibres Pvt. Ltd. [2013 (11) TMI 626 - CESTAT AHMEDABAD] - HELD THAT:- As none of those tests has been satisfied as from where the excess raw material has been procured by the appellant from where the excess labour has been employed to manufacture such a huge quantity of the goods, how much electricity has been consumed by the appellant, what is the production capacity of the plant installed in the factory premises, where the clandestine removal of the goods were sold and how the transaction were made by the appellant. None of these tests has been satisfied. Therefore, on that ground the demands are not sustainable.
Further in the case of Commissioner of C.Ex, Chandigarh versus Laxmi Engineering Works, (2010 (3) TMI 276 - PUNJAB & HARYANA HIGH COURT), the Hon’ble High Court observed that even if some record recovered during raid and corroborated by some supportable evidence holding that there was an attempt of clandestine production and removal of goods then it is necessary to have some positive evidence of clandestine production and removal of the goods. Admittedly, no such evidence is produced by the Revenue therefore, demand against the appellant is not sustainable.
Thus, it is alleged that appellants were involved in clandestine removal of goods on the basis of private records during the course of investigation and statements recorded during the course of investigation which were not corrugated by the tests laid down in the case of Arya Fibres Pvt. Ltd. (Supra) the demand of Central Excise duty is not sustainable against the appellant. As demand of duty is not sustainable, consequently, no penalty can be imposed on the appellant. In these terms we drop the demand alongwith penalties imposed on the appellant.
In result, we set aside the impugned orders and allow the appeal filed by the appellants.
1. Whether the learned Trial Court erred in acquitting the accused respondents in complaints filed under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), despite the presumption of liability arising from dishonour of cheques.
2. Whether the accused persons successfully rebutted the statutory presumptions under Sections 118 and 139 of the NI Act regarding the issuance of cheques in discharge of a legally enforceable debt or liability.
3. The legal effect and implications of a settlement entered into between the parties during trial, especially in the context of subsequent non-compliance and continuation of proceedings.
4. The scope of interference by the appellate court in an order of acquittal in cases under Section 138 of the NI Act.
Issue-wise Detailed Analysis:
1. Scope of appellate interference in acquittal under Section 138 NI Act
The Court referred to established legal principles governing appellate interference in acquittals, emphasizing that ordinarily, an appellate court should be slow to overturn a trial court's judgment unless it is perverse or wholly unsustainable in law. This principle was drawn from precedents which caution against disturbing acquittals where two views are possible, especially in regular criminal offences.
However, the Court distinguished cases under Section 138 NI Act, noting that the statutory presumptions under Sections 118 and 139 alter the evidentiary landscape. The Supreme Court's ruling in Rohitbhai Jivanlal Patel v. State of Gujarat was cited to highlight that the appellate court has wider latitude to examine the evidence and determine whether the accused has successfully rebutted the presumption of discharge of debt/liability by the cheque. The Court underscored that the appellate court can scrutinize the evidence to see if the preponderance of probabilities favors the accused's defense, thus justifying interference with an acquittal.
2. Presumptions under Sections 118 and 139 of the NI Act and their rebuttal
The Court noted that the signatures on the cheques were undisputed, thereby attracting the presumption under Section 118 that the cheques were drawn for consideration, and under Section 139 that the cheques were issued in discharge of a legally enforceable debt or liability. These presumptions shift the burden onto the accused to rebut them by adducing a probable defense.
It was clarified that the accused need not conclusively disprove the existence of debt/liability beyond reasonable doubt but must establish on a preponderance of probabilities that the cheques were not issued in discharge of such debt. The Court extensively relied on the recent Supreme Court exposition in Rajesh Jain v. Ajay Singh, which elaborated that the accused may discharge this burden through direct or circumstantial evidence, or by invoking presumptions under the Evidence Act. Once the accused meets this burden, the presumption disappears and the complainant must prove the existence of debt/liability as a matter of fact.
3. Application of law to facts regarding existence of debt/liability
The respondents contended that the transaction was not a sale of property but a mortgage loan of Rs. 4.5 lakhs, which had been repaid. They produced seventeen receipts and bank statements evidencing payments totaling approximately Rs. 3,34,820/- towards the loan. The Trial Court accepted this defense as plausible and noted the absence of the original agreement to sell the property, as well as the improbability of the property being sold for the low price of Rs. 4.5 lakhs.
The petitioner denied the loan transaction and claimed the receipts pertained to separate transactions, but failed to provide a cogent explanation for the payments or produce the original sale agreement. The Court observed that the petitioner's own admissions and documentary evidence supported the accused's version, thereby satisfying the preponderance of probabilities test in favor of the accused.
Additionally, the Court noted the peculiarity that the cheques in question totaled Rs. 6.5 lakhs, exceeding the alleged debt of Rs. 4.5 lakhs, without any explanation from the petitioner.
4. Effect of settlement entered during trial
The petitioner argued that the accused had admitted the debt by entering into a settlement before the Trial Court and had failed to comply with the payment terms, thus entitling the complainant to maintain the complaints. The accused denied knowledge of the settlement or claimed it was signed without reading.
The Court observed that a settlement subsumes the original complaint and once entered, the complainant can either pursue a fresh cause of action for breach of settlement or proceed with the original complaint. However, the complainant must prove the foundational facts of the complaint independently. The Court noted that the Trial Court had kept the matter pending for compliance with the settlement and only proceeded on merits after the accused failed to comply.
The petitioner had not taken steps to enforce the settlement, and the Court held that mere entry into a settlement does not constitute an admission of debt. Therefore, the complainant was still required to prove the existence of a legally enforceable debt/liability as per the NI Act provisions.
5. Treatment of competing arguments and evidentiary findings
The Court found that the Trial Court had carefully considered the evidence, including the documentary proof and the parties' statements. The petitioner's failure to produce the original sale agreement, the improbability of the sale price, and the credible documentary evidence produced by the accused weighed in favor of the accused's defense.
The Court also took note of a police complaint filed by the accused against the petitioner alleging threats and misuse of blank cheques, lending further credence to the accused's defense.
The petitioner's arguments were found to be based on surmises and conjectures without sufficient evidentiary support. The Court concluded that the Trial Court's appreciation of evidence was neither perverse nor unsustainable.
Significant Holdings:
"The restriction on the power of Appellate Court in regard to other offence does not apply with same vigour in the offence under NI Act which entails presumption against the accused."
"Once the execution of the cheque is admitted, the presumption under Section 118 of the NI Act that the cheque in question was drawn for consideration and the presumption under Section 139 of the NI Act that the holder of the cheque received the cheque in discharge of a legally enforceable debt or liability are raised against the accused."
"The accused is not expected to prove the non-existence of the presumed fact beyond reasonable doubt. The accused must meet the standard of 'preponderance of probabilities', similar to a defendant in a civil proceeding."
"Once the accused adduces evidence to the satisfaction of the Court that on a preponderance of probabilities there exists no debt/liability in the manner pleaded in the complaint or the demand notice or the affidavit-evidence, the burden shifts to the complainant and the presumption 'disappears' and does not haunt the accused any longer."
"The mere fact that the accused had entered into a settlement cannot be construed to be an admission of debt and the complainant was still required to establish the foundational facts in the present case."
"This Court finds no such perversity in the impugned judgments so as to merit an interference in the findings of acquittal."
The Court dismissed the appeals, upholding the acquittal of the accused respondents. The principles reaffirmed include the nature and effect of statutory presumptions under the NI Act, the evidentiary burden on the accused to rebut such presumptions on a preponderance of probabilities, and the limited scope of appellate interference in acquittals unless the trial court's findings are perverse or wholly unsustainable. The judgment also clarifies the legal effect of settlements in such proceedings and underscores the necessity for the complainant to prove the foundational facts of debt/liability notwithstanding any interim settlements.
Dishonour of cheques - returned back with the reason– “Funds Insufficient” - discharge of legally enforceable debt or liability Offence punishable u/s 138 of the NI Act - rebuttable the statutory presumptions - Challenged the acquittal of an accused -effect of the settlement entered into between the parties during trial - veracity of the receipts and payments - HELD THAT:- It was observed that even though the accused Sandeep had agreed to his signatures on the agreement to sale, however, it was disputed that the property had been sold. Also, as noted in the impugned judgments, the petitioner never produced the original agreement to sell. The learned Trial Court rightly observed that the sale price for the subject property by no stretch of imagination could be merely ₹ 4,50,000/- and the defence of the accused persons that the subject property had been only been mortgaged seemed more reliable in view of Exhibit CW1/D1. The petitioner has not contested the observation regarding price of the property and also not placed any material on record to controvert the said observation.
As far as the veracity of the receipts [Exhibit CW1/D2 (colly)] and payments are concerned, although the complainant had sought to explain that he had extended 2-3 loans to the accused Sandeep for a sum of ₹ 30,000/- to ₹ 40,000/-, however, as noted by the learned Trial Court, no cogent explanation was furnished as to why he had received payments from the accused persons for over ₹ 3 lakhs as seen from the seventeen receipts and bank transactions. The learned Trial Court also noted that it is feasible that some of the receipts had been misplaced by the accused persons as the disputes pertain to the year 2011. It is also relevant to note that the petitioner had made no mention of the prior loans in the complaint.
Even if the case of the complainant is taken at the highest, it is also peculiar to note that while a debt of ₹ 4.5 lakhs has been claimed to be due on part of the accused persons, the total amount of the cheques in dispute comes to ₹ 6.5 lakhs. No explanation has been given by the complainant as to why the cheques were drawn for an amount higher than the alleged debt of ₹ 4.5 lakhs.
The main thrust of the petitioner is on the fact that the parties had apparently settled the matter at one point and the respondents had failed to make the payments as per the settlement. It is argued that the sheer fact that the parties had settled the matter, shows the legitimacy of the debt. The accused persons had denied the settlement and contended that the statement dated 25.07.2014 was signed by accused Sandeep without reading the same. The accused Jyoti altogether denied any knowledge of the settlement. It was also stated that the petitioner had assured the accused Sandeep that he would withdraw the present complaints on receiving ₹ 30,000/- to ₹ 40,000/-.
A party may enter into a compromise for a number of reasons, especially, to avoid undergoing through the harassment of trial and mitigate the uncertainty of their odds in litigation. A party may also enter into a settlement due to the relationship with the other party. Undisputably, once the settlement is arrived at between the parties and made part of the Court record, the same subsumes the original complaint. If the accused party fails to follow through with the settlement, it is open to the complainant to pursue the fresh cause of action that arises from breach of the settlement if the settlement has attained finality or to pursue the original complaint as has been done by the complainant in the present case. In the latter case, however, the complainant has to proceed in accordance with law and prove the foundational facts as alleged in the complaint as per the provisions of NI Act. The complainant however cannot pursue parallel proceedings in relation to the same transaction.
It is relevant to note that in the present case, the learned Trial Court kept the matters pending for compliance of the agreed settlement terms. Thereafter, when the accused persons failed to make the requisite payments, the matter was proceeded on merits.
On being pointedly asked, the learned counsel for the petitioner submitted that the petitioner has taken no steps to secure compliance of the settlement. There was no adjudication in the present case regarding existence of any debt before the parties entered into the settlement.
Insofar as the effect of the settlement on the merits of the present cases are concerned, as noted above, while it was open to the petitioner to pursue his civil and criminal remedies against non- compliance of the settlement, the mere fact that the accused had entered into a settlement cannot be construed to be an admission of debt and the complainant was still required to establish the foundational facts in the present case.
From appreciation of evidence, in the opinion of this Court, the respective respondents have been able to satisfy the test of preponderance of possibilities and rebut the presumptions stipulated in Sections 118 and 139 of the NI Act.
Thus, this Court finds no such perversity in the impugned judgments so as to merit an interference in the findings of acquittal.
The present appeals are dismissed in the aforesaid terms.
TaxTMI 