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The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Liability of the purchaser for ITC claimed when the supplier fails to deposit tax
Relevant legal framework and precedents: Section 16(2)(c) of the GST Act provides that ITC shall be available only if the supplier has deposited the tax charged on the invoice with the government treasury. Section 70 empowers authorities to issue notices upon discrepancies in returns, and Section 73 deals with recovery of wrongly claimed ITC. The Court relied on the Supreme Court judgment in Assistant Commissioner of State Tax Vs. Suncraft Energy Pvt. Ltd., which held that when the purchaser has paid tax on invoices and the supplier fails to discharge their duties, the matter should be remanded for inquiry against the supplier.
Court's interpretation and reasoning: The Court observed that the petitioner, as a registered supplier, had purchased recharge coupons against seven tax invoices amounting to Rs. 1,58,46,502/- and claimed ITC of Rs. 28,52,370/-. The GST charged (CGST and SGST) on these invoices was paid by the petitioner through RTGS, which was duly recorded. The Court noted that the petitioner had discharged its tax liability and had no control over the supplier's failure to deposit the tax or file returns timely.
Key evidence and findings: The petitioner submitted payment proofs via banking channels, and the record showed that the supplier's failure to deposit tax had led to proceedings initiated against the supplier. A letter from the Joint Commissioner confirmed that action was taken against the selling dealer. However, the appellate authority failed to give weight to this fact.
Application of law to facts: The Court emphasized that the purchaser cannot be compelled to suffer for the supplier's non-performance of statutory duties. The GST Act does not impose an obligation on the purchaser to ensure the supplier's compliance. Therefore, the purchaser who has discharged its tax liability should not be penalized or denied ITC on account of the supplier's default.
Treatment of competing arguments: The State contended that ITC benefit is conditional upon the tax being deposited with the government treasury and that non-payment by the supplier justified reversal of ITC and imposition of penalty and interest on the petitioner. The Court rejected this argument, holding that the purchaser's payment through banking channels and valid tax invoices sufficed to discharge their liability.
Conclusions: The Court concluded that the petitioner's claim of ITC was legitimate and that the liability for non-payment of tax rests with the supplier. The petitioner cannot be held responsible or penalized for the supplier's failure to deposit tax.
Issue 2: Validity and propriety of the orders passed under Sections 70 and 73 of the GST Act
Relevant legal framework and precedents: Section 70 allows issuance of notices upon detection of discrepancies in returns. Section 73 permits recovery of wrongly claimed ITC. The Court referred to the Madras High Court decision in D.Y. Beathel Enterprises Vs. State Tax Officer, which held that in cases of supplier default, action must be taken against the supplier and the purchaser should not be penalized alone.
Court's interpretation and reasoning: The Court found that the orders passed by the Deputy Commissioner and Additional Commissioner (Appeals) directing the petitioner to deposit Rs. 28,52,370/- along with 10% penalty and interest on reversed ITC were not sustainable. The appellate authority failed to consider the evidence of payment and the ongoing proceedings against the supplier.
Key evidence and findings: The petitioner's replies to notices under Sections 70 and 73, payment proofs, and the letter indicating action against the supplier were on record but disregarded by the authorities. The petitioner had also requested that recovery proceedings be initiated against the supplier rather than the purchaser.
Application of law to facts: The Court held that the authorities erred in not giving due consideration to the petitioner's compliance and the supplier's default. The impugned orders were quashed, and the matter was remanded for fresh consideration with directions to hear all stakeholders and pass a reasoned order.
Treatment of competing arguments: The State's insistence on strict compliance with Section 16(2)(c) and recovery from the purchaser was rejected in light of the petitioner's payment and the principle that the purchaser cannot be penalized for supplier default.
Conclusions: The impugned orders under Sections 70 and 73 were set aside, and the matter was remanded for fresh adjudication.
3. SIGNIFICANT HOLDINGS
The Court held:
"It is a matter of common knowledge that under the provision of the GST Act, the purchaser cannot compel the selling dealer to deposit the amount of tax realized from the petitioner with the government treasury."
"The purchasing dealer cannot be left at the mercy of the selling dealer. When the petitioner has discharged his duties diligently, it is the onus upon the assessing authority to duly communicate about the said fact i.e. the purchase has been made through tax invoices and payments have been made through banking channel and therefore, the authority ought to have counterpart of the selling dealer have initiated action and action has been taken with the benefit ought to have given to the petitioner."
"In view of the above facts as stated, the matter requires reconsideration. Accordingly, the impugned orders cannot be sustained in the eyes of law and the same are hereby quashed."
Core principles established include:
Final determinations:
Non-payment of tax by the selling dealer under the GST Act - entitlement to claim ITC u/s 16(2)(c) of the GST Act - HELD THAT:- The record shows that the amount of GST charged over the said tax invoices, were paid through banking channel i.e. by R.T.G.S. - The record further shows that for non discharge of their duties by the selling dealer, the proceedings were initiated against the selling dealer as evident from the letter dated 05.09.2022 issued by the Joint Commissioner (Corporate Circle) - II, Commercial Tax, Lucknow, a copy of which has been annexed as Annexure No.9, at page no. 73 of the writ petition. The said fact was noticed by the appellate authority but no weightage has been given to the same. It is a matter of common knowledge that under the provision of the GST Act, the purchaser cannot compel the selling dealer to deposit the amount of tax realized from the petitioner with the government treasury.
The Hon’ble Apex Court in the case of Suncraft Energy [2023 (12) TMI 739 - SC ORDER] had occasioned to consider that the party who has paid the tax on invoices being raised and non-discharge of duties by the counterpart of the seller, the Court was pleased to remand the matter for making due inquiry from the supplier.
Similarly, the Madaras High Court in the case of D.Y. Beathel Enterprises Vs. State Tax Officer (Data Cell), Tirunelveli, [2021 (3) TMI 1020 - MADRAS HIGH COURT] has taken a view that in absence of non-performance of duty by the supplier, action must be taken against the supplier simultaneously and the purchaser alone shall not be suffered.
The impugned orders cannot be sustained in the eyes of law and the same are hereby quashed - the matter requires reconsideration - Petition allowed by way of remand.
Non-payment of tax by the selling dealer under the GST Act - entitlement to claim ITC u/s 16(2)(c) of the GST Act - HELD THAT:- The record shows that the amount of GST charged over the said tax invoices, were paid through banking channel i.e. by R.T.G.S. - The record further shows that for non discharge of their duties by the selling dealer, the proceedings were initiated against the selling dealer as evident from the letter dated 05.09.2022 issued by the Joint Commissioner (Corporate Circle) - II, Commercial Tax, Lucknow, a copy of which has been annexed as Annexure No.9, at page no. 73 of the writ petition. The said fact was noticed by the appellate authority but no weightage has been given to the same. It is a matter of common knowledge that under the provision of the GST Act, the purchaser cannot compel the selling dealer to deposit the amount of tax realized from the petitioner with the government treasury.
The Hon’ble Apex Court in the case of Suncraft Energy [2023 (12) TMI 739 - SC ORDER] had occasioned to consider that the party who has paid the tax on invoices being raised and non-discharge of duties by the counterpart of the seller, the Court was pleased to remand the matter for making due inquiry from the supplier.
Similarly, the Madaras High Court in the case of D.Y. Beathel Enterprises Vs. State Tax Officer (Data Cell), Tirunelveli, [2021 (3) TMI 1020 - MADRAS HIGH COURT] has taken a view that in absence of non-performance of duty by the supplier, action must be taken against the supplier simultaneously and the purchaser alone shall not be suffered.
The impugned orders cannot be sustained in the eyes of law and the same are hereby quashed - the matter requires reconsideration - Petition allowed by way of remand.
(I) Whether the "Proper Officer/Adjudicating Officer" has the power to adjudicate on the penalty provision under Section 122 of the Central Goods and Services Tax (CGST) Act, 2017;
(II) Whether the dropping of proceedings under Section 74 of the CGST Act against the main person automatically results in abatement of proceedings under Section 122 of the CGST Act against the same person.
Issue-wise detailed analysis:
Issue (I): Power of Proper Officer to Adjudicate Penalty under Section 122 CGST Act
Relevant legal framework and precedents: Section 122 of the CGST Act enumerates twenty-one specific offences attracting penalty, distinct from Sections 73 and 74 which deal with determination of tax not paid or short paid due to fraud or wilful misstatement. Section 74 proceedings are initiated by a proper officer, who also issues show cause notices and adjudicates penalties under that section. Section 122 is located in Chapter XIX titled 'Offences and Penalties', alongside Section 132 which provides for punishment for certain offences by criminal courts, subject to prior sanction of the Commissioner as per Section 132(6) and Section 134.
Supreme Court precedents such as Standard Chartered Bank, Shiv Dutt Rai Fateh Chand, Gujarat Travancore Agency, and M.C.T.M. Corporation Pvt. Ltd. have clarified the distinction between penalty and punishment, emphasizing that penalty in tax statutes is generally a civil liability, remedial and coercive in nature, and does not necessarily require mens rea or criminal trial. The definition of 'offence' under the General Clauses Act and CrPC includes acts or omissions made punishable by law, but the presence of penalty does not ipso facto convert a provision into criminal proceedings.
Court's interpretation and reasoning: The Court analyzed the scheme of the CGST Act, noting that Section 122 imposes penalty for various contraventions, some involving mens rea, others not. It distinguished Section 122 penalties from Section 132 punishments, the latter requiring prosecution in criminal courts with prior sanction. The absence of any reference to 'proper officer' in Section 122 was examined in light of Explanation 1(ii) to Section 74, which contemplates that the proper officer initiating proceedings under Sections 73 and 74 also initiates proceedings under Sections 122 and 125. Further, Rule 142 of the CGST Rules mandates that proper officers issue notices and orders under Section 122, indicating legislative intent for departmental adjudication.
The Court rejected the petitioner's argument that penalty under Section 122 is criminal in nature and requires trial in criminal courts. It held that the penal provisions under Section 122 are adjudicatory and civil in nature, designed to deter unlawful acts related to tax evasion without necessitating criminal prosecution. The Court emphasized that the presence of mens rea in some sub-clauses of Section 122 does not convert the entire provision into a criminal offence, as civil penalties may also require mens rea. The legislative scheme clearly separates civil penalties under Section 122 from criminal punishments under Section 132, the latter being more serious and requiring prior sanction and criminal trial.
Key evidence and findings: The Court relied on the statutory text, legislative intent, CBIC Circulars, and authoritative judicial precedents to conclude that proper officers have the power to adjudicate penalties under Section 122. The procedural framework under the CGST Rules further supported this conclusion.
Application of law to facts: The petitioner's contention that penalty under Section 122 cannot be adjudicated by the department was rejected as inconsistent with the statutory scheme and practical administration of GST laws. The Court found no merit in the argument that Section 122 penalties require criminal trial.
Treatment of competing arguments: The petitioner's arguments based on the heading of Section 122, the absence of reference to proper officer, reliance on definitions of offence under CrPC, and the need for predicate offence under Sections 73/74 were considered but found unpersuasive. The respondents' submissions emphasizing the civil nature of penalty, legislative scheme, and practical considerations were accepted.
Conclusion: The Court held that the proper officer/adjudicating officer has the power to adjudicate penalty under Section 122 of the CGST Act and that these proceedings are not criminal prosecutions requiring trial in criminal courts.
Issue (II): Effect of Dropping Proceedings under Section 74 on Proceedings under Section 122
Relevant legal framework and precedents: Explanation 1(ii) to Section 74 of the CGST Act states that where proceedings against the main person under Section 73 or 74 have been concluded, the proceedings against all persons liable to pay penalty under Sections 122 and 125 are deemed to be concluded. However, Explanation 1(i) excludes proceedings under Section 132 from this deeming provision.
CBIC Circular No. 171/03/2022-GST clarifies that contraventions under Sections 73/74 need not necessarily overlap with offences under Section 122. Supreme Court judgments emphasize the distinct nature of penalties under different provisions.
Court's interpretation and reasoning: The Court interpreted Explanation 1(ii) to mean that the abatement of proceedings under Section 74 against the main person results in abatement of penalty proceedings under Section 122 only against other persons liable to pay penalty, not necessarily the main person. The Court explained through hypothetical examples that the same person may be liable under different provisions for different contraventions. Therefore, dropping proceedings under Section 74 does not ipso facto abate proceedings under Section 122 against the main person.
Key evidence and findings: The Court relied on the statutory language, circulars, and practical examples to demonstrate the independence of proceedings under Sections 74 and 122.
Application of law to facts: In the present case, the department dropped proceedings under Section 74 against the petitioner's units in Haryana and Maharashtra but continued penalty proceedings under Section 122 against them. The Court held this approach consistent with the statutory scheme.
Treatment of competing arguments: The petitioner's argument that abatement under Section 74 should lead to abatement under Section 122 was rejected as inconsistent with the statutory scheme and legislative intent.
Conclusion: Dropping proceedings under Section 74 does not automatically abate proceedings under Section 122 against the same person, as they relate to different offences and penalties.
Significant holdings:
"The word 'offence' does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence."
"Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand, penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment."
"The penal provisions under Section 122 of the CGST Act are adjudicatory and civil in nature, designed to deter unlawful acts related to tax evasion without necessitating criminal prosecution."
"The proper officer/adjudicating officer has the power to adjudicate penalty under Section 122 of the CGST Act and these proceedings are not criminal prosecutions requiring trial in criminal courts."
"Dropping of proceedings under Section 74 of the CGST Act against the main person does not ipso facto abate the proceedings under Section 122 of the CGST Act against the same person, as these relate to different offences and penalties."
"Explanation 1(ii) to Section 74 of the CGST Act contemplates that conclusion of proceedings against the main person under Section 73 or 74 shall conclude proceedings against other persons liable to pay penalty under Sections 122 and 125, but not necessarily the main person."
"The legislative scheme clearly separates civil penalties under Section 122 from criminal punishments under Section 132, the latter being more serious and requiring prior sanction and criminal trial."
"Rule 142 of the CGST Rules mandates that proper officers issue notices and orders under Section 122, indicating legislative intent for departmental adjudication."
"The absence of any reference to 'proper officer' in Section 122 is not determinative of the nature of proceedings and does not imply that Section 122 proceedings are criminal prosecutions."
"The object of the legislature in levying penalty under tax statutes is deterrence against tax evasion and protection of public revenue."
Accordingly, the writ petition challenging the imposition of penalty under Section 122 was dismissed, and the respondent authorities were directed to continue the proceedings under Section 122 in accordance with the show cause notice.
Power of Proper Officer/Adjudicating Officer to adjudicate on the penalty provision provided u/s 122 of the CGST Act - dropping of proceedings under Section 74 of the CGST Act, 2017 will ipso facto abate the proceedings under Section 122 of the CGST Act or not.
HELD THAT:- The word ‘offence’ does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence. Similarly, ‘penalty’ is a slippery word and the same has to be understood in the context in which it is used in a given statute. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. However, there would be circumstances for certain offences, penalty may not be imposed and the same may be punishable by incarceration. Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand, penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment. A statute may provide for further punishment by prosecution for the same offence/contravention, if the legislature deems it necessary.
The Supreme Court in Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. [1982 (12) TMI 220 - SUPREME COURT], relied upon by the petitioner, has held that once the statute leaves the parliament, Court is the sole authority to interpret what the parliament intends through the language of the statute and other permissible aids.
Both Sections 74 and 122 being charging sections are required to be interpreted strictly and plain meaning to the word used therein should be provided by the courts. An absurd interpretation that makes the charging sections unworkable should be avoided. This does not mean that a person who is not liable to tax or to penalty should be roped into the charging provision simpliciter to curb evasion of taxes. However, the court is allowed to look at all the provision of the statute to bring about a harmonious construction and come to an interpretation which could make the statute workable. A word may have several meanings and the court may choose the meaning that could harmonise the entire statute instead of putting a meaning that would be contrary to the intention of the Legislature.
In Sukhpal Singh Bal [2005 (9) TMI 633 - SUPREME COURT], the Supreme Court while pondering the vires of penalty imposed under Section 10(3) of the Uttar Pradesh Motor Vehicles Taxation Act, 1997, in relation to the object behind imposing penalty in tax statutes has held that the penalty provision is enacted to protect public revenue and deter tax evasion while serving a compensatory role for breaches of statutory tax duties.
Thus, penalty may be imposed in cases where men rea is a requirement. It is the scheme of a particular statute that shall determine whether for imposition of penalty there is a requirement for men rea or not. However, when a taxing statute speaks of prosecution, for those offences mens rea or guilty intent is a sine qua non.
It is clear that there may be scenarios where a proceeding under Section 73/74 of the CGST Act may get concluded against the main person but the penalty proceedings under Section 122 of the CGST Act for issue of fake invoices by the main person may stand independent of the proceedings under Section 74, and therefore, those proceedings under Section 122 would not abate as per the explanation 1(ii) of Section 74.
Conclusion - Section 122 of the CGST Act is a provision specifically for imposition of penalty to be adjudicated by the proper officer while the provisions from Sections 132 to 138 deal with prosecution to be done by the criminal courts. Moreover, conclusion of proceedings on the main person under Section 74 of the CGST Act shall not ipso facto abate the proceedings under Section 122 of the CGST Act proposed to be imposed on the main person. The scheme of the CGST Act read with CGST Rules lead one to the inescapable conclusion that the arguments raised by the petitioner, though innovative and thought provoking, are fallacious as the interpretation given by the petitioner would lead to obfuscation of the very purpose and objective of the CGST Act. In light of the same, the contentions of the petitioner cannot be countenanced and, are accordingly, rejected.
Petition dismissed.
Power of Proper Officer/Adjudicating Officer to adjudicate on the penalty provision provided u/s 122 of the CGST Act - dropping of proceedings under Section 74 of the CGST Act, 2017 will ipso facto abate the proceedings under Section 122 of the CGST Act or not.
HELD THAT:- The word ‘offence’ does not necessarily under all circumstances mean a crime that is required to be tried by the criminal court. A contravention of a rule/law wherein criminal proceedings are not initiated but only penalty is imposed for the purpose of deterrence would also amount to an offence. Similarly, ‘penalty’ is a slippery word and the same has to be understood in the context in which it is used in a given statute. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. However, there would be circumstances for certain offences, penalty may not be imposed and the same may be punishable by incarceration. Penalty may be imposed in cases where there is a simple violation of a law or for omission to do a particular act without there being any mens rea. On the other hand, penalty may also be imposed for serious contravention of the law with or without mens rea that may amount to an offence for the purpose of deterrence and punishment. A statute may provide for further punishment by prosecution for the same offence/contravention, if the legislature deems it necessary.
The Supreme Court in Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. [1982 (12) TMI 220 - SUPREME COURT], relied upon by the petitioner, has held that once the statute leaves the parliament, Court is the sole authority to interpret what the parliament intends through the language of the statute and other permissible aids.
Both Sections 74 and 122 being charging sections are required to be interpreted strictly and plain meaning to the word used therein should be provided by the courts. An absurd interpretation that makes the charging sections unworkable should be avoided. This does not mean that a person who is not liable to tax or to penalty should be roped into the charging provision simpliciter to curb evasion of taxes. However, the court is allowed to look at all the provision of the statute to bring about a harmonious construction and come to an interpretation which could make the statute workable. A word may have several meanings and the court may choose the meaning that could harmonise the entire statute instead of putting a meaning that would be contrary to the intention of the Legislature.
In Sukhpal Singh Bal [2005 (9) TMI 633 - SUPREME COURT], the Supreme Court while pondering the vires of penalty imposed under Section 10(3) of the Uttar Pradesh Motor Vehicles Taxation Act, 1997, in relation to the object behind imposing penalty in tax statutes has held that the penalty provision is enacted to protect public revenue and deter tax evasion while serving a compensatory role for breaches of statutory tax duties.
Thus, penalty may be imposed in cases where men rea is a requirement. It is the scheme of a particular statute that shall determine whether for imposition of penalty there is a requirement for men rea or not. However, when a taxing statute speaks of prosecution, for those offences mens rea or guilty intent is a sine qua non.
It is clear that there may be scenarios where a proceeding under Section 73/74 of the CGST Act may get concluded against the main person but the penalty proceedings under Section 122 of the CGST Act for issue of fake invoices by the main person may stand independent of the proceedings under Section 74, and therefore, those proceedings under Section 122 would not abate as per the explanation 1(ii) of Section 74.
Conclusion - Section 122 of the CGST Act is a provision specifically for imposition of penalty to be adjudicated by the proper officer while the provisions from Sections 132 to 138 deal with prosecution to be done by the criminal courts. Moreover, conclusion of proceedings on the main person under Section 74 of the CGST Act shall not ipso facto abate the proceedings under Section 122 of the CGST Act proposed to be imposed on the main person. The scheme of the CGST Act read with CGST Rules lead one to the inescapable conclusion that the arguments raised by the petitioner, though innovative and thought provoking, are fallacious as the interpretation given by the petitioner would lead to obfuscation of the very purpose and objective of the CGST Act. In light of the same, the contentions of the petitioner cannot be countenanced and, are accordingly, rejected.
Petition dismissed.
The core legal questions considered by the Court in these petitions are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to Bail under Section 483 of Bharatiya Nagarik Suraksha Sanhita, 2023 in offences under Section 132(1)(b) and (c) of the CGST Act
Relevant legal framework and precedents: Section 132 of the CGST Act prescribes punishment for offences such as issuing invoices without supply of goods or services and availing ITC fraudulently. The punishment varies with the amount of tax evaded or ITC wrongly availed, with imprisonment extending up to five years for amounts exceeding Rs. 5 crores. Section 138 of the CGST Act makes these offences compoundable. The petitions invoke Section 483 of the Bharatiya Nagarik Suraksha Sanhita, 2023, which governs bail procedures.
Judicial precedents including Dataram Singh v. State of U.P. and others (2018) and Sanjay Chandra v. CBI (2012) emphasize the presumption of innocence, the rule that grant of bail is the norm and refusal the exception, and the necessity to balance the rights of the accused with the interests of justice. The Court also relied on Supreme Court rulings in P. Chidambaram v. Directorate of Enforcement (2020) and Satender Kumar Antil v. CBI (2022) which reaffirm these principles in economic offence contexts.
Court's interpretation and reasoning: The Court observed that while the offences are serious and involve allegations of large-scale tax evasion through fake invoicing, the statutory maximum punishment is five years. The evidence is primarily documentary and electronic, reducing the risk of witness tampering or obstruction of justice. The petitioners have been in custody since 13.12.2024, and no custodial interrogation is claimed necessary by the investigating agency. The Court noted that the offences are triable by Magistrate, and the trial may take considerable time.
Key evidence and findings: The complaint alleges the petitioners' involvement in a racket generating fake invoices to claim ITC amounting to Rs. 29.50 crores. Investigations revealed non-existent or closed firms, fraudulent use of proprietors' documents, and no actual movement of goods. E-way bills were generated for non-goods vehicles, indicating further fraud. However, the exact quantum of tax evaded is yet to be determined by competent authorities through assessment and adjudication.
Application of law to facts: The Court applied the legal framework to the factual matrix, recognizing the seriousness but also the procedural safeguards and the nature of evidence. It balanced the gravity of the offence against the absence of custodial interrogation needs and the documentary nature of evidence.
Treatment of competing arguments: The petitioners argued false implication, genuineness of their manufacturing business, absence of criminal antecedents, and readiness to abide by bail conditions. The State argued the massive scale of evasion, risk of fleeing or tampering with evidence, and loss to government revenue. The Court found the petitioners' arguments persuasive given the circumstances and the safeguards that can be imposed.
Conclusion: The Court concluded that the petitioners are entitled to bail subject to strict conditions to ensure cooperation and prevent tampering or fleeing.
Issue 2: Principles governing grant of bail in economic offences
Relevant legal framework and precedents: The Court extensively discussed the principles laid down by the Supreme Court in various judgments, including Dataram Singh, Sanjay Chandra, P. Chidambaram, and others. These emphasize that bail is the rule and jail the exception, even in economic offences. The factors to be considered include prima facie case, nature and gravity of offence, severity of punishment, risk of absconding, character and standing of accused, likelihood of repeating offence, and risk of tampering with evidence.
Court's interpretation and reasoning: The Court reiterated that economic offences cannot be categorically denied bail. Each case must be examined on its facts. The Court underscored that the maximum punishment prescribed, the nature of evidence, and the stage of trial are critical. The Court noted that the petitioners had been in custody for over two months and that the evidence was documentary and electronic, reducing concerns about tampering.
Key evidence and findings: The Court reviewed the nature of evidence and the petitioners' conduct. It found no material indicating risk of absconding or tampering, especially given the petitioners' permanent business establishments and absence of criminal antecedents.
Application of law to facts: Applying the principles, the Court found no exceptional circumstances warranting continued detention. The petitioners' release on bail with conditions was appropriate to balance the interests of justice and the rights of the accused.
Treatment of competing arguments: The State's apprehensions of risk were acknowledged but found insufficient to override the presumption in favor of bail, especially given the safeguards that could be imposed.
Conclusion: The Court held that bail should be granted subject to conditions and safeguards.
Issue 3: Consideration of precedents cited by petitioners
Relevant legal framework and precedents: The petitioners relied on multiple precedents where bail was granted in similar cases involving GST offences and economic crimes punishable with up to five years' imprisonment, including Ratnambar Kaushik, Ashutosh Garg, Vipin Garg alias Bindu, Yash Goyal, Vineet Jain, and others.
Court's interpretation and reasoning: The Court analyzed these precedents, noting that in each, the Supreme Court or High Courts granted bail considering factors such as the accused's custodial period, nature of evidence, maximum punishment, and trial duration. The Court highlighted Vineet Jain's case where the Supreme Court expressed surprise at denial of bail in such cases and emphasized that bail should ordinarily be granted unless extraordinary circumstances exist.
Key evidence and findings: The Court found these precedents analogous and supportive of the petitioners' case for bail.
Application of law to facts: The Court applied the principles and reasoning from these precedents to the facts at hand, reinforcing the entitlement to bail.
Treatment of competing arguments: The petitioners' reliance on these authorities was accepted as valid and persuasive.
Conclusion: The precedents reinforced the Court's decision to grant bail.
3. SIGNIFICANT HOLDINGS
"A fundamental postulate of criminal jurisprudence is the presumption of innocence, meaning thereby that a person is believed to be innocent until found guilty... grant of bail is the general rule and putting a person in jail... is an exception."
"While considering the prayer for grant of bail in any offence, including economic offences, it is not a rule that bail should be denied in every case where the allegation is one of grave economic offences... The broad parameters to be considered... include prima facie case, nature and gravity of charge, severity of punishment, risk of absconding, character of accused, likelihood of repetition, apprehension of witness tampering, and danger of justice being thwarted."
"In cases where the evidence to be rendered is essentially documentary and electronic... there cannot be any apprehension of tampering, intimidating or influencing the witnesses."
"We are surprised to note that in a case like this, the appellant has been denied the benefit of bail at all levels... These are the cases where in normal course, before the Trial Courts, the accused should get bail unless there are some extraordinary circumstances."
Final determinations:
Seeking grant of regular bail - running a racket of issuing fake invoices in the name of other firms - offences u/s 132 (1) (b) and 132 (1) (C) of the Central Goods & Service Tax Act, 2017 - HELD THAT:- As per the allegations, the petitioners are involved in the racket of fake invoicing, thereby causing loss to the govt. exchequer through fraudulent GST input tax credit claims. However, the claims are yet to be determined by the competent authority of the respondent by making proper assessment/adjudication. As such, it is only after assessment/adjudication that the liability of the petitioners with regard to exact amount of evasion of tax is to be determined under the relevant provisions of CGST Act. A complaint has already been filed against the petitioners. They are in custody since 13.12.2024. Nothing has been shown to this Court which may justify the further detention of the petitioners in prison.
Considering that the alleged offences are punishable with maximum punishment up to 05 years and also keeping in view that in such circumstances, the further detention of the petitioners may not at all be justified since in case of this nature, the evidence to be rendered by the respondent would essentially be documentary and electronic, which will be through official witnesses, due to which, there cannot be any apprehension of tampering, intimidating or influencing the witnesses and further as it appears justified to strike a fine balance between the need for further detention of the petitioner when no custodial interrogation has been claimed at all by the department, this Court considers that the petitioners are entitled to be released on bail but subject to certain conditions.
Conclusion - The petitions moved by both the petitioners are hereby allowed and they are ordered to be released on regular bail on their furnishing personal bonds with two sureties in the like amount each to the satisfaction of the Court concerned/Duty Magistrate, subject to fulfilment of conditions imposed.
Bail application allowed.
Seeking grant of regular bail - running a racket of issuing fake invoices in the name of other firms - offences u/s 132 (1) (b) and 132 (1) (C) of the Central Goods & Service Tax Act, 2017 - HELD THAT:- As per the allegations, the petitioners are involved in the racket of fake invoicing, thereby causing loss to the govt. exchequer through fraudulent GST input tax credit claims. However, the claims are yet to be determined by the competent authority of the respondent by making proper assessment/adjudication. As such, it is only after assessment/adjudication that the liability of the petitioners with regard to exact amount of evasion of tax is to be determined under the relevant provisions of CGST Act. A complaint has already been filed against the petitioners. They are in custody since 13.12.2024. Nothing has been shown to this Court which may justify the further detention of the petitioners in prison.
Considering that the alleged offences are punishable with maximum punishment up to 05 years and also keeping in view that in such circumstances, the further detention of the petitioners may not at all be justified since in case of this nature, the evidence to be rendered by the respondent would essentially be documentary and electronic, which will be through official witnesses, due to which, there cannot be any apprehension of tampering, intimidating or influencing the witnesses and further as it appears justified to strike a fine balance between the need for further detention of the petitioner when no custodial interrogation has been claimed at all by the department, this Court considers that the petitioners are entitled to be released on bail but subject to certain conditions.
Conclusion - The petitions moved by both the petitioners are hereby allowed and they are ordered to be released on regular bail on their furnishing personal bonds with two sureties in the like amount each to the satisfaction of the Court concerned/Duty Magistrate, subject to fulfilment of conditions imposed.
Bail application allowed.
- Whether the Show Cause Notices (SCNs) issued for cancellation of GST registrations were valid, particularly regarding the requirement to state reasons for cancellation.
- Whether the SCNs filed along with the petitions were genuine or forged.
- The authenticity of the affidavits filed by the petitioners, including the verification of the identity of the deponents through Aadhaar cards and physical presence before the Oath Commissioner.
- The legality and validity of the cancellation orders of GST registrations based on the SCNs and affidavits submitted.
- The extent of fraudulent practices involved in the filing of petitions, including the use of forged Aadhaar cards and fictitious identities.
- The procedural and investigatory steps to verify the identities of petitioners and the authenticity of documents submitted to the Court.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of Show Cause Notices (SCNs) and requirement of reasons for cancellation of GST registrations
The legal framework under GST law requires that any cancellation of registration must be preceded by a Show Cause Notice specifying reasons for such cancellation. The predecessor bench had relied on the SCNs filed along with the writ petitions, which allegedly did not mention any reasons for cancellation. This led to the setting aside of cancellation orders based on the principle that SCNs without reasons are invalid, as supported by the precedent in the case of Riddhi Siddhi Enterprises vs. CGST.
However, the Department subsequently revealed that the SCNs filed with the petitions were forged and fraudulent, and that the actual SCNs did contain reasons under the "remarks" column. This revelation undermined the initial assumption of the genuineness of the SCNs and called into question the validity of the relief granted earlier.
The Court's reasoning emphasized the importance of genuine SCNs containing valid reasons for cancellation, as required by law, and the impropriety of relying on forged documents to grant relief. The Court directed further investigation into the authenticity of the SCNs and related documents.
Issue 2: Authenticity of affidavits and identity verification of petitioners
The affidavits filed by the petitioners were attested by an Oath Commissioner, Ms. Shilpa Verma. The Court noted discrepancies in the verification process, including the Oath Commissioner's inability to recall whether the petitioners had physically appeared before her and her lack of recognition of their photographs. The attestation process, as described, requires the deponent's physical presence and verification of original Aadhaar cards.
UIDAI was directed to verify the Aadhaar cards submitted by the petitioners. The UIDAI report and police investigation revealed that the Aadhaar cards were forged and did not match the actual individuals' photographs or identities. For example, the Aadhaar card for Mr. Aman was found to be fabricated, with the real individual being a domestic help whose photograph did not match the one submitted.
The Court observed that affidavits were attested based on forged Aadhaar cards and that the individuals purported to be petitioners might be fictitious. The counsel for the petitioners had identified these forged Aadhaar cards and admitted to receiving fees in cash from the petitioners, further indicating irregularities.
Issue 3: Investigation into fraudulent practices and procedural safeguards
The Court took note of the disturbing facts that emerged from the police investigation and UIDAI report. The bank account of one petitioner firm, M/s Compact Enterprises, showed large transactions, but the rent agreement and statements from the property owner and family members indicated that the petitioner rarely visited the premises and no legal case had been filed on their behalf.
The Court directed the police to produce the individuals named in the petitions in Court and ordered further inquiries based on addresses and mobile numbers obtained from UIDAI. The Court also retained the original registers of the Oath Commissioner for further scrutiny.
The Court balanced the privacy protections accorded to UIDAI data with the need to investigate serious illegalities, allowing the Department's counsel access to the relevant details for further inquiry.
3. SIGNIFICANT HOLDINGS
- "The entire facts that have been revealed in this case shows that the petitions filed by the Petitioners were filed by fictitious persons and it is not even clear as to whether the persons who have filed these petitions even exist as forged Aadhaar Cards have been used by the said persons."
- The Court established the principle that relief obtained based on forged documents and fictitious identities is impermissible and that the authenticity of documents and identities must be rigorously verified before granting any judicial relief.
- The Court underscored the importance of the requirement that SCNs must contain valid reasons for cancellation of GST registrations and that reliance on forged SCNs is legally untenable.
- The Court's order to involve UIDAI and police authorities for verification of identities and documents reflects a procedural safeguard to prevent abuse of judicial processes through fraudulent filings.
- The Court held that the attestation of affidavits by an Oath Commissioner requires physical presence and proper identification of deponents, and failure in this regard can lead to the invalidation of affidavits.
- The final determination was that the petitions filed on the basis of forged SCNs and affidavits were fraudulent, and appropriate investigations and proceedings must follow to address the illegalities involved.
Cancellation of GST registration - Forged SCN showing that SCNs did not mention any reasons, based on which the GST registrations of the Petitioners were cancelled - violation of principles of natural justice - HELD THAT:- The entire facts that have been revealed in this case shows that the petitions filed by the Petitioners were filed by fictitious persons and it is not even clear as to whether the persons who have filed these petitions even exist as forged Aadhaar Cards have been used by the said persons. The same have been identified by the ld. Counsel for the Petitioner. The affidavits have been attested and relief has been obtained in these matters.
The UIDAI data is usually protected by the laws of privacy. However, considering the nature of the illegalities in this matter, the details supplied by the UIDAI of all the four persons including their addresses and mobile numbers are handed over to the ld. Counsels appearing for the Department i.e. Mr. Panwar and Mr. Singla as also to Mr. Sanjay Lao, ld. Standing Counsel (Criminal), GNCTD.
List these matters on 29th May, 2025 at 2:30 p.m.
Cancellation of GST registration - Forged SCN showing that SCNs did not mention any reasons, based on which the GST registrations of the Petitioners were cancelled - violation of principles of natural justice - HELD THAT:- The entire facts that have been revealed in this case shows that the petitions filed by the Petitioners were filed by fictitious persons and it is not even clear as to whether the persons who have filed these petitions even exist as forged Aadhaar Cards have been used by the said persons. The same have been identified by the ld. Counsel for the Petitioner. The affidavits have been attested and relief has been obtained in these matters.
The UIDAI data is usually protected by the laws of privacy. However, considering the nature of the illegalities in this matter, the details supplied by the UIDAI of all the four persons including their addresses and mobile numbers are handed over to the ld. Counsels appearing for the Department i.e. Mr. Panwar and Mr. Singla as also to Mr. Sanjay Lao, ld. Standing Counsel (Criminal), GNCTD.
List these matters on 29th May, 2025 at 2:30 p.m.
The core legal questions considered by the Court include:
(a) Whether the demand for recovery of Input Tax Credit (ITC) in the two impugned Orders-in-Original, particularly the amount of Rs. 60,73,541/-, involves duplication of demand and whether such duplication vitiates the demand or pre-deposit obligations.
(b) Whether the amount deposited by the Petitioner during the course of investigation (Rs. 1,16,47,808/-) can be adjusted against the pre-deposit required for filing appeals under Section 107 of the Central Goods and Services Tax (CGST) Act.
(c) The procedural question regarding the Petitioner's entitlement to cross-examine witnesses or inspect the investigation file during adjudication and whether denial of such opportunity is justified.
(d) The permissibility of filing appeals beyond the limitation period, considering the directions for adjustment and pre-deposit granted by the Court.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Duplication of Demand of Rs. 60,73,541/-
Relevant legal framework and precedents: The CGST Act empowers the tax authorities to issue Show Cause Notices (SCNs) for recovery of wrongly availed ITC. However, principles of natural justice and protection against double recovery require that demands are not duplicated across multiple notices or orders. Precedents emphasize that duplication of demand is impermissible and leads to invalidity of the duplicated portion of demand.
Court's interpretation and reasoning: The Court observed that the demand of Rs. 60,73,541/- appearing in both the impugned orders is duplicated. This duplication was acknowledged in the impugned Order-in-Original itself, where the adjudicating authority noted the Petitioner's contention regarding multiple SCNs and duplication.
Key evidence and findings: The Petitioner's replies and submissions pointed out the duplication. The adjudicating authority's own findings in the impugned orders confirmed the duplication but held that the taxpayer must discharge the entire liability before seeking appropriation.
Application of law to facts: The Court held that duplication of demand cannot stand and directed that no pre-deposit shall be required on the duplicated amount of Rs. 60,73,541/- in the appeal against the second impugned order.
Treatment of competing arguments: While the adjudicating authority rejected the Petitioner's contention and held all allegations to be true, the Court found merit in the Petitioner's objection regarding duplication and adjusted the pre-deposit accordingly.
Conclusions: The Court concluded that the duplicated amount should not be subject to pre-deposit for the purpose of appeal, thereby preventing double recovery.
Issue (b): Adjustment of Amount Deposited During Investigation Against Pre-Deposit
Relevant legal framework and precedents: Section 107 of the CGST Act requires pre-deposit of a specified percentage of the tax demand before filing an appeal. The law permits adjustment of amounts already deposited towards the liability to avoid multiple payments. Precedents recognize the principle of avoiding double payment and allowing adjustment of amounts deposited during investigation or adjudication.
Court's interpretation and reasoning: The Court acknowledged the Petitioner's submission that Rs. 1,16,47,808/- deposited during investigation should be adjusted against the pre-deposit requirement. The Court found this submission reasonable and consistent with the principles of equity and avoidance of multiplicity of payments.
Key evidence and findings: The Petitioner produced evidence of deposit during investigation. The Court noted the absence of any statutory bar or procedural impediment to such adjustment.
Application of law to facts: The Court directed that the amount deposited by the Petitioner during investigation be adjusted for the purpose of calculating the pre-deposit while filing appeals under Section 107 of the CGST Act.
Treatment of competing arguments: The GST Department did not oppose this adjustment explicitly in the record. The Court's direction reflects a balancing of interests, ensuring that the Petitioner is not unduly burdened by multiple payments.
Conclusions: The Court permitted adjustment of the deposited amount against the pre-deposit obligation, facilitating the Petitioner's right to appeal without additional financial hardship.
Issue (c): Denial of Cross-Examination and Inspection of Investigation File
Relevant legal framework and precedents: The CGST adjudication process allows the adjudicating authority discretion to permit cross-examination and inspection of documents. However, procedural timelines and case management considerations may justify denial of such requests. Principles of natural justice require a fair opportunity but do not mandate unlimited procedural rights.
Court's interpretation and reasoning: The impugned order denied the Petitioner's request for cross-examination and inspection citing paucity of time and discretion of the adjudicating authority. The Court noted this reasoning but did not interfere with the discretion exercised as it was within the procedural framework and timelines.
Key evidence and findings: The adjudicating authority's order recorded the denial and the reasons thereof. The Petitioner was provided personal hearing opportunities.
Application of law to facts: The Court found that the opportunity for personal hearing sufficed and that denial of cross-examination or inspection was a procedural decision within the authority's discretion.
Treatment of competing arguments: The Petitioner's request for cross-examination was weighed against the need for timely adjudication. The Court upheld the authority's decision without prejudice to the Petitioner's right to raise issues in appeal.
Conclusions: The denial of cross-examination and inspection was justified and did not vitiate the proceedings.
Issue (d): Filing of Appeals Beyond Limitation Period and Mode of Filing
Relevant legal framework and precedents: Appeals under Section 107 of the CGST Act are subject to limitation periods. However, courts have discretion to condone delay or permit filing beyond limitation where justified. Procedural rules allow physical filing in exceptional circumstances.
Court's interpretation and reasoning: The Court directed that the Petitioner may file both appeals by 15th July, 2025 and that such appeals shall not be dismissed as barred by limitation. The Court also permitted physical filing if online filing proves difficult due to adjustment of pre-deposit.
Key evidence and findings: The Court recognized practical difficulties faced by the Petitioner in online filing due to the adjustment directions.
Application of law to facts: The Court exercised its discretion to ensure the Petitioner's substantive rights to appeal are not defeated by procedural technicalities or limitation.
Treatment of competing arguments: The GST Department did not oppose the extension or physical filing. The Court balanced procedural compliance with access to justice.
Conclusions: The Court allowed filing of appeals beyond limitation and permitted physical filing, ensuring procedural fairness.
3. SIGNIFICANT HOLDINGS
The Court established the following core
Recovery of Input Tax Credit (ITC) - amount duplicated in the notices - amount was deposited by the Petitioner during investigation - HELD THAT:- The Court has examined the matter and it is prima facie seen that the amount of Rs. Rs.60,73,541/- is duplicated as captured in the impugned Order-in-Original.
The Petitioner would be permitted to prefer appeals challenging both the orders dated 1st February, 2025 and 4th February, 2025 and a pre-deposit qua the demand of Rs. 2,83,56,714/- shall be paid in filing the appeal challenging the impugned order 1st February, 2025. In the second appeal, no pre-deposit shall be paid on the grounds of duplication - Petition disposed off.
Recovery of Input Tax Credit (ITC) - amount duplicated in the notices - amount was deposited by the Petitioner during investigation - HELD THAT:- The Court has examined the matter and it is prima facie seen that the amount of Rs. Rs.60,73,541/- is duplicated as captured in the impugned Order-in-Original.
The Petitioner would be permitted to prefer appeals challenging both the orders dated 1st February, 2025 and 4th February, 2025 and a pre-deposit qua the demand of Rs. 2,83,56,714/- shall be paid in filing the appeal challenging the impugned order 1st February, 2025. In the second appeal, no pre-deposit shall be paid on the grounds of duplication - Petition disposed off.
The core legal questions considered by the Court are:
(a) Whether the FIR registered under Sections 420 (cheating), 468 (forgery for purpose of cheating), and 471 (using as genuine a forged document) of the Indian Penal Code against the petitioner warrants quashing at the nascent stage of investigation;
(b) Whether the allegations in the FIR disclose the commission of cognizable offences against the petitioner;
(c) Whether the petitioner's contention that the dispute is essentially civil in nature and has been given a criminal color to abuse the process of law is sustainable;
(d) Whether the petitioner has been falsely implicated due to his role as a connecting person in the transactions;
(e) Whether the Court should interfere in the investigation stage under Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (pari materia to Section 482 Cr.P.C.) to quash the FIR and proceedings.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) & (b): Whether the FIR discloses commission of cognizable offences and merits quashing at investigation stage
The Court examined the settled legal framework governing quashing of FIRs at the initial stage of investigation. Reliance was placed on authoritative precedents, including the Supreme Court's observations in Neeharika Infrastructure (P) Ltd. v. State of Maharashtra, which emphasize that courts should generally refrain from interfering with ongoing investigations unless exceptional circumstances exist that would result in miscarriage of justice.
The Court noted that the FIR alleges issuance of false and fake invoices and E-Way bills with dishonest intention to cheat the complainant, causing a loss of Rs. 3.5 crores, prima facie disclosing cognizable offences under Sections 420, 468, and 471 IPC. The police have initiated investigation, which remains at an early stage, and the petitioner has not joined the investigation so far.
The Court reiterated that at this stage it is not permissible to delve into the reliability or genuineness of the allegations or to test the correctness of the complaint. The Court must allow the investigating agency to complete its probe and file an appropriate report under Section 173 Cr.P.C. if no substantive evidence is found. The Court cited the principle that the FIR is not an encyclopaedia of all facts and details, and the investigation should not be scuttled prematurely.
The Court also referred to the recent Supreme Court ruling in Somjeet Mallick v. State of Jharkhand, which clarified that the court must evaluate allegations and materials collected during investigation at face value to determine if a prima facie case exists, without testing the correctness or specific offence at this stage.
Thus, the Court concluded that the FIR prima facie discloses cognizable offences and no exceptional circumstances exist to justify interference at this stage.
Issue (c) & (d): Whether the dispute is civil in nature and petitioner is falsely implicated as a connecting person
The petitioner contended that the dispute is essentially civil, relating to business transactions and payments, and the criminal proceedings have been initiated to abuse the process of law. He argued that he was merely a connecting person facilitating transactions between the complainant and a third party, Mr. Anil Rai, who allegedly committed the fraud. The petitioner submitted that he had no dishonest intention and had even lodged an FIR against the third party for fraud.
The Court acknowledged these contentions but observed that such factual disputes and contentions regarding the nature of the transactions and intent cannot be adjudicated at the stage of investigation. The Court emphasized that the existence of a civil dispute does not preclude investigation into criminal offences if prima facie ingredients are made out.
The Court also noted that the petitioner's role in receiving advances through his bank account and issuing invoices was a relevant factor for investigation. The prior closure of an earlier complaint by the police was not determinative of the present FIR's validity.
Therefore, the Court held that the petitioner's claim of false implication and civil nature of dispute cannot be a ground for quashing the FIR at this stage.
Issue (e): Whether the Court should exercise inherent jurisdiction under Section 528 BNSS to quash FIR and proceedings
The Court considered the scope of inherent jurisdiction under Section 528 BNSS, which is pari materia to Section 482 Cr.P.C., allowing quashing of FIRs to prevent abuse of process or miscarriage of justice. However, the Court reiterated the principle that such power is to be exercised sparingly and only in rarest of rare cases, especially when investigation is in its infancy.
The Court relied on multiple precedents to underscore that premature quashing of FIRs hampers the statutory right and duty of the police to investigate cognizable offences. The Court held that no exceptional circumstances exist in this case warranting interference at the investigation stage.
Accordingly, the Court declined to quash the FIR or proceedings, emphasizing that the petitioner is free to participate in the investigation and that the police may file a report under Section 173 Cr.P.C. if no case is made out.
3. SIGNIFICANT HOLDINGS
The Court's crucial legal reasoning is encapsulated in the following verbatim excerpts:
"The well settled proposition of law is that except in exceptional circumstances where non-interference would result in miscarriage of justice, the Courts ought not to interfere at the stage of investigation of an offence as if the FIR is quashed at the very inception, the same thwarts legitimate investigation."
"The first information report is not an encyclopaedia which must disclose all facts and details relating to the offence reported. Therefore, when the investigation by the police is in progress, the court should not go into the merits of the allegations in the FIR."
"The Court is also not required to ascertain at this stage as to which specific offence is committed. It is only after investigation, at the time of framing charge, when the material collected during investigation is before the Court, that the Court has to draw an opinion as to for commission of which offence, the accused should be tried."
"Recourse to quashing of FIR has to be taken only in rarest of rare cases and when the investigation of a case is at its nascent stage, this power should be used sparingly."
"It would be premature to pronounce any conclusion based on given facts that the FIR does not deserve to be investigated."
Core principles established include:
- The FIR must prima facie disclose a cognizable offence to sustain investigation.
- Courts must exercise restraint and not interfere at the investigation stage except in exceptional circumstances.
- The correctness or genuineness of allegations cannot be tested at the FIR quashing stage.
- Civil disputes cannot be converted into criminal cases without prima facie material, but mere civil nature of dispute does not preclude investigation if criminal ingredients are prima facie present.
Final determinations:
- The FIR registered under Sections 420, 468, and 471 IPC cannot be quashed at this stage.
- The petitioner's contention of false implication and civil nature of dispute is not a ground for quashing.
- Investigation should be allowed to proceed and the petitioner is expected to cooperate.
- Police may file appropriate report under Section 173 Cr.P.C. after investigation.
Seeking quashing of FIR - issuance of false and fake invoices and E-Way bills with an intent to cheat the complainant - HELD THAT:- The well settled proposition of law is that except in exceptional circumstances where non-interference would result in miscarriage of justice, the Courts ought not to interfere at the stage of investigation of an offence as if the FIR is quashed at the very inception, the same thwarts legitimate investigation. Reliance in this context can be made to the observations made by Hon'ble Supreme Court in Neeharika Infrastructure (P) Ltd. vs. State of Maharashtra, [2021 (4) TMI 1244 - SUPREME COURT], wherein after analyzing a catena of judicial precedents, it was observed that the police had statutory right and duty to investigate into cognizable offences under the relevant provisions of the Code of Criminal Procedure. The Courts should not thwart any investigation into cognizable offences. The criminal proceedings ought not to be scuttled at the initial stage. While examining a FIR/complaint, quashing of which is sought, the Court cannot embark upon an inquiry as to the reliability or genuineness or otherwise of the allegations made in the FIR/complaint.
Reliance can be placed upon Union of India v. Prakash P. Hinduja, [2003 (7) TMI 744 - SUPREME COURT], wherein it was held that the Court should not interfere with investigation or during the course of investigation i.e. till the filing of a report under Section 173 of Cr.P.C. by exercise of inherent jurisdiction.
Recourse to quashing of FIR has to be taken only in rarest of rare cases and when the investigation of a case is at its nascent stage, this power should be used sparingly. In the instant case, the investigation is at its initial stage. The petitioner has not joined the same so far. After conducting preliminary inquiry, an FIR has been registered since it appears prima facie that cognizable offences were committed by the petitioner. However, it cannot be ascertained at this stage as to whether the petitioner had any intention to dupe the complainant and cause wrongful loss to him by not fulfilling the obligations cast upon him or not? The FIR has also been lodged after a gap of about three years from the date when the offences alleged were committed. In the considered opinion of this Court, it would be premature to pronounce any conclusion based on given facts that the FIR does not deserve to be investigated.
Conclusion - The FIR registered under Sections 420, 468, and 471 IPC cannot be quashed at this stage. The petitioner's contention of false implication and civil nature of dispute is not a ground for quashing.
This Court is of the opinion that no case for quashing of FIR has been made out at this stage. As such, no ground for allowing the petition is made out. As a consequence, the same is dismissed.
Seeking quashing of FIR - issuance of false and fake invoices and E-Way bills with an intent to cheat the complainant - HELD THAT:- The well settled proposition of law is that except in exceptional circumstances where non-interference would result in miscarriage of justice, the Courts ought not to interfere at the stage of investigation of an offence as if the FIR is quashed at the very inception, the same thwarts legitimate investigation. Reliance in this context can be made to the observations made by Hon'ble Supreme Court in Neeharika Infrastructure (P) Ltd. vs. State of Maharashtra, [2021 (4) TMI 1244 - SUPREME COURT], wherein after analyzing a catena of judicial precedents, it was observed that the police had statutory right and duty to investigate into cognizable offences under the relevant provisions of the Code of Criminal Procedure. The Courts should not thwart any investigation into cognizable offences. The criminal proceedings ought not to be scuttled at the initial stage. While examining a FIR/complaint, quashing of which is sought, the Court cannot embark upon an inquiry as to the reliability or genuineness or otherwise of the allegations made in the FIR/complaint.
Reliance can be placed upon Union of India v. Prakash P. Hinduja, [2003 (7) TMI 744 - SUPREME COURT], wherein it was held that the Court should not interfere with investigation or during the course of investigation i.e. till the filing of a report under Section 173 of Cr.P.C. by exercise of inherent jurisdiction.
Recourse to quashing of FIR has to be taken only in rarest of rare cases and when the investigation of a case is at its nascent stage, this power should be used sparingly. In the instant case, the investigation is at its initial stage. The petitioner has not joined the same so far. After conducting preliminary inquiry, an FIR has been registered since it appears prima facie that cognizable offences were committed by the petitioner. However, it cannot be ascertained at this stage as to whether the petitioner had any intention to dupe the complainant and cause wrongful loss to him by not fulfilling the obligations cast upon him or not? The FIR has also been lodged after a gap of about three years from the date when the offences alleged were committed. In the considered opinion of this Court, it would be premature to pronounce any conclusion based on given facts that the FIR does not deserve to be investigated.
Conclusion - The FIR registered under Sections 420, 468, and 471 IPC cannot be quashed at this stage. The petitioner's contention of false implication and civil nature of dispute is not a ground for quashing.
This Court is of the opinion that no case for quashing of FIR has been made out at this stage. As such, no ground for allowing the petition is made out. As a consequence, the same is dismissed.
The core legal questions considered by the Court in these petitions are:
- Whether the petitioners are entitled to regular bail under Section 483 of the Bharatiya Nagarik Suraksha Sanhita, 2023, in a case involving offences under Section 132(1)(b) of the Central Goods & Services Tax Act, 2017 (CGST Act), punishable under Section 132(1)(2) of the GST Act.
- Whether the petitioners were rightly implicated and arrested on allegations of involvement in a racket of fake invoicing and fraudulent Input Tax Credit (ITC) claims causing substantial loss to the government exchequer.
- Whether the provisions of Section 132(1) of the CGST Act have been correctly invoked against the petitioners.
- Whether the petitioners' detention violates constitutional rights under Articles 14 and 21 of the Constitution of India.
- The applicability of relevant precedents and principles governing grant of bail in economic offences, particularly offences under the CGST Act.
- The adequacy of evidence and the risk of tampering with evidence or influencing witnesses if bail is granted.
- The balance between the gravity of the offence and the rights of the accused to liberty pending trial.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to Bail under Section 483 of Bharatiya Nagarik Suraksha Sanhita, 2023, for offences under Section 132(1)(b) of the CGST Act
The Court examined the statutory framework under Section 132 of the CGST Act, which penalizes offences such as issuance of invoices without supply of goods or services leading to wrongful availment or utilization of ITC. The punishment varies with the amount of tax evaded or ITC wrongly claimed, with imprisonment extending up to five years for amounts exceeding five hundred lakh rupees.
The Court noted that offences under Section 132 are compoundable under Section 138 of the CGST Act. The maximum punishment applicable to the petitioners is imprisonment up to five years.
Relevant precedents cited include the Supreme Court's rulings in Dataram Singh v. State of U.P., Sanjay Chandra v. CBI, P. Chidambaram v. Directorate of Enforcement, and Satender Kumar Antil v. CBI, which collectively emphasize that the grant of bail is the general rule and refusal is the exception. The Court reiterated the fundamental principle of presumption of innocence and that bail should not be withheld as a punishment.
The Court applied the broad parameters for grant of bail in economic offences, including prima facie evidence, nature and gravity of the charge, severity of punishment, risk of absconding, character and standing of the accused, likelihood of offence repetition, apprehension of witness tampering, and danger of thwarting justice.
Issue 2: Validity of Petitioners' Arrest and Allegations of Involvement in Fake Invoicing and Tax Evasion
The investigation revealed that the petitioners were allegedly involved in operating 65 fake or bogus firms, issuing good-less invoices along with e-way bills, and facilitating fraudulent ITC claims amounting to approximately Rs. 325 crores. The petitioners were arrested following recovery of unaccounted cash and incriminating documents from their premises.
The petitioners contended that they were falsely implicated, were neither instrumental in issuing invoices nor beneficiaries of the ITC, and that the firms issuing invoices did not belong to them. They argued that persons who benefited from the fraudulent ITC were not arrested or implicated, and their arrest violated their constitutional rights.
The respondent countered with evidence of the petitioners' active involvement, including statements admitting creation of fake firms, and financial transactions indicating participation in the racket. The respondent also argued a strong apprehension of witness tampering and interference if bail was granted.
The Court noted that the allegations are serious but also observed that the evidence to be produced would be documentary and electronic, reducing the risk of tampering or intimidation of witnesses.
Issue 3: Application of Precedents and Distinction of Cases Cited by Parties
The Court analyzed the precedents relied upon by both parties. Petitioners' cited cases where bail was granted despite serious economic offences, often due to prolonged custody, documentary nature of evidence, and the maximum sentence being five years. For instance, in Ratnambar Kaushik, Ashutosh Garg, Vipin Garg alias Bindu, Yash Goyal, and Vineet Jain, bail was granted considering these factors.
The respondent cited cases where bail was denied, but the Court distinguished those on the basis that the offences in those cases carried punishment extending to life imprisonment or where investigation was incomplete. Cases involving ongoing investigation or more severe penalties were held not analogous.
The Court emphasized that the present case involves maximum punishment of five years, compoundable offences, and a completed investigation with a filed complaint, which justified consideration for bail.
Issue 4: Constitutional and Procedural Safeguards
The petitioners argued their arrest and detention violated Articles 14 and 21 of the Constitution, highlighting absence of due process and lack of custodial interrogation needs. The Court acknowledged these contentions, noting no custodial interrogation was claimed necessary by the department, and the petitioners had no criminal antecedents or flight risk, offering to surrender passports and abide by bail conditions.
The Court balanced the need for custodial detention against the petitioners' rights and the nature of evidence, concluding that continued detention was not justified.
Issue 5: Conditions for Grant of Bail
The Court recognized the gravity of the offence but found that the petitioners were entitled to bail subject to conditions aimed at safeguarding the trial process and preventing misuse of liberty. Conditions included surrender of passports, cooperation with the trial, prohibition on tampering with evidence or influencing witnesses, restrictions on disposal of property under investigation, prohibition on further criminal activity, and furnishing of identification and contact details.
The Court clarified that breach of these conditions would justify cancellation of bail.
3. SIGNIFICANT HOLDINGS
The Court held:
"A fundamental postulate of criminal jurisprudence is the presumption of innocence, meaning thereby that a person is believed to be innocent until found guilty... the grant of bail is the general rule and putting a person in jail... is an exception."
It reaffirmed that economic offences, including those under the CGST Act, do not warrant automatic denial of bail merely due to the gravity of allegations or economic magnitude of the offence.
The Court stated:
"While considering the prayer for grant of bail in any offence, including economic offences, it is not a rule that bail should be denied in every case where the allegation is one of grave economic offences since there is not such bar created in the relevant enactment passed by the Legislature nor does the jurisprudence provide so."
Further, the Court emphasized the need to consider the nature of evidence and the absence of custodial interrogation requirements:
"...in case of this nature, the evidence to be rendered by the respondent would essentially be documentary and electronic, which will be through official witnesses, due to which, there cannot be any apprehension of tampering, intimidating or influencing the witnesses..."
The Court concluded that the petitioners were entitled to regular bail subject to stringent conditions, balancing the interests of justice and the rights of the accused.
The petitions were allowed, and the petitioners ordered released on bail with conditions including deposit of passports, cooperation in trial, non-tampering with evidence, restrictions on disposal of property, and prohibition on further criminal activity.
Seeking grant of regular bail - availing and passing on fraudulent Input Tax Credit - compoundable offences or not - HELD THAT:- The offences alleged carry minimum punishment of 06 months and a maximum punishment of 05 years of imprisonment. Further, Section 138 of the CGST Act is relevant, as per which, the offences under Section 132 of the Act are compoundable.
Reference must also be made to P. Chidambaram vs. Directorate of Enforcement, [2019 (12) TMI 186 - SUPREME COURT], wherein Hon’ble Supreme Court observed that even economic offences would fall under the category of ‘grave offence’ and while considering the application for bail in such matters, the Court has to be sensitive to the nature of the allegations made against the accused as well as the term of sentence i.e. prescribed for the offence that the accused is alleged to have committed. It was also observed that the reasonable apprehension of tampering with evidence or apprehension of threat to the complainant or the witnesses as well as character, behavior and standing of the accused and the circumstances that are peculiar to the accused and the larger interest of the public should also be taken into consideration.
Considering that the alleged offences are punishable with maximum punishment up to 05 years and also keeping in view that in such circumstances, the further detention of the petitioners may not at all be justified since in case of this nature, the evidence to be rendered by the respondent would essentially be documentary and electronic, which will be through official witnesses, due to which, there cannot be any apprehension of tampering, intimidating or influencing the witnesses and further as it appears justified to strike a fine balance between the need for further detention of the petitioner when no custodial interrogation has been claimed at all by the department, this Court considers that the petitioners are entitled to be released on bail but subject to certain conditions.
Conclusion - The petitions moved by both the petitioners are hereby allowed and they are ordered to be released on regular bail on their furnishing personal bonds with two sureties in the like amount each to the satisfaction of the Court concerned/Duty Magistrate, subject to the fulfilment of conditions imposed.
Bail application allowed.
Seeking grant of regular bail - availing and passing on fraudulent Input Tax Credit - compoundable offences or not - HELD THAT:- The offences alleged carry minimum punishment of 06 months and a maximum punishment of 05 years of imprisonment. Further, Section 138 of the CGST Act is relevant, as per which, the offences under Section 132 of the Act are compoundable.
Reference must also be made to P. Chidambaram vs. Directorate of Enforcement, [2019 (12) TMI 186 - SUPREME COURT], wherein Hon’ble Supreme Court observed that even economic offences would fall under the category of ‘grave offence’ and while considering the application for bail in such matters, the Court has to be sensitive to the nature of the allegations made against the accused as well as the term of sentence i.e. prescribed for the offence that the accused is alleged to have committed. It was also observed that the reasonable apprehension of tampering with evidence or apprehension of threat to the complainant or the witnesses as well as character, behavior and standing of the accused and the circumstances that are peculiar to the accused and the larger interest of the public should also be taken into consideration.
Considering that the alleged offences are punishable with maximum punishment up to 05 years and also keeping in view that in such circumstances, the further detention of the petitioners may not at all be justified since in case of this nature, the evidence to be rendered by the respondent would essentially be documentary and electronic, which will be through official witnesses, due to which, there cannot be any apprehension of tampering, intimidating or influencing the witnesses and further as it appears justified to strike a fine balance between the need for further detention of the petitioner when no custodial interrogation has been claimed at all by the department, this Court considers that the petitioners are entitled to be released on bail but subject to certain conditions.
Conclusion - The petitions moved by both the petitioners are hereby allowed and they are ordered to be released on regular bail on their furnishing personal bonds with two sureties in the like amount each to the satisfaction of the Court concerned/Duty Magistrate, subject to the fulfilment of conditions imposed.
Bail application allowed.
The core legal questions considered by the Court include:
(a) Whether the Show Cause Notice (SCN) dated 29th May, 2024 is barred by limitation or is otherwise liable to be quashed;
(b) Whether the impugned Notification No. 56/2023-Central Tax dated 28th December, 2023 (hereinafter 'impugned notification') is ultra vires and invalid for non-compliance with statutory procedural requirements under Section 168A of the Central Goods and Services Tax Act, 2017 (hereinafter 'GST Act');
(c) The validity and legal effect of the impugned notification in light of conflicting judicial pronouncements across various High Courts and pending adjudication by the Supreme Court;
(d) Whether the Petitioner was afforded a fair opportunity of hearing and whether the adjudication order passed ex-parte without the Petitioner filing a reply to the SCN is sustainable;
(e) The scope of relief that can be granted to the Petitioner pending final adjudication on the validity of the impugned notification by the Supreme Court;
(f) The procedural and substantive rights of the parties in the context of ongoing proceedings and appeals under the GST framework.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) & (b): Validity of the Show Cause Notice and the Impugned Notification
The Petitioner challenged the SCN on the ground that it was belated and issued pursuant to an ultra vires notification. The impugned notification purportedly extended timelines for adjudication under the GST Act without adhering to the mandatory procedural requirement of prior recommendation by the GST Council as prescribed under Section 168A of the GST Act.
The Court referred extensively to the ongoing batch of petitions before it and other High Courts where the validity of Notification No. 56/2023 was under scrutiny. The Court noted that while some High Courts (Allahabad and Patna) upheld the notification, others (Guwahati and Telangana) quashed or expressed doubts on its validity. The Telangana High Court's judgment, which questioned the validity of the notification, was under consideration by the Supreme Court in S.L.P No. 4240/2025.
The Supreme Court had issued notices and acknowledged the cleavage of opinion among High Courts, specifically on whether the time limit for adjudication under Section 73 of the GST Act could be extended by notifications issued under Section 168A. The Supreme Court's order indicated that the question was substantial and warranted final adjudication.
The Court also noted the Punjab and Haryana High Court's decision to refrain from expressing an opinion on the vires of Section 168A and related notifications, deferring to the Supreme Court's forthcoming judgment and maintaining interim orders accordingly.
Application of Law to Facts: Given the pendency of the Supreme Court's decision and the conflicting High Court rulings, the Court recognized that the question of the validity of the impugned notification was not ripe for final determination at this stage. The Court accordingly left the issue open and subject to the Supreme Court's outcome.
Issue (c): Fair Opportunity and Adjudication Without Petitioner's Reply
The Court examined the impugned order passed by the Sales Tax Officer, which was based on the Petitioner's failure to file any reply to the SCN and failure to seek adjournments or provide clarifications. The order was passed ex-parte relying on available records and best judgment.
The Court emphasized the fundamental principle of natural justice that a party must be given a fair opportunity to be heard before adverse orders are passed. The absence of any reply or personal hearing for the Petitioner was found to be a procedural infirmity.
Application of Law to Facts: In light of the Petitioner's non-participation and the absence of opportunity to present its case, the Court held that the matter deserved to be remanded to the Adjudicating Authority for fresh consideration after affording the Petitioner a chance to file a reply and participate in personal hearings.
Issue (d): Relief Pending Final Adjudication on Validity of Notification
The Court acknowledged submissions by various counsel that even if the impugned notification were upheld, relief could be granted on grounds of procedural fairness and to allow the Petitioner to place its case before the adjudicating authority.
Recognizing the complexity and ongoing litigation, the Court proposed a categorical approach categorizing pending petitions and affording appropriate procedural reliefs, including the opportunity to file replies and pursue appellate remedies, without prejudging the validity of the notification.
The Court thus balanced the need to preserve the parties' rights with the overarching requirement of judicial discipline pending the Supreme Court's final decision.
Issue (e): Procedural Directions and Preservation of Rights
The Court directed that the impugned order be set aside and remanded the matter to the Adjudicating Authority. The Petitioner was granted time until 10th July 2025 to file a reply to the SCN. Upon receipt, the Adjudicating Authority was mandated to issue a notice for personal hearing and duly consider the Petitioner's submissions before passing a fresh order.
The Court explicitly preserved the question of the validity of the impugned notification, clarifying that any order passed by the Adjudicating Authority would be subject to the Supreme Court's decision in S.L.P No. 4240/2025.
Access to the GST Portal was to be provided to the Petitioner to enable uploading replies and accessing notices and documents, ensuring procedural fairness.
All rights and remedies of the parties were kept open, reflecting the Court's intent to avoid foreclosing any legal avenue pending final adjudication.
3. SIGNIFICANT HOLDINGS
"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 reply filed by the Petitioner to the SCN along with the submissions made in the personal hearing proceedings shall be duly considered by the Adjudicating Authority and fresh order with respect to the SCN shall be passed accordingly."
"However, it is made clear that 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 titled M/s HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax & Ors."
Core principles established include:
(i) The necessity of compliance with statutory procedural requirements under Section 168A of the GST Act for issuance of notifications extending limitation periods;
(ii) The importance of affording a fair opportunity of hearing before passing adjudication orders, including the right to file replies and participate in personal hearings;
(iii) Judicial restraint in deciding contentious issues pending before the Supreme Court, with interim reliefs tailored to preserve parties' rights without prejudging substantive questions;
(iv) The binding effect of the Supreme Court's forthcoming decision on all pending matters involving the validity of the impugned notification and related provisions.
Final determinations:
The Court set aside the impugned order passed without hearing, remanded the matter for fresh adjudication after allowing the Petitioner to file replies and be heard, and left the question of the validity of the impugned notification open pending the Supreme Court's ruling. All procedural rights and remedies were preserved, and access to relevant portals was ensured to facilitate participation in proceedings.
Challenge to SCN and consequent order - challenge to vires of N/N. 56/2023- Central Tax dated 28th December, 2023 - case of the Petitioner is that the SCN is belated and is liable to be quashed, in view of the fact that the impugned notification is ultra vires - Petitioner did not get a proper opportunity to be heard - Violation of principles of natural justice - HELD THAT:- On 23rd April, 2025, this Court, having noted that the validity of the impugned notification is under consideration before the Supreme Court, had disposed of several matters in the said batch of petitions after addressing other factual issues raised in the respective petitions. Additionally, while disposing of the said petitions, this Court clearly observed that the validity of the impugned notification therein shall be subject to the outcome of the proceedings before the Supreme Court in M/s HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax & Ors. [2025 (4) TMI 60 - SC ORDER].
Conclusion - 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 allowed by way of remand.
Challenge to SCN and consequent order - challenge to vires of N/N. 56/2023- Central Tax dated 28th December, 2023 - case of the Petitioner is that the SCN is belated and is liable to be quashed, in view of the fact that the impugned notification is ultra vires - Petitioner did not get a proper opportunity to be heard - Violation of principles of natural justice - HELD THAT:- On 23rd April, 2025, this Court, having noted that the validity of the impugned notification is under consideration before the Supreme Court, had disposed of several matters in the said batch of petitions after addressing other factual issues raised in the respective petitions. Additionally, while disposing of the said petitions, this Court clearly observed that the validity of the impugned notification therein shall be subject to the outcome of the proceedings before the Supreme Court in M/s HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax & Ors. [2025 (4) TMI 60 - SC ORDER].
Conclusion - 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 allowed by way of remand.
The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of the impugned orders of detention, notice, and confiscation under GST law
The relevant legal framework comprises the provisions of the Central Goods and Services Tax (CGST) Act, particularly Section 130 which deals with detention, seizure, and confiscation of goods and conveyances in transit, and the procedural forms prescribed under the GST Rules (Forms GST MOV-1, MOV-6, MOV-10, and MOV-11).
The Court examined the sequence of actions taken by the respondent authority: physical interception of goods and conveyance, issuance of inspection forms, detention order citing non-existence of the supplier's business, issuance of show cause notice under Section 130, and finally the confiscation order.
The Court noted that the detention and confiscation orders were premised on findings that the supplier M/s Dhatu Metallo Industries Private Limited was not found at the registered address, and that its supplier M/s Mewad Scrap had its registration cancelled for issuing invoices without actual supply, indicating possible tax evasion.
The respondent authority relied on physical verification reports, GST portal data, and the fact that e-way bills were generated for the intercepted vehicle even after its detention, suggesting fraudulent conduct and circular trading. The Court found that these findings raised serious concerns regarding the genuineness of the transactions.
However, the petitioner contended that the orders were passed without considering their reply and without affording an opportunity of hearing, thereby violating principles of natural justice.
Issue 2: Alleged violation of principles of natural justice and opportunity of hearing
The petitioner argued that the impugned orders were passed without hearing and without due consideration of their submissions.
The Court observed that the person in charge of the conveyance was served with notice, and the petitioner had filed replies to the show cause notice. The Court, however, did not delve into the merits of whether the hearing was adequate but referred to the established principle that writ jurisdiction under Article 227 is not to be exercised where alternative statutory remedies exist.
Issue 3: Existence of disputed questions of fact and sufficiency of evidence
The Court highlighted that the factual issues regarding the existence of the supplier's business, the relationship between the entities involved, and the suspicious nature of the e-way bills and invoices gave rise to disputed questions of fact.
It was noted that the inspection reports and GST portal data indicated non-existence of the business at the declared address and suspicious generation of e-way bills even after detention of the vehicle.
The Court emphasized that such factual disputes are to be adjudicated by the appropriate statutory authorities and appellate forums, not by the High Court in exercise of extraordinary writ jurisdiction.
Issue 4: Maintainability of the petition under Article 227 in presence of alternative remedy under Section 107 of the CGST Act
The Court relied heavily on the precedent set by the Supreme Court which held that writ petitions under Article 226/227 challenging orders passed under the GST Act are generally not maintainable if an alternative statutory remedy is available, except in cases involving breach of fundamental rights, violation of natural justice, excess of jurisdiction, or challenge to the vires of the statute.
In the present case, none of these exceptions were established. The Court noted that the petitioner had a statutory remedy under Section 107 to appeal against the confiscation order.
Accordingly, the Court declined to entertain the petition and directed the petitioner to avail the alternate remedy.
Issue 5: Allegations of circular trading and issuance of fake input tax credit invoices
The confiscation order detailed that the intercepted vehicle had e-way bills generated from different states even after detention, suggesting malafide intentions to evade tax through circular trading and fake invoices.
The Court accepted that such findings, if substantiated, constitute serious violations warranting confiscation under the GST regime.
However, the Court did not examine the merits of these allegations but left the matter to be adjudicated through the statutory appellate process.
3. SIGNIFICANT HOLDINGS
The Court held:
"The existence of an alternate remedy is not an absolute bar to the maintainability of a writ petition under Article 226 of the Constitution. But a writ petition can be entertained in exceptional circumstances where there is: (i) a breach of fundamental rights; (ii) a violation of the principles of natural justice; (iii) an excess of jurisdiction; or (iv) a challenge to the vires of the statute or delegated legislation."
"In the present case, none of the above exceptions was established. There was, in fact, no fact, no violation of the principles of natural justice since a notice was served on the person in charge of the conveyance."
"The assessment of the facts would have to be carried out by the appellate authority. As a matter of fact, the High Court has while doing this exercise proceeded on the basis of surmises."
"Therefore, without entering into the merits of the matter the petition is disposed of, so as to enable the petitioner to avail alternative efficacious remedy by preferring an appeal under Section 107 of the GST Act to challenge the impugned order passed in Form GST MOV."
The Court thus established the principle that challenges to confiscation orders under GST must primarily be pursued through the statutory appellate mechanism, and writ jurisdiction is to be exercised sparingly and only in exceptional circumstances.
Final determinations included dismissal of the petition under Article 227 without adjudicating the merits, and direction to the petitioner to pursue remedy under Section 107 of the CGST Act.
Challenge to impugned orders of detention, notice of confiscation, and order of confiscation issued under the GST regime - respondent authority has passed the impugned orders without giving any opportunity of hearing and without considering the reply filed by the petitioner - violation of principles of natural justice - HELD THAT:- In view of the findings arrived at by the respondent authority it appears that the existence of relation between the two entities i.e. M/s. Dhatu Metallo Industries Private Limited and M/s. Mewad Scrap and contentions raised by the petitioner, is giving rise to the disputed of questions of fact and therefore we are not inclined to entertain this petition while exercising our extraordinary jurisdiction under Article 227 of the Constitution of India in view of the decision of the Hon’ble Apex Court in case of The Assistant Commissioner of State Tax and Others V/s. M/s. Commercial Steel Limited [2021 (9) TMI 480 - SUPREME COURT], wherein it is held 'There was, in fact, no fact, no violation of the principles of natural justice since a notice was served on the person in charge of the conveyance. In this backdrop, it was not appropriate for the High Court to entertain a writ petition. The assessment of the facts would have to be carried out by the appellate authority. As a matter of fact, the High Court has while doing this exercise proceeded on the basis of surmises. However, since we are inclined to relegate the respondent to the pursuit of the alternate statutory remedy under Section 107, this Court makes no observation on the merits of the case of the respondent.'
Thus, without entering into the merits of the matter the petition is disposed of, so as to enable the petitioner to avail alternative efficacious remedy by preferring an appeal under Section 107 of the GST Act to challenge the impugned order passed in Form GST MOV - petition disposed off.
Challenge to impugned orders of detention, notice of confiscation, and order of confiscation issued under the GST regime - respondent authority has passed the impugned orders without giving any opportunity of hearing and without considering the reply filed by the petitioner - violation of principles of natural justice - HELD THAT:- In view of the findings arrived at by the respondent authority it appears that the existence of relation between the two entities i.e. M/s. Dhatu Metallo Industries Private Limited and M/s. Mewad Scrap and contentions raised by the petitioner, is giving rise to the disputed of questions of fact and therefore we are not inclined to entertain this petition while exercising our extraordinary jurisdiction under Article 227 of the Constitution of India in view of the decision of the Hon’ble Apex Court in case of The Assistant Commissioner of State Tax and Others V/s. M/s. Commercial Steel Limited [2021 (9) TMI 480 - SUPREME COURT], wherein it is held 'There was, in fact, no fact, no violation of the principles of natural justice since a notice was served on the person in charge of the conveyance. In this backdrop, it was not appropriate for the High Court to entertain a writ petition. The assessment of the facts would have to be carried out by the appellate authority. As a matter of fact, the High Court has while doing this exercise proceeded on the basis of surmises. However, since we are inclined to relegate the respondent to the pursuit of the alternate statutory remedy under Section 107, this Court makes no observation on the merits of the case of the respondent.'
Thus, without entering into the merits of the matter the petition is disposed of, so as to enable the petitioner to avail alternative efficacious remedy by preferring an appeal under Section 107 of the GST Act to challenge the impugned order passed in Form GST MOV - petition disposed off.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity and legality of provisional attachment under Section 83 of the MGST Act
Relevant legal framework and precedents: Section 83(1) of the MGST Act empowers the Commissioner to provisionally attach any property, including bank accounts, belonging to a taxable person after initiation of proceedings under Chapters XII, XIV, or XV, if the Commissioner is of the opinion that such attachment is necessary to protect Government revenue. Sub-section (2) limits such attachment to a maximum period of one year. The power is thus discretionary but must be exercised judiciously and on valid grounds.
The Court referred to the Supreme Court precedent in Radha Krishan Industries v. State of Himachal Pradesh & Ors. (2021) 6 SCC 771, which emphasized that such powers are drastic and must be exercised with caution, based on tangible material and not mere assumptions or presumptions.
Court's interpretation and reasoning: The Court held that the power under Section 83 is drastic and could severely impact the business operations of the taxable person. Therefore, the Commissioner must act with circumspection and ensure that the attachment is based on a reasoned opinion supported by material that the revenue is at risk. The Court stressed that the opinion must be formed after due application of mind and cannot be arbitrary.
Key evidence and findings: The impugned order dated 27th January 2025, issued in Form GST-DRC-22, provisionally attached the petitioner's bank account citing proceedings under Section 67 of the MGST Act. However, the proceedings under Section 67 had concluded on 18th October 2024 without any determination of tax liability or issuance of a show-cause notice. The petitioner had cooperated fully during the search and investigation and had not been called upon for further proceedings since November 2024.
Application of law to facts: The Court found that since the Section 67 proceedings were concluded without any demand or adjudication, and no show-cause notice was issued, the basis for the attachment was tenuous. The impugned order did not disclose any material or reasons forming the basis for the Commissioner's opinion that attachment was necessary to protect revenue. The petitioner's request for reasons and material was not responded to by the Commissioner.
Treatment of competing arguments: The State argued that the attachment was justified as proceedings under Section 67 had been initiated and that the attachment was provisional to safeguard revenue. The Court rejected this argument on the ground that mere initiation of proceedings is insufficient; there must be a reasoned opinion based on material. The absence of any demand or show-cause notice and the failure to communicate reasons to the petitioner weighed heavily against the State's position.
Conclusions: The Court concluded that the impugned provisional attachment was unsustainable in law as it lacked the requisite reasoned opinion and material basis. The attachment was quashed, and the petitioner was permitted to operate its bank account.
Issue 2: Procedural safeguards and communication of reasons
Relevant legal framework: The MGST Act and principles of natural justice require that before depriving a person of property or rights, the authority must communicate reasons and afford an opportunity to be heard. Although Section 83 does not explicitly mandate issuance of a show-cause notice before attachment, the exercise of such a drastic power must be accompanied by disclosure of reasons and material to the affected party.
Court's interpretation and reasoning: The Court emphasized that even if the impugned order was in a prescribed format (Form GST-DRC-22), the Commissioner was obliged to furnish the reasons and material on which the opinion was based when requested by the petitioner. The failure to provide such reasons amounted to violation of procedural fairness and natural justice.
Key evidence and findings: The petitioner's letter dated 3rd February 2025 requested the Commissioner to furnish the reasons and material for the attachment. No response was received. The impugned order itself was silent on the reasons or material basis for attachment.
Application of law to facts: The Court held that the absence of communicated reasons or material to the petitioner rendered the attachment arbitrary and unjustified.
Treatment of competing arguments: The State did not furnish any material or reasons to justify the attachment. The Court found this lack of transparency unacceptable.
Conclusions: The Court held that procedural safeguards were not complied with, and the failure to communicate reasons was fatal to the validity of the attachment.
Issue 3: Scope and limits of attachment power in absence of demand or show-cause notice
Relevant legal framework: Section 67 of the MGST Act deals with search and seizure and initiation of proceedings for determination of tax liability. Section 83 provides for provisional attachment after initiation of proceedings under specified chapters. However, attachment is a protective measure and not a substitute for adjudication or recovery proceedings.
Court's interpretation and reasoning: The Court noted that the Section 67 proceedings had concluded without any determination of tax liability or issuance of a show-cause notice. The attachment under Section 83 cannot be sustained merely on the basis of concluded investigation without any pending demand or recovery proceedings. The power to attach must be exercised only when there is a real risk of revenue loss and pending proceedings to justify such risk.
Key evidence and findings: No show-cause notice or demand notice had been issued to the petitioner at the time of attachment. The petitioner was not under any ongoing proceedings that would justify immediate attachment to protect revenue.
Application of law to facts: The Court found that attachment in such circumstances was premature and lacked legal basis.
Treatment of competing arguments: The State's reliance on initiation of proceedings under Section 67 was insufficient to justify attachment when those proceedings had been concluded without demand.
Conclusions: The Court concluded that the attachment was beyond the permissible scope of Section 83 in the absence of pending proceedings or demand, and was therefore invalid.
3. SIGNIFICANT HOLDINGS
The Court held:
"The power provided under Section 83 has to be exercised in the manner provided therein. The power to cause attachment of a Bank Account is drastic in nature, inasmuch as, it could in certain situations, bring the business of the taxable person to a grinding halt. It is, therefore, more important that the Authority wielding such powers is required to act with circumspection and misuse of the said powers is required to be avoided at all times."
"Before levying any attachment, the Authority should be satisfied that the Government Revenue is required to be protected and that he has reason to believe that if the attachment is not levied, there is likelihood that the Revenue cannot be recovered."
"The impugned order dated 27th January 2025 does not set out any material which form the basis of the opinion for attaching the Bank Account of the Petitioner... Till date, no material which led the Commissioner to believe that the attachment is necessary to secure the interest of the Revenue has been communicated to the Petitioner."
"In these facts and circumstances, we are of the view that the impugned order is unsustainable and would have to be set aside."
Core principles established include:
Final determinations were that the impugned provisional attachment order was quashed and set aside, and the petitioner was permitted to operate its bank account. The Court clarified that this order does not preclude the Department from initiating recovery proceedings or issuing show-cause notices in accordance with law.
Provisional attachment of the petitioner's bank account u/s 83 of the Maharashtra Goods and Services Tax Act, 2017 - reasons to believe and the material upon which the 2nd Respondent derived its opinion that the attachment of the Bank Account was necessary, is never been furnished to the Petitioner till date - violation of principles of natural justice - HELD THAT:- On a bare reading of Section 83(1) it is clear that where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government Revenue, it is necessary so to do, he may, by an order in writing, provisionally attach any property, including a Bank Account of the taxable person. The power provided under Section 83 has to be exercised in the manner provided therein. The power to cause attachment of a Bank Account is drastic in nature, inasmuch as, it could in certain situations, bring the business of the taxable person to a grinding halt.
The impugned order refers to the proceedings initiated under Section 67 as the basis for causing the Provisional Attachment. This is undisputed. Admittedly, the proceedings under Section 67 stood concluded on 18th October 2024 and there is no determination of any tax amount, or even calling upon the Petitioner to show-cause as to why any tax amount ought not to be recovered from him. No proceedings for raising a demand on the Petitioner have been filed till date. This apart, before the attachment is levied, the Commissioner has to form an opinion that for the purpose of protecting the interest of Government Revenue, it is necessary to attach any property, including the Bank Account of the taxable person. This opinion has to be based on material, and cannot be on the basis of assumptions and presumptions of the Commissioner. The impugned order dated 27th January 2025 does not set out any material which form the basis of the opinion for attaching the Bank Account of the Petitioner.
Conclusion - Attachment cannot be sustained if proceedings under Section 67 have concluded without any demand or show-cause notice.
The impugned order is unsustainable and would have to be set aside - Petition allowed.
Provisional attachment of the petitioner's bank account u/s 83 of the Maharashtra Goods and Services Tax Act, 2017 - reasons to believe and the material upon which the 2nd Respondent derived its opinion that the attachment of the Bank Account was necessary, is never been furnished to the Petitioner till date - violation of principles of natural justice - HELD THAT:- On a bare reading of Section 83(1) it is clear that where, after the initiation of any proceeding under Chapter XII, Chapter XIV or Chapter XV, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government Revenue, it is necessary so to do, he may, by an order in writing, provisionally attach any property, including a Bank Account of the taxable person. The power provided under Section 83 has to be exercised in the manner provided therein. The power to cause attachment of a Bank Account is drastic in nature, inasmuch as, it could in certain situations, bring the business of the taxable person to a grinding halt.
The impugned order refers to the proceedings initiated under Section 67 as the basis for causing the Provisional Attachment. This is undisputed. Admittedly, the proceedings under Section 67 stood concluded on 18th October 2024 and there is no determination of any tax amount, or even calling upon the Petitioner to show-cause as to why any tax amount ought not to be recovered from him. No proceedings for raising a demand on the Petitioner have been filed till date. This apart, before the attachment is levied, the Commissioner has to form an opinion that for the purpose of protecting the interest of Government Revenue, it is necessary to attach any property, including the Bank Account of the taxable person. This opinion has to be based on material, and cannot be on the basis of assumptions and presumptions of the Commissioner. The impugned order dated 27th January 2025 does not set out any material which form the basis of the opinion for attaching the Bank Account of the Petitioner.
Conclusion - Attachment cannot be sustained if proceedings under Section 67 have concluded without any demand or show-cause notice.
The impugned order is unsustainable and would have to be set aside - Petition allowed.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Maintainability of Refund Claims Filed Post Effective Date of Notification No. 09/2022-Central Tax for Periods Prior to Such Date
Relevant Legal Framework and Precedents: Section 54 of the CGST Act governs refund of tax, including unutilized ITC. Notification No. 09/2022-Central Tax (dated 13.07.2022, effective 18.07.2022) amended the refund provisions prospectively. The Petitioner relied on the extended limitation period provided under Notification No. 13/2022-Central Tax and Section 54(1) for filing refund claims. The decision in Patanjali Foods Ltd. v. Union of India and Priyanka Refineries Pvt. Ltd. v. Deputy Commissioner ST were cited as authoritative precedents supporting the Petitioner's position.
Court's Interpretation and Reasoning: The Court recognized that the Petitioner's refund application dated 07.11.2022 was filed within the prescribed limitation period as extended by Notification No. 13/2022-Central Tax. The Court observed that Notification No. 09/2022-Central Tax was prospective and did not explicitly bar refund claims for periods prior to its effective date. The Court relied on the ratio in Patanjali Foods (Supra), which struck down similar restrictions imposed by Circular No. 181/13/2022-GST that differentiated refund claims based on the date of filing, rather than the tax period to which the claim related.
Key Evidence and Findings: The Petitioner produced a tabulated chart showing the relevant tax periods, corresponding dates, and limitation deadlines, demonstrating compliance with the statutory limitation. The acknowledgment of the refund application in Form GST RFD-02 confirmed the application was complete and eligible for consideration.
Application of Law to Facts: The Court applied the principle that a statutory right to refund, once accrued and within limitation, cannot be denied by subsequent administrative circulars or notifications unless explicitly provided by law. Since the refund claim related to tax periods prior to 18.07.2022 and was filed within limitation, the claim was maintainable.
Treatment of Competing Arguments: The Respondent contended that Circular No. 181/13/2022-GST and Notification No. 09/2022-Central Tax barred the refund claim because it was filed after 18.07.2022. The Court rejected this contention, holding that the Circular cannot impose retrospective effect or override the statutory provisions. The Respondent's reliance on the Circular was deemed legally improper.
Conclusions: The refund claim filed by the Petitioner for periods prior to 18.07.2022 is maintainable even if filed after that date, provided it is within the statutory limitation period.
Issue 2: Legality and Binding Effect of Circular No. 181/13/2022-GST Dated 10.11.2022
Relevant Legal Framework and Precedents: Circulars issued by tax authorities serve as clarifications but cannot override or amend statutory provisions. The Court referred to the Patanjali Foods decision which invalidated paragraph 2(2) of the Circular No. 181/13/2022-GST for creating an impermissible classification of refund applications based on filing dates.
Court's Interpretation and Reasoning: The Court found that the Circular sought to give retrospective effect to Notification No. 09/2022-Central Tax, which was not intended by the latter. It held that Circulars are binding on the revenue but not on taxpayers and cannot impose conditions contrary to the Act or Notifications. The Circular's attempt to deny refund claims filed after 18.07.2022 for periods prior to that date was held to be beyond the scope of the law.
Key Evidence and Findings: The impugned rejection order relied heavily on the Circular to deny the Petitioner's claim. The Court identified this reliance as erroneous, given the Circular's illegality as established in precedent.
Application of Law to Facts: The Court applied the principle that administrative instructions cannot curtail statutory rights or extend limitations retrospectively. The Circular's retrospective application was inconsistent with the CGST Act and Notifications.
Treatment of Competing Arguments: The Respondent argued the Circular clarified the Notification and was binding on the revenue. The Court acknowledged the binding nature on revenue but emphasized that the Circular cannot impose illegal restrictions or retrospective effects.
Conclusions: The Circular No. 181/13/2022-GST cannot legally bar refund claims filed within limitation for periods prior to 18.07.2022, and its retrospective application is invalid.
3. SIGNIFICANT HOLDINGS
The Court's crucial legal reasoning is encapsulated in the following verbatim excerpts from the impugned order and judgment:
"As the applicant has filed refund claim on 07.11.2022 i.e. after 18.07.2022, the same is not admissible in light of clarification issued vide Circular No. 181/13/2022-GST dated 10.11.2022 read with Section 54(3)(ii) of the CGST Act 2017 read with Rule 89 of the CGST Rules 2017."
"The Noticee mainly contended that the restriction imposed vide Notification No. 09/2022-Central Tax (Rate) dated 13.07.2022 should be effective prospectively w.e.f. 18.07.2022 and not for the refund claims for the earlier period and it should not be on the basis of date of filing refund application; and the Circular No. 181/13/2022-GST dated 10.11.2022 is illegal and contrary to the provisions of law. However, I find that the said contention is not proper and legal, as the circular dated 10.11.2022 clarifies that such refund applications would not be allowed after 18.07.2022 which is in clarification to the Notification dated 13.07.2022 and not contrary to it. There is no mention in the Notification dated 13.07.2022 itself that such applications will be allowed after 18.07.2022. The Circular dated 10.11.2022 has been issued on the basis of Notification No. 09/2022-Central Tax (Rate) dated 13.07.2022 and it is binding on the revenue to follow the conditions laid down in the said Circular."
The Court, however, held this reasoning erroneous and quashed the impugned rejection order.
Core principles established include:
Final determinations on each issue are:
Refund of unutilized Input Tax Credit (ITC) - claim pertaining to periods prior to the effective date of N/N. 09/2022-Central Tax (dated 13.07.2022, effective 18.07.2022), filed after the said effective date but within the statutory limitation period - HELD THAT:- In the case of Patanjali Foods (Supra), this Court while dealing with the Notification No.1 3/2022–Central Tax dated 05.07.2022 and Circular No. 181/13/2022-GST dated 10.11.2022, after relying upon the ratio in the case of Ascent Meditech Ltd. Vs. Union of India [2025 (3) TMI 367 - GUJARAT HIGH COURT] had struck down paragraph No. 2(2) of the Circular No. 181/13/2022-GST dated 10.11.2022 by which two classes of the Refund Applications i.e. whether filed before 13.07.2022 or filed after 13.07.2022 was sought to be created by the Respondent-Department. In the present case, the Petitioner had filed his Refund Application on 07.011.2022 which was well within the period of limitation under Section 54 (1) of the Act as will be evident from the Chart at Paragraph No. 3.3 hereinabove. In such view of the matter, following the decision of Patanjali Foods since the Refund Applications in question were filed within the period of limitation, the same could not be rejected, by placing reliance on Circular No.181/13/2022-GST dated 10.11.2022.
Conclusion - The refund claim filed by the Petitioner on 07.11.2022 for periods prior to 18.07.2022 is maintainable as it was within the statutory limitation period.
The impugned rejection Order is clearly erroneous and hence, is hereby quashed and set aside - Petition allowed.
Refund of unutilized Input Tax Credit (ITC) - claim pertaining to periods prior to the effective date of N/N. 09/2022-Central Tax (dated 13.07.2022, effective 18.07.2022), filed after the said effective date but within the statutory limitation period - HELD THAT:- In the case of Patanjali Foods (Supra), this Court while dealing with the Notification No.1 3/2022–Central Tax dated 05.07.2022 and Circular No. 181/13/2022-GST dated 10.11.2022, after relying upon the ratio in the case of Ascent Meditech Ltd. Vs. Union of India [2025 (3) TMI 367 - GUJARAT HIGH COURT] had struck down paragraph No. 2(2) of the Circular No. 181/13/2022-GST dated 10.11.2022 by which two classes of the Refund Applications i.e. whether filed before 13.07.2022 or filed after 13.07.2022 was sought to be created by the Respondent-Department. In the present case, the Petitioner had filed his Refund Application on 07.011.2022 which was well within the period of limitation under Section 54 (1) of the Act as will be evident from the Chart at Paragraph No. 3.3 hereinabove. In such view of the matter, following the decision of Patanjali Foods since the Refund Applications in question were filed within the period of limitation, the same could not be rejected, by placing reliance on Circular No.181/13/2022-GST dated 10.11.2022.
Conclusion - The refund claim filed by the Petitioner on 07.11.2022 for periods prior to 18.07.2022 is maintainable as it was within the statutory limitation period.
The impugned rejection Order is clearly erroneous and hence, is hereby quashed and set aside - Petition allowed.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity and sufficiency of service of notices via the GST Portal under "View Additional Notices/Orders"
Relevant legal framework and precedents: Section 169 of the GST Act prescribes the modes of service of notices and orders. Clause (d) of Section 169 specifically recognizes service through the online GST Portal as a valid mode. However, the section also recognizes other modes including hand delivery, registered post, speed post, courier with acknowledgment, or delivery by messenger to the last known address of the taxpayer.
Court's interpretation and reasoning: The Court noted that while Section 169(d) authorizes service via the online portal, it does not exclude other modes of service. The Court emphasized that the respondent-Department must ensure that the mode of service adopted is effective and results in actual communication to the taxpayer or their authorized representative. The Court observed that the notices in this case were uploaded under an unusual tab, "View Additional Notices/Orders," rather than the usual "View Notices/Orders," which led to the petitioner's consultant not noticing them.
Key evidence and findings: The petitioner's consultant failed to notice the notices because they were not uploaded in the usual location on the GST Portal. There was no physical service or alternative mode of service such as registered post or courier with acknowledgment. The petitioner claimed ignorance of the notices due to this unusual placement.
Application of law to facts: The Court held that mere uploading of notices under an unusual tab on the online portal cannot be deemed sufficient service, particularly when it results in the taxpayer being unaware of the notices. The Court suggested that if the online mode does not elicit a response, the Department should adopt more effective modes such as RPAD (Registered Post with Acknowledgment Due) to ensure proper service.
Treatment of competing arguments: The respondent contended that the online mode is sufficient and consistent with Section 169(d), especially as most taxpayers engage GST practitioners who access the portal regularly. The Court, however, found that this argument does not hold when the notices are not placed in the usual location and the taxpayer remains unaware.
Conclusion: The Court concluded that the mode of service adopted was ineffective and insufficient, violating the statutory mandate and principles of natural justice.
Issue 2: Validity of the impugned order passed ex parte without hearing the petitioner
Relevant legal framework and precedents: Principles of natural justice require that before an adverse order is passed, the affected party must be given an opportunity to be heard. Section 73 of the GST Act governs determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized.
Court's interpretation and reasoning: The Court observed that the impugned order dated 16.03.2024 was passed summarily confirming the notice proposal under Section 73 without issuing a detailed assessment order or providing the petitioner an opportunity of hearing. The order was based on annexures uploaded on the portal but not physically served or brought to the petitioner's notice effectively.
Key evidence and findings: The petitioner was deprived of the opportunity to file a reply or to be heard in person. The respondent did not issue any detailed order or communication in DRC-01A form but relied on documents uploaded online. The petitioner's claim that the order is ex parte and violates natural justice was substantiated by the absence of any hearing or effective communication.
Application of law to facts: The Court held that an order passed without hearing the affected party is ex parte and violates the principles of natural justice. The absence of a detailed order or proper service further compounded the procedural infirmity.
Treatment of competing arguments: The respondent did not dispute the absence of hearing but sought to justify the service mode and the order's validity. The Court found these arguments insufficient to cure the procedural defect.
Conclusion: The impugned order was held to be unsustainable and liable to be set aside for violation of natural justice.
Issue 3: Appropriate remedy and directions when disputed tax has already been recovered
Relevant legal framework and precedents: The Court has inherent powers to set aside orders passed in violation of natural justice and to remit the matter for fresh consideration. Recovery of disputed tax does not preclude judicial scrutiny of the order authorizing such recovery.
Court's interpretation and reasoning: The respondent fairly submitted that the disputed tax has already been recovered through the Electronic Credit Ledger. The Court acknowledged this but held that since the order underlying the recovery was passed without due process, it must be set aside and the matter remanded.
Key evidence and findings: The petitioner's statement regarding recovery was accepted for the purpose of remanding the matter. The Court emphasized the need to provide the petitioner an opportunity to file a reply and be heard afresh.
Application of law to facts: The Court directed that the impugned order be set aside and the matter remanded to the respondent for fresh consideration after affording the petitioner an opportunity of hearing. The petitioner was directed to file a reply within three weeks, and the respondent was directed to issue a clear notice and conduct a personal hearing before passing a fresh order.
Treatment of competing arguments: The respondent's submission for remand was accepted as a fair and just course of action. The Court declined to impose any condition requiring the petitioner to deposit any amount, considering the tax was already recovered.
Conclusion: The Court remanded the matter for fresh adjudication in accordance with law and principles of natural justice.
3. SIGNIFICANT HOLDINGS
The Court held:
"The impugned order is an ex parte order as the same suffers from violation of principles of natural justice and is liable to be set aside on account of the fact that the petitioner has not been heard before passing such order."
"Though Section 169 of the Act, particularly clause (d) prescribes mode of service via Online Portal, the very same Section also prescribes many modes of services for sending notice to the assessees... when the respondent-Department realizes the fact that the notice effected via Online portal service does not fetch them any reply/response... they could change mode of service and this Court suggests that notice through RPAD would be the best mode of service."
"Had the notice caused by the respondent reaches the petitioner-assessee's hand, definitely, the petitioner-assesseee would have come forward to file an effective reply/objection and convinced the respondent... however, since such an opportunity was deprived to the petitioner, the petitioner is now forced to pay tax/interest/penalty."
Core principles established include:
Final determinations:
Challenge to order of the respondent - reversal of suo moto debiting of the Electronic Credit Ledger of the Petitioner - non-service of notices - notices were uploaded in the GST Portal under the unusual column, i.e. 'View Additional Notice/Orders' - violation of principles of natural justice - HELD THAT:- The service effected by the respondent through on-line portal cannot be deemed to be sufficient service. It is pertinent to mention here that though Section 169 of the Act, particularly, clause (d) prescribes mode of service via. Online Portal, the very same Section also prescribes many modes of services for sending notice to the assessees, of which, valid modes of sending GST Notices are hand-delivering the notices either directly or by a messenger by a courier to the taxpayer or his authorized representative, by registered post or a speed post or a courier with an acknowledgement addressed to the last known address of the taxpayer.
When the respondent-Department realizes the fact that the notice effected via, On-line portal service does not fetch them any reply/response, instead of sticking on to the similar of mode of service by sending notices/reminders incessantly, they could change mode of service and this Court suggests that notice through RPAD would be the best mode of service,in which case, the assessee cannot take advantage of the notice being unnoticed or plead ignorance, and in the case of the same being not delivered due to reasons such as 'No such addressee', 'Incorrect address', proper endorsement to such effect would be available to the respondent- Department, and in the case of acceptance by the assessee, acknowledgement of the same would be available, thereafter, there won't be any fetter on the respondent-GST Department to proceed against the assessees in the manner known to law.
This Court has no hesitation to hold that the impugned order is an ex parte order as the same suffers from violation of principles of natural justice and is liable to be aside on account of the fact that the petitioner has not been heard before passing such order. Therefore, this Court is inclined to set aside the impugned order - the matter is remanded to the respondent for fresh consideration.
Challenge to order of the respondent - reversal of suo moto debiting of the Electronic Credit Ledger of the Petitioner - non-service of notices - notices were uploaded in the GST Portal under the unusual column, i.e. 'View Additional Notice/Orders' - violation of principles of natural justice - HELD THAT:- The service effected by the respondent through on-line portal cannot be deemed to be sufficient service. It is pertinent to mention here that though Section 169 of the Act, particularly, clause (d) prescribes mode of service via. Online Portal, the very same Section also prescribes many modes of services for sending notice to the assessees, of which, valid modes of sending GST Notices are hand-delivering the notices either directly or by a messenger by a courier to the taxpayer or his authorized representative, by registered post or a speed post or a courier with an acknowledgement addressed to the last known address of the taxpayer.
When the respondent-Department realizes the fact that the notice effected via, On-line portal service does not fetch them any reply/response, instead of sticking on to the similar of mode of service by sending notices/reminders incessantly, they could change mode of service and this Court suggests that notice through RPAD would be the best mode of service,in which case, the assessee cannot take advantage of the notice being unnoticed or plead ignorance, and in the case of the same being not delivered due to reasons such as 'No such addressee', 'Incorrect address', proper endorsement to such effect would be available to the respondent- Department, and in the case of acceptance by the assessee, acknowledgement of the same would be available, thereafter, there won't be any fetter on the respondent-GST Department to proceed against the assessees in the manner known to law.
This Court has no hesitation to hold that the impugned order is an ex parte order as the same suffers from violation of principles of natural justice and is liable to be aside on account of the fact that the petitioner has not been heard before passing such order. Therefore, this Court is inclined to set aside the impugned order - the matter is remanded to the respondent for fresh consideration.
Challenge to impugned order - ITC has been availed by fraud or mis-statement - HELD THAT:- In the personal affidavit filed by Additional Commissioner, Grade - 2 (Appeals), Mainpuri, pursuant to the order of this Court, there is no mention of any provision or notification empowering the authority not passing the judgement on the date fixed, but on a later date, to which neither any notice was issued nor the petitioner was heard on the next date.
The issue in hand is squarely covered by the judgement of this Court in M/s Wonder Enterprises [2024 (9) TMI 1749 - ALLAHABAD HIGH COURT] where it was held that 'Once the higher authority under the GST Act and the counsel appearing for the State has accepted the fact that there is no such provision for passing an order on a later date of hearing, the impugned order 07.03.2024 passed by respondent no. 1 in Appeal No. GST AD0905220410341/2022, F.Y. 2018-19 cannot sustain in the eyes of law and the same is liable to be dismissed.'
The impugned order dated 25.09.2024 passed by the Additional Commissioner, Grade - 2 (Appeals), Mainpuri cannot be sustained in the eyes of law. The matters require reconsideration - Petition allowed by way of remand.
Challenge to impugned order - ITC has been availed by fraud or mis-statement - HELD THAT:- In the personal affidavit filed by Additional Commissioner, Grade - 2 (Appeals), Mainpuri, pursuant to the order of this Court, there is no mention of any provision or notification empowering the authority not passing the judgement on the date fixed, but on a later date, to which neither any notice was issued nor the petitioner was heard on the next date.
The issue in hand is squarely covered by the judgement of this Court in M/s Wonder Enterprises [2024 (9) TMI 1749 - ALLAHABAD HIGH COURT] where it was held that 'Once the higher authority under the GST Act and the counsel appearing for the State has accepted the fact that there is no such provision for passing an order on a later date of hearing, the impugned order 07.03.2024 passed by respondent no. 1 in Appeal No. GST AD0905220410341/2022, F.Y. 2018-19 cannot sustain in the eyes of law and the same is liable to be dismissed.'
The impugned order dated 25.09.2024 passed by the Additional Commissioner, Grade - 2 (Appeals), Mainpuri cannot be sustained in the eyes of law. The matters require reconsideration - Petition allowed by way of remand.
Challenge to impugned order with summary order passed by the respondent no.3 as well as the impugned order passed by the respondent no.2 under section 130 of the GST Act - HELD THAT:- Looking to the fact that controversy raised in the present writ petition is squarely covered by the judgement of this Court in S/s Dinesh Kumar Pradeep Kumar [2024 (8) TMI 71 - ALLAHABAD HIGH COURT], the present case is being decided without exchanging the pleadings.
In S/s Dinesh Kumar Pradeep Kumar, this Court has held that if excess stock is found, the proceedings under section 73 and 74 of UPGST Act will come into play and the proceedings under Section 130 of the GST Act cannot be initiated.
The impugned order dated 27.7.2022, 3.1.2023 and 27.11.2024 passed in the proceedings under section 130 of the GST Act, are hereby quashed - Petition allowed.
Challenge to impugned order with summary order passed by the respondent no.3 as well as the impugned order passed by the respondent no.2 under section 130 of the GST Act - HELD THAT:- Looking to the fact that controversy raised in the present writ petition is squarely covered by the judgement of this Court in S/s Dinesh Kumar Pradeep Kumar [2024 (8) TMI 71 - ALLAHABAD HIGH COURT], the present case is being decided without exchanging the pleadings.
In S/s Dinesh Kumar Pradeep Kumar, this Court has held that if excess stock is found, the proceedings under section 73 and 74 of UPGST Act will come into play and the proceedings under Section 130 of the GST Act cannot be initiated.
The impugned order dated 27.7.2022, 3.1.2023 and 27.11.2024 passed in the proceedings under section 130 of the GST Act, are hereby quashed - Petition allowed.
Fraudulent availment of iTC - ITC has been availed by fraud or mis-statement - HELD THAT:- In the personal affidavit filed by Additional Commissioner, Grade - 2 (Appeals), Mainpuri, pursuant to the order of this Court, there is no mention of any provision or notification empowering the authority not passing the judgement on the date fixed, but on a later date, to which neither any notice was issued nor the petitioner was heard on the next date.
The issue in hand is squarely covered by the judgement of this Court in M/s Wonder Enterprises [2024 (9) TMI 1749 - ALLAHABAD HIGH COURT] where it was held that 'Once the higher authority under the GST Act and the counsel appearing for the State has accepted the fact that there is no such provision for passing an order on a later date of hearing, the impugned order 07.03.2024 passed by respondent no. 1 in Appeal No. GST AD0905220410341/2022, F.Y. 2018-19 cannot sustain in the eyes of law and the same is liable to be dismissed.'
In view of the peculiar facts & circumstances of the case as noted above, the impugned order dated 25.09.2024 passed by the Additional Commissioner, Grade - 2 (Appeals), Mainpuri cannot be sustained in the eyes of law. The matters require reconsideration - petition allowed by way of remand.
Fraudulent availment of iTC - ITC has been availed by fraud or mis-statement - HELD THAT:- In the personal affidavit filed by Additional Commissioner, Grade - 2 (Appeals), Mainpuri, pursuant to the order of this Court, there is no mention of any provision or notification empowering the authority not passing the judgement on the date fixed, but on a later date, to which neither any notice was issued nor the petitioner was heard on the next date.
The issue in hand is squarely covered by the judgement of this Court in M/s Wonder Enterprises [2024 (9) TMI 1749 - ALLAHABAD HIGH COURT] where it was held that 'Once the higher authority under the GST Act and the counsel appearing for the State has accepted the fact that there is no such provision for passing an order on a later date of hearing, the impugned order 07.03.2024 passed by respondent no. 1 in Appeal No. GST AD0905220410341/2022, F.Y. 2018-19 cannot sustain in the eyes of law and the same is liable to be dismissed.'
In view of the peculiar facts & circumstances of the case as noted above, the impugned order dated 25.09.2024 passed by the Additional Commissioner, Grade - 2 (Appeals), Mainpuri cannot be sustained in the eyes of law. The matters require reconsideration - petition allowed by way of remand.
- Whether the cancellation of the petitioner's GST registration by the Superintendent of Central Goods and Services Tax was valid in light of the petitioner's failure to file GST returns due to illness.
- Whether the petitioner was entitled to apply for revocation of cancellation under Section 30 of the CGST Act, 2017, read with Rule 23(1) of the CGST Rules, 2017, despite the expiry of the prescribed limitation period.
- Whether the limitation bar on the petitioner's appeal against cancellation under Section 107(1) of the CGST Act could be a ground to refuse relief under Article 226 of the Constitution of India.
- Whether the petitioner should be granted relief similar to that granted in a coordinate bench decision in a related matter involving restoration of GST registration after cancellation.
2. ISSUE-WISE DETAILED ANALYSIS
Validity of GST Registration Cancellation
The petitioner's GST registration was cancelled on the ground of non-filing of returns for a continuous period exceeding six months. The petitioner contended that the failure to file returns was due to illness, a fact that prevented timely compliance. The legal framework governing cancellation is found under the CGST Act, 2017, which empowers authorities to cancel registration where returns are not filed for six consecutive months.
The Court considered the petitioner's explanation and the fact that he was unaware of the cancellation until resumption of business activities in March 2025. The petitioner promptly filed all pending returns and paid due taxes and penalties. The Court noted that the cancellation order was dated 04.05.2024 and the petitioner filed returns up to May 2024, indicating compliance post-cancellation.
The Court's reasoning emphasized the principle of fairness and the petitioner's bona fide efforts to comply once aware of the cancellation. The illness was accepted as a mitigating circumstance explaining non-compliance, thereby casting doubt on the strict application of cancellation.
Right to Apply for Revocation of Cancellation Despite Limitation
Section 30 of the CGST Act, 2017, read with Rule 23(1) of the CGST Rules, 2017, provides for revocation of cancellation of GST registration within a prescribed time limit. The petitioner was denied the opportunity to apply for revocation on the ground that the limitation period, including any extended period, had expired.
The Court examined whether the limitation bar could be an absolute impediment to relief, especially where the petitioner was unaware of cancellation and had taken remedial action immediately upon discovery. The Court referred to a coordinate bench decision in WP(C) No. 70/2025, which had granted relief restoring GST registration under similar circumstances, thereby recognizing equitable considerations in such cases.
The Court found merit in the petitioner's plea to be allowed to regularize his status despite the lapse of limitation, particularly given the absence of any objection from the respondents and the petitioner's compliance with pending dues and penalties.
Limitation Bar on Appeal and Relief under Article 226
The petitioner's appeal under Section 107(1) of the CGST Act challenging cancellation was dismissed as barred by limitation. The question arose whether such dismissal precluded judicial review under Article 226 of the Constitution.
The Court observed that limitation bars in statutory appeals do not oust the jurisdiction of the High Court under Article 226, especially where fundamental rights or principles of natural justice are engaged. The petitioner's inability to file returns due to illness and ignorance of cancellation justified interference.
The Court relied on precedents where writ jurisdiction was invoked to remedy procedural or substantive injustice despite limitation in statutory remedies.
Grant of Relief Analogous to Coordinate Bench Decisions
The Court took note of the decision in Ms Yassung Yangfo vs Union of India and others, where a coordinate bench had quashed cancellation of GST registration and directed the tax authorities to intimate outstanding dues and restore registration upon payment.
The respondents did not oppose similar relief in the present case. The Court found the precedent persuasive and applicable, underscoring consistency in judicial approach to GST cancellation cases involving non-filing due to genuine reasons.
The Court directed the respondent authority to intimate any outstanding statutory dues within two weeks and upon payment, to restore the petitioner's GST registration, thereby ensuring procedural fairness and adherence to statutory mandates.
3. SIGNIFICANT HOLDINGS
"The impugned cancellation order dated 04.05.2024 is interfered with and accordingly, the same stands set aside and quashed."
"The respondent No. 3 is directed to intimate the petitioner if any statutory dues are pending and if any such dues are pending, then upon payment of the said dues, the respondent No. 3 will pass appropriate order to restore the GST registration of the petitioner."
Core principles established include the recognition that cancellation of GST registration for non-filing of returns may be set aside where non-compliance is due to genuine reasons such as illness, and where the petitioner acts promptly upon becoming aware of cancellation.
The Court affirmed that limitation bars under the CGST Act and Rules cannot be applied rigidly to deny relief where equity and justice demand otherwise, particularly in the context of writ jurisdiction under Article 226.
The final determination was that the GST registration cancellation was invalidated and the petitioner was entitled to restoration upon compliance with statutory dues, with the tax authorities mandated to facilitate this process expeditiously.
Cancellation of GST registration of the petitioner - non-filing of GST returns for a continuous period of more than six months - HELD THAT:- Annexure-4 Colly is perused, which indicates that the petitioner has submitted his GST returns up to May, 2024.
Further, it appears that in the case of Ms. Yassung Yangfo vs the Union of India and 2 Ors, a Coordinate Bench of this Court, vide order dated 24.02.2025, relying upon a decision of another Coordinate Bench of this Court in Krishanu Borthakur vs. Union of India [2025 (1) TMI 721 - GAUHATI HIGH COURT], had interfered with the GST cancellation order and also directed the Superintendent, Central Goods and Services Tax, Bhalukpung Range to intimate the petitioner therein the total outstanding statutory dues, if any, standing in the name of the petitioner till the date of cancellation of the GST registration.
Taking note of the submissions of learned Advocates of both sides, and also considering the facts and circumstances on the record, the impugned cancellation order dated 04.05.2024 (Annexure-3 of this petition) is interfered with and accordingly, the same stands set aside and quashed. The respondent No. 3 is directed to intimate the petitioner if any statutory dues are pending and if any such dues are pending, then upon payment of the said dues, the respondent No. 3 will pass appropriate order to restore the GST registration of the petitioner.
Petition disposed off.
Cancellation of GST registration of the petitioner - non-filing of GST returns for a continuous period of more than six months - HELD THAT:- Annexure-4 Colly is perused, which indicates that the petitioner has submitted his GST returns up to May, 2024.
Further, it appears that in the case of Ms. Yassung Yangfo vs the Union of India and 2 Ors, a Coordinate Bench of this Court, vide order dated 24.02.2025, relying upon a decision of another Coordinate Bench of this Court in Krishanu Borthakur vs. Union of India [2025 (1) TMI 721 - GAUHATI HIGH COURT], had interfered with the GST cancellation order and also directed the Superintendent, Central Goods and Services Tax, Bhalukpung Range to intimate the petitioner therein the total outstanding statutory dues, if any, standing in the name of the petitioner till the date of cancellation of the GST registration.
Taking note of the submissions of learned Advocates of both sides, and also considering the facts and circumstances on the record, the impugned cancellation order dated 04.05.2024 (Annexure-3 of this petition) is interfered with and accordingly, the same stands set aside and quashed. The respondent No. 3 is directed to intimate the petitioner if any statutory dues are pending and if any such dues are pending, then upon payment of the said dues, the respondent No. 3 will pass appropriate order to restore the GST registration of the petitioner.
Petition disposed off.
1. Whether the petitioner is entitled to claim ITC on purchases made from a supplier who was registered at the time of supply but whose registration was later cancelled and who did not deposit the tax to the government.
2. The applicability and interpretation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 ("Central Act") and corresponding provisions under the U.P. GST Act regarding the condition that tax must have been actually paid to the government by the supplier for ITC to be claimed.
3. The evidentiary burden on the recipient of goods to prove the genuineness of the transaction, including actual physical movement of goods and payment of tax by the supplier.
4. The validity and scope of proceedings initiated under Section 74 of the U.P. GST Act for recovery of tax, interest, and penalty where ITC has been wrongly availed.
5. The relevance and impact of various judicial precedents, including judgments of coordinate benches and the Supreme Court, on the interpretation of ITC eligibility and procedural safeguards.
Issue-wise Detailed Analysis
Issue 1: Entitlement to ITC when supplier's registration is cancelled and tax not deposited
The legal framework governing ITC entitlement is primarily found in Section 16 of the Central Act and corresponding provisions of the U.P. GST Act. Section 16(1) grants a registered person the right to claim ITC subject to prescribed conditions. However, Section 16(2) imposes restrictions, notably clause (c), which mandates that the tax charged in respect of the supply must have been actually paid to the government either in cash or through utilization of ITC.
The Court noted that the transaction in question took place in 2018, when the supplier was registered. However, the supplier's registration was cancelled in 2019, and it was found that the supplier had not deposited the tax on the supplies made. The petitioner claimed ITC on the basis of tax invoices and payment through banking channels but failed to demonstrate that the tax was paid by the supplier to the government.
The Court emphasized the plain language of Section 16(2)(c), which clearly restricts ITC entitlement to cases where the tax has been actually paid by the supplier. The provision was described as unambiguous and mandatory. Therefore, the petitioner's claim was not sustainable in the absence of proof of tax payment by the supplier.
Issue 2: Interpretation of Section 16(2)(c) and related provisions
The Court extensively examined the statutory scheme, including the unamended provisions of Section 41 and Section 43A (prior to their amendment/omission by the Finance Act, 2022), which deal with the provisional acceptance and procedure for availing ITC. These provisions, read with Section 16(2)(c), collectively impose a framework that conditions ITC on the actual payment of tax by the supplier and verification of outward supplies.
The Court observed that although the dispute relates to a 2018 transaction, understanding the post-amendment framework was helpful to appreciate the legislative intent to prevent fraudulent claims and ensure compliance. The amendments underscore the importance of matching ITC claims with actual tax payments by suppliers.
Issue 3: Burden of proof on the recipient to establish genuineness and physical movement of goods
The Court relied heavily on the Supreme Court's decision in a case concerning the Karnataka Value Added Tax Act, 2003, which clarified that the burden of proving the correctness of an ITC claim lies squarely on the recipient claiming such credit. Mere production of tax invoices or payment proofs is insufficient. The recipient must prove beyond doubt the actual transaction, physical movement of goods, and payment particulars.
The petitioner in this case failed to discharge this burden. There was no evidence of actual tax payment by the supplier, nor sufficient proof of physical movement of goods beyond the tax invoices and banking transactions. The Court found that the authorities rightly initiated proceedings under Section 74 of the U.P. GST Act for wrongful availing of ITC.
Issue 4: Validity of proceedings under Section 74 for recovery of wrongly availed ITC
Section 74 of the U.P. GST Act empowers authorities to determine tax not paid or input tax credit wrongly availed due to fraud, willful misstatement, or suppression of facts. The Court noted that the issuance of a show-cause notice under Section 74 was justified as the supplier's registration was cancelled and tax was not deposited, yet the petitioner claimed ITC.
The Court explained that Section 74 proceedings are a mechanism to protect government revenue from fraudulent claims and ensure compliance with the statutory conditions for ITC. The petitioner's failure to produce evidence of tax payment by the supplier justified the demand for tax, interest, and penalty.
Issue 5: Consideration of judicial precedents relied upon by parties
The petitioner relied on several judgments from coordinate benches and other High Courts, including cases where ITC claims were allowed or matters remanded for fresh consideration. However, the Court observed that many of these judgments did not address or consider the mandatory condition under Section 16(2)(c) regarding actual tax payment by the supplier.
In contrast, the Court found the decision in a coordinate bench case rejecting ITC claims where the burden of proof was not discharged, and the Supreme Court's ruling emphasizing the recipient's burden of proof, to be more authoritative and applicable. The Court distinguished the petitioner's cited judgments on these grounds.
Application of Law to Facts and Treatment of Competing Arguments
The petitioner argued that since the supplier was registered at the time of supply, and payment was made through banking channels with tax invoices issued, ITC should be allowed. The petitioner contended that the fault lay with the supplier's failure to deposit tax, which should not affect the recipient's claim.
The Court rejected this argument, holding that the statutory scheme expressly conditions ITC entitlement on actual tax payment by the supplier. The petitioner's inability to prove tax payment or physical movement of goods meant the claim was not bona fide. The Court also noted that safeguards in the GST law are designed to prevent fraudulent claims and protect government revenue.
The respondent and the authorities relied on the statutory provisions and the Supreme Court precedent to maintain that the petitioner failed to discharge the burden of proof and that the initiation of proceedings under Section 74 was justified.
Conclusions
The Court concluded that the petitioner was not entitled to claim ITC on the disputed transaction because the supplier had not deposited the tax as required under Section 16(2)(c). The petitioner failed to prove the genuineness of the transaction, physical movement of goods, and tax payment by the supplier. The proceedings under Section 74 were rightly initiated and upheld. The Court dismissed the writ petition and discharged the interim order.
Significant Holdings
"The provision is simple and clear, and there is no ambiguity as regards actual payment of tax by supplier to Government. Once the supplier has not deposited the tax mandated under sub-section (2)(c) of Section 16, the petitioner purchaser cannot claim the benefit."
"The burden of proving the correctness of ITC remains upon the dealer claiming such ITC. Such a burden of proof cannot get shifted on the revenue. Mere production of the invoices or the payment made by cheques is not enough and cannot be said to be discharging the burden of proof."
"Section 74 is a mechanism where any input tax credit which has wrongly been availed can be taken back by Government along with interest and penalty."
"The scheme under the Act has been provided to prevent fraudulent transactions and bogus claims of ITC. Safeguards have been put in place through various provisions to match transactions which have taken place between the parties before ITC is availed."
Final determinations:
- ITC claim is not permissible without proof of actual tax payment by the supplier as per Section 16(2)(c).
- The petitioner failed to discharge the burden of proof regarding genuineness and physical movement of goods.
- Proceedings under Section 74 for recovery of wrongly availed ITC were valid and rightly upheld.
- Reliance on judgments not considering Section 16(2)(c) is misplaced.
- The writ petition is dismissed, and no interference with the orders of the authorities is warranted.
Entitlement for input tax credit for alleged transaction having been taken place between the supplier, Shree Radhey International, Delhi and petitioner in the year 2018 - HELD THAT:- Section 16(2) was amended and sub-section (2)(c) was amended to the extent that the words “or Section 43A” were omitted by Finance Act, 2022 w.e.f. 01.10.2022. Moreover, Section 41 which previously dealt with “claim of input tax credit and provisional acceptance thereof” was also substituted by Finance Act, 2022 w.e.f. 01.10.2022 with “availment of input tax credit”.
In the case in hand, petitioner is claiming ITC on the basis of supplies made by Shree Radhey International in the year 2018. Admittedly, only tax invoice was issued by the supplier. The alleged tax to have been charged was never deposited by the supplier and no compliance of Section 16(2)(c) was made. The eligibility and availment of ITC is subject to deposit of tax by supplier which is clear from the reading of sub-section (2)(c) - The provision is simple and clear, and there is no ambiguity as regards actual payment of tax by supplier to Government. Once the supplier has not deposited the tax mandated under sub-section (2)(c) of Section 16, the petitioner purchaser cannot claim the benefit.
In M/s Solvi Enterprises [2025 (3) TMI 1313 - ALLAHABAD HIGH COURT], the co-ordinate Bench while dealing with Section 16 and 74 of the Act had not noticed the import of sub-section (2)(c) while granting the benefit of ITC on the ground that the registration of the seller dealer was cancelled on the subsequent date when the transaction had admittedly taken place - From the reading of the judgment, it appears that provisions of subsection (2)(c) of Section 16 was not brought to the notice of the Court by State Counsel appearing in the matter.
In the instant case, notice under Section 74(1) was issued by taxing authorities after it was found that registration of the supplier Shree Radhey International was cancelled and no tax was deposited by him while ITC was claimed on the alleged transaction between the supplier and the purchaser.
Reliance place upon the various judgments by petitioner’s counsel does not help her case as no consideration of mandatory provision of Section 16(2)(c) of the Act has been considered. Moreover, in many of the cases placed before the Court, the matter has been remanded back to authorities for consideration afresh. In Rimjhim Ispat Ltd. [2023 (1) TMI 1479 - ALLAHABAD HIGH COURT], the show-cause notice issued to petitioner therein was only stayed though challenge is to the vires of Section 16(2)(c) which still holds the field.
No interference is required in the orders impugned - Petition dismissed.
Entitlement for input tax credit for alleged transaction having been taken place between the supplier, Shree Radhey International, Delhi and petitioner in the year 2018 - HELD THAT:- Section 16(2) was amended and sub-section (2)(c) was amended to the extent that the words “or Section 43A” were omitted by Finance Act, 2022 w.e.f. 01.10.2022. Moreover, Section 41 which previously dealt with “claim of input tax credit and provisional acceptance thereof” was also substituted by Finance Act, 2022 w.e.f. 01.10.2022 with “availment of input tax credit”.
In the case in hand, petitioner is claiming ITC on the basis of supplies made by Shree Radhey International in the year 2018. Admittedly, only tax invoice was issued by the supplier. The alleged tax to have been charged was never deposited by the supplier and no compliance of Section 16(2)(c) was made. The eligibility and availment of ITC is subject to deposit of tax by supplier which is clear from the reading of sub-section (2)(c) - The provision is simple and clear, and there is no ambiguity as regards actual payment of tax by supplier to Government. Once the supplier has not deposited the tax mandated under sub-section (2)(c) of Section 16, the petitioner purchaser cannot claim the benefit.
In M/s Solvi Enterprises [2025 (3) TMI 1313 - ALLAHABAD HIGH COURT], the co-ordinate Bench while dealing with Section 16 and 74 of the Act had not noticed the import of sub-section (2)(c) while granting the benefit of ITC on the ground that the registration of the seller dealer was cancelled on the subsequent date when the transaction had admittedly taken place - From the reading of the judgment, it appears that provisions of subsection (2)(c) of Section 16 was not brought to the notice of the Court by State Counsel appearing in the matter.
In the instant case, notice under Section 74(1) was issued by taxing authorities after it was found that registration of the supplier Shree Radhey International was cancelled and no tax was deposited by him while ITC was claimed on the alleged transaction between the supplier and the purchaser.
Reliance place upon the various judgments by petitioner’s counsel does not help her case as no consideration of mandatory provision of Section 16(2)(c) of the Act has been considered. Moreover, in many of the cases placed before the Court, the matter has been remanded back to authorities for consideration afresh. In Rimjhim Ispat Ltd. [2023 (1) TMI 1479 - ALLAHABAD HIGH COURT], the show-cause notice issued to petitioner therein was only stayed though challenge is to the vires of Section 16(2)(c) which still holds the field.
No interference is required in the orders impugned - Petition dismissed.
The core legal questions considered by the Court in this matter include:
(a) Whether delay in filing an appeal under Section 107 of the Central Goods and Services Tax (CGST) Act can be condoned;
(b) Whether the impugned Show Cause Notice (SCN) and the Order of Cancellation of Registration Certificate (RC) were valid and legally enforceable despite the presence of a digital signature stamp indicating "Signature Not Verified" and being digitally signed by the Goods and Services Tax Network (GSTN) rather than a proper officer;
(c) Whether the cancellation of the Registration Certificate was legally sustainable given the grounds stated, particularly the allegation of failure to furnish returns for a continuous period of six months when the petitioner had already applied for cancellation;
(d) Whether the limitation period for filing the appeal commenced only upon receipt of a properly signed order by the proper officer;
(e) Whether the retrospective cancellation of the Registration Certificate without prior notice or explicit mention in the SCN was lawful;
(f) Whether the Court erred in not considering the merits of the petitioner's other contentions due to dismissal on the ground of delay.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Condonation of Delay in Filing Appeal under Section 107 of the CGST Act
Relevant Legal Framework and Precedents: The Court relied on the statutory provisions of Sections 107(1) and 107(4) of the CGST Act, which prescribe a strict limitation period for filing appeals against orders passed under the Act. The Court examined whether the Limitation Act, 1963, could be invoked to condone delay in such appeals.
Court's Interpretation and Reasoning: The Court held that the power to condone delay depends on the statutory regime governing the limitation period. If the statute creates a special and independent regime with respect to limitation, the general provisions of the Limitation Act do not apply. Since the CGST Act prescribes a specific limitation period for appeals under Section 107 and proscribes entertaining appeals beyond the terminal date, delay cannot be condoned.
Key Findings: The appeals filed beyond the prescribed period were barred by limitation. The Court dismissed the writ petitions on this ground alone, without delving into the merits.
Application of Law to Facts: The petitioner filed the appeal on 18th October 2023, beyond the limitation period expiring on 17th August 2023. Hence, the appeal was rightly rejected as time-barred.
Treatment of Competing Arguments: The petitioner argued for condonation of delay, but the Court found no statutory basis for it under the CGST Act.
Conclusion: Delay in filing appeal under Section 107 of the CGST Act is not condonable.
Issue (b): Validity of the Show Cause Notice and Cancellation Order Despite Digital Signature Stamp "Signature Not Verified"
Relevant Legal Framework and Precedents: The issue pertains to the authenticity and validity of digitally signed orders under GST law. The Court considered precedents including M/s Vishwa Enterprise v. State of Gujarat, where a similar contention was rejected on the ground that orders uploaded on the GSTN portal are digitally signed and verified by the concerned officer.
Court's Interpretation and Reasoning: The Court noted that the impugned order bears the name, designation, ward number, and digital signature of the official. The presence of the phrase "Signature Not Verified" was held to be a technical glitch and did not invalidate the order. Uploading on the GST portal requires verification by the State Tax Officer through digital signature, which lends authenticity.
Key Evidence and Findings: The order was digitally signed by the Superintendent and uploaded on the GSTN portal, indicating official sanction and verification.
Application of Law to Facts: The petitioner's argument that the order was unsigned and hence void was rejected. The Court held that the order is a valid, enforceable official document.
Treatment of Competing Arguments: The petitioner relied on judgments requiring signed orders, but the Court distinguished those by emphasizing the digital verification process under GST.
Conclusion: The digital signature and uploading on the GSTN portal render the order valid despite the "Signature Not Verified" stamp.
Issue (c): Legality and Grounds of Cancellation of Registration Certificate
Relevant Legal Framework and Precedents: Section 29(2) of the CGST Act prescribes grounds for cancellation of registration, including failure to furnish returns for a continuous period of six months. The petitioner contended that the cancellation was illegal as the six-month period had not expired and that the petitioner had already applied for cancellation.
Court's Interpretation and Reasoning: The Court noted that the petitioner's application for cancellation was pending and that the SCN was issued before the six-month period had elapsed. The petitioner argued that the cancellation order was arbitrary, illegal, and violated principles of natural justice and statutory provisions.
Key Evidence and Findings: The SCN dated 3rd February 2023 cited failure to furnish returns for six months as the reason. The petitioner had applied for cancellation on 9th March 2022. The cancellation order directed payment of zero amount, contradicting the SCN's allegations.
Application of Law to Facts: The Court did not examine these contentions on merits as the appeal was dismissed on limitation grounds. However, the petitioner relied on a prior judgment emphasizing illegality of retrospective cancellation without due process.
Treatment of Competing Arguments: The Court observed that since the appeal was time barred, the merits were not considered. The petitioner's challenge to the grounds of cancellation remained unaddressed substantively.
Conclusion: The Court did not adjudicate on the legality of cancellation due to dismissal on limitation grounds.
Issue (d): Commencement of Limitation Period for Filing Appeal
Relevant Legal Framework: Section 107 of the CGST Act prescribes the limitation period from the date of communication of the order.
Court's Interpretation and Reasoning: The petitioner contended that limitation should run only from receipt of a properly signed order. The Court rejected this contention, holding that the order was validly communicated and digitally signed.
Key Findings: The limitation period was correctly computed from the date of communication of the order dated 18th April 2023.
Conclusion: Limitation period commenced upon communication of the valid order, irrespective of the petitioner's contention on signature verification.
Issue (e): Lawfulness of Retrospective Cancellation Without Prior Notice
Relevant Legal Framework and Precedents: The petitioner relied on judicial authority emphasizing that retrospective cancellation without prior notice or explicit mention in the SCN is unlawful and violates principles of natural justice.
Court's Interpretation and Reasoning: The Court did not examine this contention on merits due to dismissal on limitation grounds but recorded the petitioner's submissions.
Conclusion: No determination was made on this issue due to procedural dismissal.
Issue (f): Consideration of Merits Despite Dismissal on Delay
Court's Reasoning: The Court held that once the appeal was dismissed as barred by limitation, there was no requirement to consider the merits of the petitioner's contentions.
Conclusion: The Court did not consider the petitioner's substantive arguments beyond delay.
3. SIGNIFICANT HOLDINGS
"The power to condone delay caused in pursuing a statutory remedy would always be dependent upon the statutory provision that governs. The right to seek condonation of delay and invoke the discretionary power inhering in an appellate authority would depend upon whether the statute creates a special and independent regime with respect to limitation or leaves an avenue open for the appellant to invoke the general provisions of the Limitation Act to seek condonation of delay. The facility to seek condonation can be resorted provided the legislation does not construct an independent regime with respect to an appeal being preferred. Once it is found that the legislation incorporates a provision which creates a special period of limitation and proscribes the same being entertained after a terminal date, the general provisions of the Limitation Act would cease to apply."
"In the opinion of this Court, there may be some technical glitch with the wording in the Stamp 'Signature Not Verified' but the same is digitally signed and the said expression would not render the order void or non est as is being argued. The fact that the officer has digitally signed the order and the order is uploaded on the GST portal renders the same as a valid order."
"In view of the fact that the impugned order was uploaded on the GSTN portal which can only be done after verification by the concerned State Tax Officer through its portal after logging into the portal using the digital signature, the contention that the impugned notice and the order are unsigned does not merit any acceptance."
Core Principles Established:
- Statutory limitation periods under the CGST Act are strictly enforced, and delay in filing appeals cannot be condoned unless the statute permits.
- Digital signature and uploading of orders on the GSTN portal constitute valid authentication, and minor technical glitches in signature verification do not invalidate orders.
- Appeals filed beyond the statutory limitation period are liable to be dismissed without consideration of merits.
Final Determinations:
- The review petition challenging the dismissal of the writ petition on the ground of delay was dismissed.
- The Court upheld the validity of the impugned cancellation order despite the petitioner's challenge regarding digital signatures.
- The Court declined to consider the merits of the petitioner's challenge to the cancellation order due to dismissal on limitation grounds.
Condonation of delay in filing an appeal under Section 107 of the CGST Act - HELD THAT:- In M/S VISHWA ENTERPRISE VERSUS STATE OF GUJARAT [2025 (3) TMI 1487 - GUJARAT HIGH COURT] wherein on squarely similar facts, it was argued that the copy of the impugned order therein ought to have been signed by the concerned authority and the same not being signed, is invalid. The Gujarat High Court while considering the facts and contentions inter alia held that in view of the fact that the impugned order therein was uploaded on the GSTN portal which can only be done after verification by the concerned State Tax Officer, the said order is valid.
Thus, in the opinion of this Court, the review petition is unmerited, both on the issue of lack of error apparent on the face of the record as also on merits.
Review petition dismissed.
Condonation of delay in filing an appeal under Section 107 of the CGST Act - HELD THAT:- In M/S VISHWA ENTERPRISE VERSUS STATE OF GUJARAT [2025 (3) TMI 1487 - GUJARAT HIGH COURT] wherein on squarely similar facts, it was argued that the copy of the impugned order therein ought to have been signed by the concerned authority and the same not being signed, is invalid. The Gujarat High Court while considering the facts and contentions inter alia held that in view of the fact that the impugned order therein was uploaded on the GSTN portal which can only be done after verification by the concerned State Tax Officer, the said order is valid.
Thus, in the opinion of this Court, the review petition is unmerited, both on the issue of lack of error apparent on the face of the record as also on merits.
Review petition dismissed.
In addressing this issue, the Court examined the relevant legal framework, including Section 15(4) of the CGST Act and Rule 28 of the CGST Rules, 2017, which govern the valuation of supplies between distinct persons. Rule 28(a) mandates that the value of supply between distinct persons be the open market value. The second proviso to Rule 28 further provides that if the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.
The Court also considered Circular No. 199/11/2023-GST dated 17th July, 2023 issued by the Central Board of Indirect Taxes and Customs (CBIC). This Circular clarified that where a Head Office (HO) provides services to Branch Offices (BOs) and the BOs are eligible for full input tax credit, the value declared in the invoice by the HO is deemed to be the open market value, regardless of whether all cost components, such as employee salary costs, are included. Importantly, if no tax invoice is issued by the HO for such services, the value may be deemed to be nil, which would correspondingly mean no tax liability arises.
The Petitioner relied heavily on this Circular and on a precedent set by a Coordinate Bench of the Court in Metal One Corporation India Pvt. Ltd. & Ors., where it was held that if the charge is nil, no tax demand is payable. In that case, the Court had quashed the Show Cause Notice and the consequent Order-in-Original on the basis that no invoices were generated and the value of the services rendered was to be treated as nil, resulting in no plausible tax liability.
The Respondents, however, referred to a similar case where the Court had relegated the party to the appellate remedy, emphasizing procedural propriety and the need for adjudication at the appropriate forum rather than quashing proceedings outright.
Upon review, the Court found that the Adjudicating Authority had applied the second proviso to Rule 28 without considering the benefit of Circular No. 199/11/2023-GST and without giving due regard to the clarifications therein. The absence of cross-charges between the Petitioner and other entities was a critical factual finding that the Adjudicating Authority failed to adequately consider. The Court held that the Adjudicating Authority must reconsider the matter in light of the Circular and the Metal One Corporation judgment.
The Court directed that the Petitioner be afforded a fresh hearing and that a fresh order be passed after considering the Circular and the relevant precedent. The Court emphasized the principle that where no tax invoice is issued and the recipient is eligible for full input tax credit, the value of the services rendered may be deemed nil, resulting in no tax liability. The Court quoted the Metal One Corporation judgment stating:
"In the facts of the present writ petitions, it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as 'Nil'. This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently, we are of the considered opinion that the proceedings initiated in terms of the impugned SCNs' and their continuance would be futile and impractical. The impugned SCNs are essentially rendered impotent and would serve no practical purpose."
In conclusion, the Court held that the Adjudicating Authority must reconsider the tax demand in light of the CBIC Circular and the Metal One Corporation judgment, ensuring that the valuation of internally generated services and the issuance (or non-issuance) of invoices are properly evaluated before determining any tax liability. The petition was disposed of with liberty to the Petitioner to pursue all available remedies, and pending applications were also disposed of.
Requirement to pay GST in respect of those expenses which were incurred by the Petitioner but were not cross-charged with the other entities - Circular No. 199/11/2023-GST dated 17th July, 2023 - HELD THAT:- A perusal of the Order-in-Original clearly shows that there were no cross-charges of expenses with the other entities. Moreover, the second proviso to Rule 28 of the Central Goods and Services Tax Rules, 2017 has been applied without giving benefit of the Circular No. 199/11/2023-GST and consideration to the said circular.
Under such circumstances this Court of the view that the Adjudicating Authority needs to reconsider the matter in the light Circular No. 199/11/2023-GST dated 17th July, 2023 and the judgment in Metal One Corporation India Pvt. Ltd. & Ors. [2024 (10) TMI 1534 - DELHI HIGH COURT] where the Court observed 'In the facts of the present writ petitions, it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as ‘Nil’. This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently, we are of the considered opinion that the proceedings initiated in terms of the impugned SCNs’ and their continuance would be futile and impractical.'
Accordingly, the Adjudicating Authority shall afford a hearing once again to the Petitioner and pass a fresh order in the light of the Circular No. 199/11/2023-GST dated 17th July, 2023 and the judgement passed in Metal One Corporation India Pvt. Ltd. & Ors.
Petition disposed off.
Requirement to pay GST in respect of those expenses which were incurred by the Petitioner but were not cross-charged with the other entities - Circular No. 199/11/2023-GST dated 17th July, 2023 - HELD THAT:- A perusal of the Order-in-Original clearly shows that there were no cross-charges of expenses with the other entities. Moreover, the second proviso to Rule 28 of the Central Goods and Services Tax Rules, 2017 has been applied without giving benefit of the Circular No. 199/11/2023-GST and consideration to the said circular.
Under such circumstances this Court of the view that the Adjudicating Authority needs to reconsider the matter in the light Circular No. 199/11/2023-GST dated 17th July, 2023 and the judgment in Metal One Corporation India Pvt. Ltd. & Ors. [2024 (10) TMI 1534 - DELHI HIGH COURT] where the Court observed 'In the facts of the present writ petitions, it is conceded that no invoices were generated. In view of the above and in light of the explicit terms of the Circular, the value of the service rendered would have to be treated as ‘Nil’. This would lead one to the inescapable conclusion of no perceivable or plausible tax liability possibly being created. Consequently, we are of the considered opinion that the proceedings initiated in terms of the impugned SCNs’ and their continuance would be futile and impractical.'
Accordingly, the Adjudicating Authority shall afford a hearing once again to the Petitioner and pass a fresh order in the light of the Circular No. 199/11/2023-GST dated 17th July, 2023 and the judgement passed in Metal One Corporation India Pvt. Ltd. & Ors.
Petition disposed off.
Challenge to order as well as rectification order - rectification application moved mainly on the ground that the petitioner submitted that he has paid a credit amount through its personal ledger account at the time of the filing of the appeal - pre deposit as is prescribed under Section 107 (6) (b) of the CGST Act, not made - HELD THAT:- The issue whether the pre deposit is permissible to be made through personal ledger account came up for consideration before the Madras High Court in the case of M/S. FORD INDIA PRIVATE LIMITED, REP. BY ITS AUTHORIZED SIGNATORY, SRINIVASAN KADIRVELU VERSUS THE OFFICE OF THE JOINT COMMISSIONER (ST), THE DEPUTY COMMISSIONER (S.T.) -III, CHENNAI [2024 (11) TMI 1333 - MADRAS HIGH COURT] wherein the court held that the pre deposit made through the ECS would be a valid deposit.
Considering and following the same judgement, it would be appropriate to remand the matter - Petition allowed by way of remand.
Challenge to order as well as rectification order - rectification application moved mainly on the ground that the petitioner submitted that he has paid a credit amount through its personal ledger account at the time of the filing of the appeal - pre deposit as is prescribed under Section 107 (6) (b) of the CGST Act, not made - HELD THAT:- The issue whether the pre deposit is permissible to be made through personal ledger account came up for consideration before the Madras High Court in the case of M/S. FORD INDIA PRIVATE LIMITED, REP. BY ITS AUTHORIZED SIGNATORY, SRINIVASAN KADIRVELU VERSUS THE OFFICE OF THE JOINT COMMISSIONER (ST), THE DEPUTY COMMISSIONER (S.T.) -III, CHENNAI [2024 (11) TMI 1333 - MADRAS HIGH COURT] wherein the court held that the pre deposit made through the ECS would be a valid deposit.
Considering and following the same judgement, it would be appropriate to remand the matter - Petition allowed by way of remand.
The core legal questions considered by the Tribunal in this appeal relate primarily to the taxability of various streams of income earned by the assessee under the provisions of the Income-tax Act, 1961 and the India-Canada Double Taxation Avoidance Agreement ("tax treaty"). The key issues are:
2. ISSUE-WISE DETAILED ANALYSIS
Dependent Agent PE (DAPE) status of ATCs and taxation of distance learning courses:
Legal framework and precedents: The Tribunal examined Articles 5(4) and 5(5) of the India-Canada tax treaty, which define the circumstances under which an enterprise has a PE in the other contracting state, particularly focusing on the dependent agent PE provisions. Article 5(5) provides that an enterprise will not be deemed to have a PE merely because it carries on business through an agent of independent status acting in the ordinary course of business, unless the agent's activities are devoted wholly or almost wholly on behalf of the enterprise and transactions are not at arm's length.
Precedents relied upon include the Tribunal's own decisions in the assessee's prior years (AY 2012-13 and others), the Special Bench decision in Motorola Inc. Vs. Dy. CIT, and the Bombay High Court's ruling in DIT Vs. Delmas France, which emphasize the onus on the revenue to prove that the agent is not independent and that transactions are not at arm's length.
Court's interpretation and reasoning: The Tribunal found that the ATCs are independent third-party organizations offering a variety of courses, including but not limited to those designed by the assessee. The evidence showed that ATCs had multiple revenue streams and were not exclusively dependent on the assessee. The Tribunal noted that the revenue authorities failed to demonstrate that transactions between the assessee and ATCs were not at arm's length. The Dispute Resolution Panel's (DRP) reliance on the ATCs being dependent agents was rejected due to lack of evidence that the ATCs' activities were devoted wholly or almost wholly to the assessee or that transactions were not arm's length.
Key evidence and findings: The Tribunal analyzed financial statements and course offerings of various ATCs, showing their independent business operations. It also noted that the course materials were dispatched directly from outside India, and ownership transferred outside India. The Tribunal relied on the absence of any adverse findings on arm's length nature of transactions.
Application of law to facts: Applying Article 5(5), the Tribunal concluded that the ATCs qualify as agents of independent status, and thus no PE arises in India. Consequently, income from distance learning courses cannot be taxed as business profits attributable to a PE in India.
Treatment of competing arguments: The revenue's reliance on the DRP's order and the AO's attribution of 40% of gross receipts to the alleged PE was rejected. The Tribunal held that the DRP's observations were general and unsupported by concrete evidence. The Tribunal also declined to remit the matter back for further inquiry as there was no prima facie material to suggest non-arm's length transactions.
Conclusion: The Tribunal held that the ATCs do not constitute a DAPE of the assessee in India and income from distance learning courses is not taxable under the India-Canada tax treaty. The addition made by the AO on this ground was deleted.
Taxability of income from sale of physical publications:
Legal framework and precedents: Article 12(3) of the India-Canada tax treaty defines 'royalties' to include payments for use or right to use copyrights or for information concerning industrial, commercial or scientific experience. The Tribunal relied on its earlier decision for AY 2012-13 and the Madhya Pradesh High Court ruling in CIT Vs. HEG Ltd., which held that mere sale of publications without transfer of intellectual property rights does not constitute royalty.
Court's interpretation and reasoning: The Tribunal found that the publications/manuals (e.g., Dangerous Goods Regulations) were compilations of publicly available information issued by ICAO and did not involve transfer of copyright or undisclosed technical information. The customers acquired ownership of the physical manuals but no right to reproduce or exploit the content.
Key evidence and findings: The Tribunal examined the content of the manuals, their basis on ICAO instructions, and the manner of sale directly to customers. It noted that the manuals were user-friendly reference materials.
Application of law to facts: Since no use or right to use copyright was granted, and the information was publicly available, the receipts from sale of physical publications did not fall within the definition of royalty under Article 12(3).
Treatment of competing arguments: The revenue's contention that the income was royalty was rejected as the Tribunal found no intellectual property transfer or exclusive know-how involved.
Conclusion: The addition treating sale proceeds as royalty was deleted.
Taxability of receipts from provision of advertising space:
Legal framework and precedents: Article 12(3) of the tax treaty defines royalty, and the Tribunal relied on its own earlier decisions and the ITAT Mumbai ruling in Yahoo India (P) Ltd. Vs. DCIT, which held that payments for advertising space do not constitute royalty.
Court's interpretation and reasoning: The Tribunal held that provision of advertising space on the assessee's website or publications did not grant any right to use or exploit the assessee's logo, brand, or goodwill. The customers merely placed advertisements without acquiring any intellectual property rights.
Key evidence and findings: The Tribunal noted that the advertisement services were managed from outside India and consideration was received outside India. It also reviewed similar precedents where advertising payments were held to be business profits, not royalty.
Application of law to facts: The receipts from advertising space did not satisfy the definition of royalty and thus were not taxable as such under the treaty.
Treatment of competing arguments: The revenue's reliance on the DRP order was rejected as the Tribunal found no right to use or exploit intellectual property was granted.
Conclusion: The addition treating advertising receipts as royalty was deleted.
Taxability of database access facility charges:
Legal framework and precedents: The Tribunal referred to the India-Canada tax treaty and its earlier decisions for AYs 2011-12, 2014-15, and 2016-17, holding that database access fees for publicly available data do not constitute royalty.
Court's interpretation and reasoning: The Tribunal found that the databases comprised publicly available information collated and organized by the assessee, and the fees were for facilitating access rather than imparting any technical or scientific experience or copyright use.
Key evidence and findings: The Tribunal noted that the data such as currency exchange rates and tariffs were publicly available and the subscription fee was received outside India.
Application of law to facts: The income from database access was held not to be royalty and thus not taxable in India.
Treatment of competing arguments: The revenue's reliance on the DRP order was again rejected in view of the consistent precedents.
Conclusion: The addition on account of database access fees was deleted.
Taxability of joining and annual fees, ICH facility fees, and e-services data processing charges:
Legal framework and precedents: Article 7 of the tax treaty provides that business profits are taxable in the source state only if attributable to a PE. The Tribunal relied on its earlier decisions including the Supreme Court ruling in Ishikawajima Harima Heavy Industries Co. Ltd. Vs. DIT, which held that profits attributable to a PE are limited to the role played by the PE in the transactions.
Court's interpretation and reasoning: The Tribunal accepted the assessee's contention that these services and fees were provided and collected directly outside India by IATA Canada and were not connected to activities of the IATA India branch (alleged PE). The Tribunal directed the matter to be restored to the AO for verification of the claim that these services were provided outside India.
Key evidence and findings: The Tribunal noted that the IATA India branch was permitted by RBI to conduct non-commercial activities on a no-profit basis and filed returns under the principle of mutuality. The DRP's rejection of the claim was found unsustainable without verifying the factual claim.
Application of law to facts: Only profits attributable to the PE's role in India are taxable. Where services are provided and fees received outside India, such income cannot be attributed to the PE.
Treatment of competing arguments: The revenue's reliance on the DRP order was set aside, and the matter remanded for factual verification.
Conclusion: The appeal was allowed for statistical purposes with directions for fresh adjudication.
Classroom training courses and credit notes:
Legal framework and precedents: The issue concerned adjustment of income for credit notes issued in subsequent years.
Court's interpretation and reasoning: The Tribunal noted that the assessee had inadvertently offered income for tax and subsequently issued credit notes. The AO had rejected the claim for adjustment due to lack of third-party confirmation.
Key evidence and findings: The assessee submitted additional evidence including invoices, credit notes, and email communications showing rescheduling due to COVID-19.
Application of law to facts: The Tribunal restored the issue to the AO for verification and consequential relief.
Treatment of competing arguments: The revenue did not object to the adjustment on verification.
Conclusion: The issue was remanded for limited purpose of verifying credit notes and allowing relief.
Computation of interest under Sections 234A and 234B:
The Tribunal directed recomputation of interest after giving effect to the order, as agreed by both parties.
Penalty proceedings under Sections 274 read with 270A:
The Tribunal observed that the issue was premature and did not require adjudication at this stage.
3. SIGNIFICANT HOLDINGS
"An enterprise carrying on business in the other contracting state through an agent of independent status acting in the ordinary course of business shall not be deemed to have a permanent establishment in that state, unless the agent's activities are devoted wholly or almost wholly on behalf of the enterprise and transactions are not made under arm's length conditions."
"In the absence of any finding that transactions between the principal and the agent are not at arm's length, the agent retains its independent status, and no dependent agent PE arises."
"Receipts from sale of physical publications, which are mere compilations of publicly available information and do not involve transfer of intellectual property rights or undisclosed technical information, do not constitute 'royalty' under Article 12(3) of the India-Canada tax treaty."
"Provision of advertising space without granting any right to use or exploit the brand or logo of the assessee does not amount to royalty."
"Database access fees for facilitating access to publicly available information do not constitute royalty."
"Business profits attributable to a PE are limited to the extent of the role played by the PE in the transactions. Income from services provided and fees received outside India cannot be attributed to the PE."
"The onus lies on the revenue to establish the existence of a PE and to prove that transactions between the enterprise and agent are not at arm's length."
"Inadvertent inclusion of income subsequently adjusted by credit notes should be verified and adjusted accordingly."
"Interest under Sections 234A and 234B must be recomputed after giving effect to the Tribunal's order."
The Tribunal allowed the appeal on all substantive grounds relating to the taxability of income streams, vacated the additions made by the AO and DRP, remanded certain issues for factual verification, and declined to adjudicate penalty proceedings at this stage.
Income taxable in India - Provisions of distance learning course - HELD THAT:- For AYs 2011-12, 2014-15 and 2016-17 also, the coordinate benches had held that the income of the assessee from the provision of distance learning courses is not taxable in India, after placing reliance on the decision of case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT]
After noting that there is no change in the facts and circumstances in this year, we hold that the addition made by the AO, on the direction of DRP, on account of the provision of distance learning courses is not justified and is, therefore, deleted.
Sale of physical publications - After noting that there is no change in facts and circumstances during the year, we hold that the addition made by the AO on account of the sale of physical publications is not justified and is, therefore, deleted.
Provision of advertising space - Addition made by the Ld. AO on account of the provision of advertising space is not justified and, is therefore deleted.
Database access facility - We hold that the addition made by the Ld. AO on account of the data base access facility is not justified and, is therefore deleted.
Clearing House Facility (ICH facility) & Joining and annual fees (membership fees) - We are unable to subscribe to the manner in which the A.O/DRP had summarily rejected the claim of the assessee that as the ICH services were provided by the assessee, viz. IATA, Canada directly outside India, and the fees in respect of the said services was also received by the assessee in its bank account maintained outside India, therefore, the revenue pertaining to the said ICH services could not have been attributed to the IATA-India branch. In our considered view, the matter in all fairness requires to be restored to the file of the AO. AO shall in the course of the 'set aside' proceedings verify the veracity of the claim of the assessee that the ICH services were provided by assessee, viz. IATA, Canada directly outside India. In case, the claim of the assessee is found to be in order, then the addition of fees received from providing ICH services made in its hands would stand vacated.
Data processing charges - Addition made by AO on account of the joining and annual fees (membership fees) is not justified and is therefore deleted.
Classroom training courses - Income from class room training course was suo moto offered to tax in AY 2020-21 amounting to USD should be reduced in AY 2020-21 to the extent of credit note issued by IATA Canada in subsequent years i.e. in AY 2021-22. DR has not objected to the above-mentioned proposition.
Income taxable in India - Provisions of distance learning course - HELD THAT:- For AYs 2011-12, 2014-15 and 2016-17 also, the coordinate benches had held that the income of the assessee from the provision of distance learning courses is not taxable in India, after placing reliance on the decision of case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT]
After noting that there is no change in the facts and circumstances in this year, we hold that the addition made by the AO, on the direction of DRP, on account of the provision of distance learning courses is not justified and is, therefore, deleted.
Sale of physical publications - After noting that there is no change in facts and circumstances during the year, we hold that the addition made by the AO on account of the sale of physical publications is not justified and is, therefore, deleted.
Provision of advertising space - Addition made by the Ld. AO on account of the provision of advertising space is not justified and, is therefore deleted.
Database access facility - We hold that the addition made by the Ld. AO on account of the data base access facility is not justified and, is therefore deleted.
Clearing House Facility (ICH facility) & Joining and annual fees (membership fees) - We are unable to subscribe to the manner in which the A.O/DRP had summarily rejected the claim of the assessee that as the ICH services were provided by the assessee, viz. IATA, Canada directly outside India, and the fees in respect of the said services was also received by the assessee in its bank account maintained outside India, therefore, the revenue pertaining to the said ICH services could not have been attributed to the IATA-India branch. In our considered view, the matter in all fairness requires to be restored to the file of the AO. AO shall in the course of the 'set aside' proceedings verify the veracity of the claim of the assessee that the ICH services were provided by assessee, viz. IATA, Canada directly outside India. In case, the claim of the assessee is found to be in order, then the addition of fees received from providing ICH services made in its hands would stand vacated.
Data processing charges - Addition made by AO on account of the joining and annual fees (membership fees) is not justified and is therefore deleted.
Classroom training courses - Income from class room training course was suo moto offered to tax in AY 2020-21 amounting to USD should be reduced in AY 2020-21 to the extent of credit note issued by IATA Canada in subsequent years i.e. in AY 2021-22. DR has not objected to the above-mentioned proposition.
Validity of reopening of assessment - Reason to believe - Whether the AO was justified in proposing to reopen the search assessments earlier made beyond the period of four years? - As decided by HC [2025 (4) TMI 1495 - MADRAS HIGH COURT] we are satisfied that the materials relied on by the assessing officer prima facie indicate that KKR Mauritius Cement Investment Limited is a shell company. The scale of returns and the manner in which the transactions had been conducted also prima facie suggest round tripping. The assessing officer was justified in coming to the conclusion that the matter requires a deeper probe if the black money of the Dalmias was deployed in making the initial investment. Section 147 of the Income Tax Act was incorporated with a laudable objective. It intends to check escapement of income for the purpose of assessment
HELD THAT:- In addition to the usual mode, liberty is granted to the petitioner(s) to serve notice through the Standing Counsel for the respondent(s).
Until further orders, there shall be stay of the impugned order.
Validity of reopening of assessment - Reason to believe - Whether the AO was justified in proposing to reopen the search assessments earlier made beyond the period of four years? - As decided by HC [2025 (4) TMI 1495 - MADRAS HIGH COURT] we are satisfied that the materials relied on by the assessing officer prima facie indicate that KKR Mauritius Cement Investment Limited is a shell company. The scale of returns and the manner in which the transactions had been conducted also prima facie suggest round tripping. The assessing officer was justified in coming to the conclusion that the matter requires a deeper probe if the black money of the Dalmias was deployed in making the initial investment. Section 147 of the Income Tax Act was incorporated with a laudable objective. It intends to check escapement of income for the purpose of assessment
HELD THAT:- In addition to the usual mode, liberty is granted to the petitioner(s) to serve notice through the Standing Counsel for the respondent(s).
Until further orders, there shall be stay of the impugned order.
1. Whether the order passed by the National Faceless Appeal Centre dismissing the petitioner's appeal against the Assessing Officer's order under Section 154 of the Income Tax Act, 1961, was valid, especially when it allegedly disregarded the order of the Income Tax Appellate Tribunal (ITAT) which had allowed the petitioner's claim under Section 80IC.
2. Whether the Assessing Officer was competent to revise or rectify the appeal effect order under Section 154 of the Income Tax Act, 1961, withdrawing relief granted to the petitioner, particularly in light of settled legal principles and precedents on the scope of Section 154.
3. Whether the respondents' action in initiating recovery proceedings and passing orders under Section 154, contrary to the ITAT's order and the Assistant Commissioner's earlier order, violated principles of judicial discipline and propriety.
4. Whether the petitioner had an alternate efficacious remedy under the Income Tax Act, and if so, whether the writ petition was maintainable.
Issue-wise Detailed Analysis:
Issue 1: Validity of the National Faceless Appeal Centre's order dismissing the petitioner's appeal against the Section 154 order
The relevant legal framework involves the powers and jurisdiction of the National Faceless Appeal Centre and the scope of appeal under the Income Tax Act. The petitioner challenged the dismissal of its appeal by the National Faceless Appeal Centre, arguing that the order under Section 154 was passed without jurisdiction and contrary to the ITAT's earlier order.
The Court examined the sequence of events: the ITAT had allowed the petitioner's appeal on merits regarding the deduction under Section 80IC, the Assessing Officer gave effect to this order, and subsequently passed a rectification order under Section 154 withdrawing the relief. The National Faceless Appeal Centre dismissed the petitioner's appeal against this rectification order without addressing the jurisdictional issue.
The Court reasoned that the National Faceless Appeal Centre erred in not considering that the Assessing Officer lacked jurisdiction under Section 154 to revisit the substantive issue of eligibility for deduction under Section 80IC, which required detailed adjudication beyond the scope of rectification of "mistake apparent from the record." The dismissal was therefore quashed.
Issue 2: Competence of the Assessing Officer to pass order under Section 154 withdrawing relief granted under ITAT order
Section 154 of the Income Tax Act allows correction of "mistake apparent from the record" but does not permit re-opening or re-adjudication of substantive issues already decided by appellate authorities.
The respondents contended that the rectification was necessitated by an apparent mistake in the appeal effect order, as the ITAT had not adjudicated the core issue of eligibility under Section 80IC on merits. The Assessing Officer argued that the hotel was not an eco-tourism project as required and that the ITAT's order was limited to the issue of delayed filing of return.
The Court analyzed the ITAT's order and found that the petitioner had indeed challenged the substantive issue of eligibility under Section 80IC before the appellate authorities. The ITAT had allowed the appeal, and the Assessing Officer had given effect to this order, which had attained finality. The subsequent attempt to withdraw relief under Section 154 was held to be beyond the scope of rectification powers.
The Court emphasized that the Assessing Officer's action amounted to judicial impropriety and was subversive of judicial discipline, as it disregarded the binding appellate orders.
Issue 3: Violation of judicial discipline and propriety by subordinate authorities
The Court underscored the principle that subordinate authorities must adhere to the orders of higher appellate authorities to maintain the hierarchical judicial system. It cited several Supreme Court decisions establishing that appellate orders are binding and must be followed unreservedly by lower authorities.
The Court observed that the Assistant Commissioner's order dated 25.02.2020 giving effect to the ITAT's order had attained finality and was binding on all concerned. The subsequent rectification order and recovery proceedings initiated by the Assessing Officer were without jurisdiction and violated the principle of judicial discipline.
The Court held that failure to implement appellate orders leads to anarchy and breakdown of the judicial system, and constitutes judicial impropriety.
Issue 4: Maintainability of the writ petition in view of alternate remedy
The respondents raised preliminary objections that the petitioner had alternate remedies under the Income Tax Act and thus the writ petition was not maintainable.
The Court, however, found that the petitioner was entitled to approach the High Court by way of writ because the respondents' actions were without jurisdiction and violated settled principles of law and judicial discipline. The petitioner's fundamental right to fair adjudication was at stake, justifying the exercise of writ jurisdiction.
Significant Holdings:
"The action of the Assistant Commissioner of Income Tax in issuing order under Section 154 of the Act is clearly subversive to judicial discipline and amounts to gross impropriety."
"The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities."
"The mere fact that the order of the appellate authority is not 'acceptable' to the subordinate authority cannot and should not be the ground for not following the said directions."
"Willful refusal to implement the judgment of the appellate authority not only subvert the rule of law but also constitute judicial impropriety."
"Once the order rendered by the ITAT and the earlier order passed by the Assistant Commissioner of Income Tax dated 25.02.2020 were absolutely clear and unambiguous, then judicial comity, discipline, con-committal, pragmatism, poignantly point, per force to observe constitutional proprietary and adhere to the decision so rendered by the authorities."
The Court concluded that the Assessing Officer and the National Faceless Appeal Centre had no jurisdiction to revisit the substantive issue under Section 154 after the ITAT's order had attained finality and relief was given effect to. The writ petition was allowed, quashing the impugned orders dated 29.03.2024 and 03.01.2025.
Rectification u/s 154 - disallowance of deduction u/s 80IC - hotel run by the assessee is located in the most urbanized and prime location of the capital city and is not located in the area as per “eco tourism” policy of the State of Himachal Pradesh - HELD THAT:- The principal of judicial discipline requires that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. In our considered view, the action of the Assistant Commissioner of Income Tax in issuing order under Section 154 of the Act is clearly subversive to judicial discipline and amounts to gross impropriety. So long the aforesaid orders were operative and had attained finality, the Assessing Authority had no option but to give effect to the orders so passed and rather had already given effect to these orders, as noted in the order.
Judicial discipline requires decorum known to law which warrants that the appellate directions should be followed in the hierarchical system by the Courts/quasi-judicial authorities, which exist in this country. It is, therefore, necessary for each lower tier to accept loyally the decision of the higher tier. The judicial or quasi-judicial system only works if someone is allowed to have the last word and if the last word, once spoken is loyally accepted.
Once the order rendered by the ITAT and the earlier order passed by the Assistant Commissioner of Income Tax were absolutely clear and unambiguous, then judicial comity, discipline, con-committal, pragmatisim, poignantly point, per force to observe constitutional proprietary and adhere to the decision so rendered by the authorities.
It is settled proposition of law that when a subordinate authority refuses to implement the judgment of the Appellate Authority, the situation is akin to anarchy and will result in complete breakdown of the judicial/quasi-judicial stem.
Reverting back to the facts of the present case, clearly respondent No.3 has indulged in mis-adventure in sitting over the orders passed by its higher authorities, which orders, as observed above, have already attained finality and thus the proceedings clearly are without jurisdiction and in such circumstances, the petitioner is well within its right to file the instant writ petition.
Rectification u/s 154 - disallowance of deduction u/s 80IC - hotel run by the assessee is located in the most urbanized and prime location of the capital city and is not located in the area as per “eco tourism” policy of the State of Himachal Pradesh - HELD THAT:- The principal of judicial discipline requires that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. In our considered view, the action of the Assistant Commissioner of Income Tax in issuing order under Section 154 of the Act is clearly subversive to judicial discipline and amounts to gross impropriety. So long the aforesaid orders were operative and had attained finality, the Assessing Authority had no option but to give effect to the orders so passed and rather had already given effect to these orders, as noted in the order.
Judicial discipline requires decorum known to law which warrants that the appellate directions should be followed in the hierarchical system by the Courts/quasi-judicial authorities, which exist in this country. It is, therefore, necessary for each lower tier to accept loyally the decision of the higher tier. The judicial or quasi-judicial system only works if someone is allowed to have the last word and if the last word, once spoken is loyally accepted.
Once the order rendered by the ITAT and the earlier order passed by the Assistant Commissioner of Income Tax were absolutely clear and unambiguous, then judicial comity, discipline, con-committal, pragmatisim, poignantly point, per force to observe constitutional proprietary and adhere to the decision so rendered by the authorities.
It is settled proposition of law that when a subordinate authority refuses to implement the judgment of the Appellate Authority, the situation is akin to anarchy and will result in complete breakdown of the judicial/quasi-judicial stem.
Reverting back to the facts of the present case, clearly respondent No.3 has indulged in mis-adventure in sitting over the orders passed by its higher authorities, which orders, as observed above, have already attained finality and thus the proceedings clearly are without jurisdiction and in such circumstances, the petitioner is well within its right to file the instant writ petition.
The core legal questions considered by the Court in this matter are:
1. Whether the payments received by the Assessee from Indian customers for cloud computing services constitute "royalty" income under Article 12(3) of the India-US Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vi) of the Income Tax Act, 1961 (the Act).
2. Whether the Assessee's provision of cloud computing services, which involve use of hardware and infrastructure such as servers, software, data storage, networking equipment, and databases, amounts to "use of equipment" that attracts royalty taxation under the Act and DTAA.
3. Whether the payments received by the Assessee qualify as "fees for technical services" (FTS) or "fees for included services" (FIS) under Section 9(1)(vii) of the Act and Article 12(4) of the India-US DTAA, including the question of whether the Assessee makes available technical knowledge, experience, skill, know-how, or processes to its customers.
4. Whether the "make available" clause under Article 12(4)(b) of the India-US DTAA and Explanation 2 to Section 9(1)(vii) of the Act is fulfilled by the Assessee's cloud computing services, thereby rendering the payments taxable as FTS/FIS.
5. Whether the Tribunal erred in holding that the payments received by the Assessee are not taxable in India, given the nature of the services and the contractual terms.
Issue-wise Detailed Analysis
Issue 1 & 2: Taxability of Payments as "Royalty" under Article 12(3) of the India-US DTAA and Section 9(1)(vi) of the Act
Legal Framework and Precedents: Article 12(3) defines "royalties" to include payments for the "use of, or the right to use" copyrights, patents, trademarks, designs, secret formulas, processes, or industrial, commercial, or scientific equipment. Section 9(1)(vi) of the Act similarly taxes income by way of royalties. The relevant question is whether cloud computing services amount to "use of equipment" or "right to use equipment" attracting royalty taxation.
Court's Interpretation and Reasoning: The Court examined the contractual terms between the Assessee and its customers, noting that the Assessee grants only a limited, revocable, non-exclusive, non-transferable license to access its cloud services and associated content. The customers do not acquire any intellectual property rights (IPR) or the right to commercially exploit the Assessee's software or infrastructure. The hardware and software remain under the Assessee's control, and customers merely access these services remotely.
The Court emphasized that the phrase "use" or "right to use" in Article 12(3) must be interpreted narrowly. The cloud computing infrastructure is used by the Assessee to render services rather than being placed at the exclusive disposal of the customers. The payments are for services, not for the right to use scientific equipment.
Key Evidence and Findings: The Agreement's clauses confirm that customers have no rights to modify, reverse engineer, or sublicense the software or infrastructure. The Assessee provides support and access but does not transfer any proprietary rights. The Tribunal's findings were that the prerequisites for royalty income were not met, as customers receive only a non-exclusive license to use standard automated services.
Application of Law to Facts: The Court applied the narrow interpretation of "royalty" and found that the payments do not fall within the definition of royalty under the DTAA or the Act. The cloud computing services are standardised services, and the customers' access does not amount to "use of" or "right to use" equipment in the royalty sense.
Treatment of Competing Arguments: The Revenue argued that the payments were for use of equipment and thus taxable as royalty. The Court rejected this, relying on the contractual terms and precedents that clarify that mere access to services without transfer of rights does not constitute royalty.
Conclusion: The payments for cloud computing services do not constitute royalty income under Article 12(3) of the India-US DTAA or Section 9(1)(vi) of the Act.
Issue 3 & 4: Taxability as Fees for Technical Services (FTS) or Fees for Included Services (FIS)
Legal Framework and Precedents: Article 12(4) of the India-US DTAA defines FIS as payments for technical or consultancy services that (a) are ancillary and subsidiary to the enjoyment of rights or property for which royalties are paid, or (b) make available technical knowledge, experience, skill, know-how, or processes. Section 9(1)(vii) of the Act similarly taxes fees for technical services.
Court's Interpretation and Reasoning: The Court considered whether the Assessee "makes available" technical knowledge or skill to its customers. The Tribunal found that the services do not transfer any skill, knowledge, or know-how; instead, the Assessee provides support limited to enabling customers to use the cloud platform. The support includes answering queries and guidance but does not extend to transferring technical knowledge or processes.
Key Evidence and Findings: The AO's reliance on the "AWS Support" documentation was scrutinized. The Court noted that the support provided is incidental and ancillary to the service and does not amount to making available technology or technical expertise as defined under the DTAA or the Act.
Application of Law to Facts: The Court applied the "make available" test and found no fulfillment of this criterion. The services rendered are standardised and automated, without transfer of technical knowledge or processes that would justify FTS or FIS taxation.
Treatment of Competing Arguments: The Revenue argued that the technical support and access to APIs and other service offerings amounted to making available technology, thus taxable as FTS/FIS. The Court rejected this, emphasizing that mere access and incidental support do not satisfy the "make available" requirement.
Conclusion: The payments do not constitute fees for technical services or fees for included services under the Act or India-US DTAA.
Issue 5: Whether the Tribunal Erred in Holding the Payments Non-Taxable
Legal Framework and Precedents: The Tribunal's decision was evaluated in light of authoritative Supreme Court and High Court precedents, including Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, CIT (International Taxation) v. Salesforce.com Singapore Pte. Ltd., and Commissioner of Income-tax (International Taxation) v. MOL Corporation.
Court's Interpretation and Reasoning: The Court found that the Tribunal's conclusions were consistent with settled law. The precedents establish that access to cloud-based software or services does not amount to royalty or FTS unless there is transfer of intellectual property rights or technical knowledge. The Court also noted that the Revenue did not allege any permanent establishment of the Assessee in India, which would have otherwise attracted business profits taxation.
Key Evidence and Findings: The Court relied on detailed examination of the contractual terms, the nature of cloud computing services, and the absence of transfer of proprietary rights or technical know-how. The Court also noted that the Revenue's reliance on "equipment royalty" was misplaced as the customers do not have exclusive or proprietary use of any equipment.
Application of Law to Facts: The Court applied the principles from the cited precedents to the facts, affirming that the payments are for services and not for royalty or FTS. The Tribunal's order allowing the Assessee's appeals was upheld.
Treatment of Competing Arguments: The Court addressed the Revenue's arguments regarding the nature of the services and the applicability of the "make available" clause, rejecting them based on the contractual and factual matrix and judicial precedents.
Conclusion: The Tribunal did not err in holding that the payments received by the Assessee are not taxable as royalty or fees for technical services under the Act or India-US DTAA.
Significant Holdings
"The expression 'use' or 'right to use' as mentioned in Article 12(3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12(3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers."
"The fact that the Assessee lends certain support and assistance to its customers for availing of the services does not in any manner support the view that the Assessee makes available technology or technical skills, know-how or the other process to its customers within the scope of Article 12(4)(b) of the India-US DTAA."
"The Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. There is no material to establish that grant of such service entails transfer of any technical know-how, skill, knowledge or process."
"The payments made by Indian entities to the Assessee for cloud computing services would not constitute 'royalty' as the customers do not acquire any right to commercially exploit the Assessee's intellectual property rights."
"The Tribunal's decision that the payments for cloud computing services do not constitute royalty or fees for included services under the India-US DTAA is consistent with the Supreme Court's ruling in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT and other authoritative precedents."
"No substantial question of law arises for consideration, and the appeals are accordingly dismissed."
Withholding of tax u/s 195 - royalty and fees for technical service [FTS] - Assessee is a company incorporated in the United States of America and is a tax resident of that country as received certain sums of money from Indian entities for rendering cloud computing services, which, according to the AO are chargeable to tax as royalty and fees for technical service [FTS] under the Act as well as India-US DTAA
Whether the amounts received by the Assessee from Indian entities for providing its services are taxable under the Act? - HELD THAT:- The services offered by the Assessee does not entail transferring of any skill, knowledge, technology or process to its customers. The cloud computing models indicate that the Assessee has developed an infrastructure and permits the customers to access the hardware and software for developing their own content.
There is no cavil that the customers do not control the cloud computing hardware or software. They also have no right to commercially exploit the same.
The expression “use” or “right to use” as mentioned in Article 12 (3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12 (3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers.
AO’s conclusion that the provision of such service would amount to grant of the ‘right to use’ scientific equipment and therefore, the payments made were covered under the definition of ‘royalty’ under the Act as well as u/s 12 (4) (a) of the India-US DTAA is erroneous.
Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. As explained by the Assessee, cloud computing provides an effective alternative for customers to use cloud computing services instead of buying, owning and maintaining their own data centres and servers.
After examining the Agreement and appreciating the scope of services, the learned Tribunal found that the Assessee’s customers are granted only a non-exclusive and non-transferable license to access the standard automated services offered by the Assessee. Further, the Assessee does not provide the source code of the licensed software to the customers. The Assessee’s customers have no right to exploit the Assessee’s IPR.
Whether payments for cloud computing are taxable as royalty under the Act and the relevant Double Taxation Avoidance Agreement has been the subject matter of various decisions? - We find no merit in the contention that the amount received by the Assessee for providing services would be taxable as equipment royalty. As noted before, the Assessee’s customers do not acquire any right of using the infrastructure and software of the Assessee for the purposes of commercially exploitation. The charges paid by the Assessee’s customers are for availing services, which the Assessee provides by using its proprietary equipment and other assets. No part of its equipment or IPRs are alienated by the Assessee in favour of its customers for their use. Therefore, the payments received cannot be considered as royalties within the meaning of Article 12 (3) of the India- US DTAA. No substantial question of law arises.
Withholding of tax u/s 195 - royalty and fees for technical service [FTS] - Assessee is a company incorporated in the United States of America and is a tax resident of that country as received certain sums of money from Indian entities for rendering cloud computing services, which, according to the AO are chargeable to tax as royalty and fees for technical service [FTS] under the Act as well as India-US DTAA
Whether the amounts received by the Assessee from Indian entities for providing its services are taxable under the Act? - HELD THAT:- The services offered by the Assessee does not entail transferring of any skill, knowledge, technology or process to its customers. The cloud computing models indicate that the Assessee has developed an infrastructure and permits the customers to access the hardware and software for developing their own content.
There is no cavil that the customers do not control the cloud computing hardware or software. They also have no right to commercially exploit the same.
The expression “use” or “right to use” as mentioned in Article 12 (3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12 (3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers.
AO’s conclusion that the provision of such service would amount to grant of the ‘right to use’ scientific equipment and therefore, the payments made were covered under the definition of ‘royalty’ under the Act as well as u/s 12 (4) (a) of the India-US DTAA is erroneous.
Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. As explained by the Assessee, cloud computing provides an effective alternative for customers to use cloud computing services instead of buying, owning and maintaining their own data centres and servers.
After examining the Agreement and appreciating the scope of services, the learned Tribunal found that the Assessee’s customers are granted only a non-exclusive and non-transferable license to access the standard automated services offered by the Assessee. Further, the Assessee does not provide the source code of the licensed software to the customers. The Assessee’s customers have no right to exploit the Assessee’s IPR.
Whether payments for cloud computing are taxable as royalty under the Act and the relevant Double Taxation Avoidance Agreement has been the subject matter of various decisions? - We find no merit in the contention that the amount received by the Assessee for providing services would be taxable as equipment royalty. As noted before, the Assessee’s customers do not acquire any right of using the infrastructure and software of the Assessee for the purposes of commercially exploitation. The charges paid by the Assessee’s customers are for availing services, which the Assessee provides by using its proprietary equipment and other assets. No part of its equipment or IPRs are alienated by the Assessee in favour of its customers for their use. Therefore, the payments received cannot be considered as royalties within the meaning of Article 12 (3) of the India- US DTAA. No substantial question of law arises.
The core legal questions considered by the Court include:
(a) Whether the notice dated 31.03.2021 issued under Section 148 of the Income Tax Act, 1961 ("the Act") was validly issued within the prescribed limitation period under Section 149(1) of the Act for initiating reassessment proceedings for AY 2013-14.
(b) Whether the date of issuance of the notice under Section 148 of the Act should be construed as the date on which the notice was digitally signed (31.03.2021) or the date on which the notice was actually dispatched and delivered to the petitioner (01.04.2021).
(c) Whether the impugned notices issued under Sections 148A(b), 148A(d), and 148 of the Act after 01.04.2021 are to be treated as valid in light of the Supreme Court's directions in Union of India and Ors. v. Ashish Agarwal, which substituted the procedure for reassessment notices issued after 01.04.2021.
(d) The applicability and effect of the Supreme Court's directions issued under Article 142 of the Constitution of India in Ashish Agarwal on reassessment proceedings initiated by notices issued under the unamended provisions of the Act post 01.04.2021.
(e) The legal significance of the date and time of dispatch of notices via the Income Tax Business Application (ITBA) portal and email in determining the date of issuance of the notice under Section 148.
(f) Whether the petitioner's challenge to the impugned notices and orders should be upheld or dismissed in light of the above issues.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Validity and Date of Issuance of the Section 148 Notice
Relevant Legal Framework and Precedents: Section 149(1) of the Income Tax Act prescribes the limitation period for issuance of notice under Section 148 for reassessment. The date of issuance of the notice is critical to determine whether the notice is time-barred. The Court relied heavily on the decision in Suman Jeet Agarwal v. Income Tax Officer, where it was held that the date of issuance means the date on which the notice is dispatched to the assessee, not merely the date on which it is digitally generated or signed.
Court's Interpretation and Reasoning: The Court examined the facts that the notice was digitally signed on 31.03.2021 at 7:44 PM but was dispatched and delivered electronically and by speed post only on 01.04.2021 at 7:30 AM. The Court emphasized that mere generation or digital signing of the notice does not constitute issuance. The issuance requires an overt act of dispatch to the addressee. The Court referred to the ITBA portal's email timestamp as determinative of dispatch and delivery.
Key Evidence and Findings: The Revenue filed affidavits confirming the timestamps of dispatch and delivery as 01.04.2021. The petitioner did not dispute that they received the notice only on 01.04.2021. The Court also reviewed the ITBA system's automated process and the inability of the Revenue to control the exact timing of upload and dispatch.
Application of Law to Facts: Applying the principle from Suman Jeet Agarwal, the Court held that the notice was "issued" on 01.04.2021, the date of dispatch and delivery, not on the date of digital signing. Therefore, the limitation period under Section 149(1) runs from 01.04.2021.
Treatment of Competing Arguments: The petitioner argued that the date on the notice (31.03.2021) and its digital signing date should govern. The Revenue contended that the actual dispatch date is decisive. The Court found the Revenue's position consistent with legal principles and instructions issued by the Directorate of Income-tax (Systems) distinguishing generation and issuance of notices.
Conclusion: The notice under Section 148 was validly issued on 01.04.2021 and not on 31.03.2021.
Issue (c) and (d): Applicability of Supreme Court Directions in Ashish Agarwal and Validity of Post-01.04.2021 Notices
Relevant Legal Framework and Precedents: The Supreme Court in Union of India and Ors. v. Ashish Agarwal exercised powers under Article 142 of the Constitution to clarify the procedural regime for reassessment notices issued after 01.04.2021 following amendments by the Finance Act, 2021 substituting Sections 147 to 151 of the Act and introducing Section 148A. The Court held that notices issued under the unamended Section 148 after 01.04.2021 should be deemed to have been issued under Section 148A(b) and treated as show-cause notices, with procedural safeguards and rights preserved for both Revenue and assessee.
Court's Interpretation and Reasoning: The Court observed that the Supreme Court's directions were remedial and benevolent, intended to balance the rights of the Revenue and assessees and prevent the Revenue from being rendered remediless due to procedural lapses. The directions mandated that notices issued after 01.04.2021 under unamended provisions be construed as Section 148A(b) notices, with subsequent procedural compliance including furnishing of material relied upon and opportunity to reply.
Key Evidence and Findings: The petitioner's notice being issued on 01.04.2021 falls squarely within the scope of these directions. The Court noted that the Revenue had complied with the procedural requirements post issuance of the notice under Section 148A(b) and Section 148A(d).
Application of Law to Facts: Since the notice was issued on 01.04.2021, the reassessment proceedings are governed by the substituted provisions and the Supreme Court's directions. The petitioner's challenge that the notice was time-barred or invalid was therefore untenable.
Treatment of Competing Arguments: The petitioner contended that the Ashish Agarwal judgment was not applicable as the notice bore the date 31.03.2021. The Court rejected this, emphasizing the actual dispatch date and the binding nature of the Supreme Court's PAN India directions.
Conclusion: The impugned notices and proceedings are valid and governed by the substituted provisions and directions in Ashish Agarwal.
Issue (e): Legal Significance of ITBA Portal Dispatch and Email Timestamp
Relevant Legal Framework and Precedents: The Court relied on the detailed analysis in Suman Jeet Agarwal and instructions issued by the Directorate of Income-tax (Systems) distinguishing generation, issuance, and dispatch of notices. The document identification number (DIN) system was also discussed to clarify that issuance requires dispatch, not merely generation or assignment of DIN.
Court's Interpretation and Reasoning: The Court held that the date and time recorded on the ITBA portal for dispatch and email delivery are determinative of the date of issuance of the notice. The Court rejected the argument that digital signing or generation on the portal alone constitutes issuance.
Key Evidence and Findings: The Revenue's affidavits and annexures confirmed the ITBA timestamps for email dispatch and delivery at 7:30 AM on 01.04.2021. The petitioner did not dispute actual receipt date.
Application of Law to Facts: The Court applied these principles to hold that the notice was issued on 01.04.2021, the date of dispatch and delivery, notwithstanding the earlier digital signing.
Treatment of Competing Arguments: The petitioner's reliance on the date on the notice and digital signature was rejected as inconsistent with legal and procedural requirements.
Conclusion: The ITBA portal dispatch and email delivery timestamps govern the date of issuance of notices under Section 148.
Issue (f): Disposition of the Petitioner's Challenge
Relevant Legal Framework and Precedents: The Court considered the entire procedural framework of reassessment notices, limitation under Section 149(1), and the Supreme Court's directions in Ashish Agarwal.
Court's Interpretation and Reasoning: Since the notice was issued on 01.04.2021, the petitioner's challenge that the notice was time-barred as per Section 149(1) fails. The reassessment proceedings initiated under Sections 148A(b), 148A(d), and 148 are valid and in accordance with law.
Key Evidence and Findings: The petitioner participated in the reassessment proceedings and filed returns and replies. The Revenue complied with procedural safeguards mandated by the Supreme Court.
Application of Law to Facts: The Court applied the law strictly and found no merit in the petitioner's challenge.
Treatment of Competing Arguments: The petitioner's reliance on the date on the notice and the original return filing date was rejected in light of the actual dispatch date and Supreme Court directions.
Conclusion: The petition is dismissed.
3. SIGNIFICANT HOLDINGS
"The expression 'issue' in its common parlance and its legal interpretation means that the issuer of the notice must after drawing up the notice and signing the notice, make an overt act to ensure due despatch of the notice to the addressee. It is only upon due despatch, that the notice can be said to have been 'issued'."
"Mere generation of notice on the Income Tax Business Application screen cannot in fact or in law constitute issue of notice, whether the notice is issued in paper form or electronic form."
"The impugned section 148 notices issued to the respective assessees which were issued under unamended section 148 of the IT Act, which were the subject matter of writ petitions before the various respective High Courts shall be deemed to have been issued under section 148A of the IT Act as substituted by the Finance Act, 2021 and construed or treated to be show-cause notices in terms of section 148A (b)."
"The requirement of conducting any enquiry, if required, with the prior approval of specified authority under section 148A (a) is hereby dispensed with as a one-time measure vis-a-vis those notices which have been issued under section 148 of the unamended Act from 01.04.2021 till date, including those which have been quashed by the High Courts."
"All defences which may be available to the assessee including those available under section 149 of the IT Act and all rights and contentions which may be available to the concerned assessees and Revenue under the Finance Act, 2021 and in law shall continue to be available."
"The date and time recorded on the ITBA portal for dispatch and delivery of the notice are determinative of the date of issuance of the notice under Section 148 of the Act."
Final determination: The notice dated 31.03.2021 digitally signed on that date, but dispatched and delivered on 01.04.2021, is deemed to have been issued on 01.04.2021. Consequently, the reassessment proceedings initiated under Sections 148A(b), 148A(d), and 148 of the Act are valid and in accordance with the Supreme Court's directions in Ashish Agarwal. The petitioner's challenge to the limitation and validity of the notice is rejected, and the petition is dismissed.
Reopening of assessment u/s 147 - prescribed limitation period u/s 149(1) of the Act for initiating reassessment proceedings for AY 2013-14 - determination of date of issuance of the notice u/s 148
HELD THAT:- Notice had been signed digitally on the system on 31.03.2021 and was, thus, placed on the portal. However, the email was despatched to the petitioner on the morning of 01.04.2021 at 07:30:47 AM and was delivered at 7:30:48 AM. The notice was also despatched to the petitioner by speed post on 01.04.2021.
It is material to note that it is not the petitioner’s case that he had, in fact, received the notice on 31.03.2021.
Section 149 (1) of the Act proscribes issuance of notice beyond the period as stipulated in the said section. In Suman Jeet Agarwal [2022 (9) TMI 1384 - DELHI HIGH COURT] had considered the question regarding as to the date of issue of a notice under Section 148 of the Act for ascertaining the period of limitation for issuance of such a notice.
It is material to note that a notice under Section 148 of the Act is a jurisdictional notice and issuance of such notice is necessary for the AO to assume jurisdiction to assess/re-assess the income under Section 147 of the Act. If the notice under Section 148 is found to be invalid, it would vitiate the proceedings commenced pursuant thereto. Thus, merely because the parties had laboured under a misconception at the initial stage that the initial notice issued under Section 148 of the Act was valid, would not invalidate the subsequent steps taken by the Revenue in conformity with the decision of the Supreme Court in Union of India and Ors. v. Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT] as well as the decision of this Court in Suman Jeet Agarwal v. Income Tax Officer and Ors. (supra).
Viewed from another perspective, if an adverse re-assessment order was passed pursuant to the notice dated 31.03.2021 (issued on 01.04.2021), the same would be vulnerable to a challenge by the Assessee on the ground that the proceedings were not in compliance with the directions issued by the Supreme Court in Union of India and Ors. v. Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT]
We find it difficult to sustain the petitioner’s challenge in the present petition. The petition is, accordingly, dismissed.
Reopening of assessment u/s 147 - prescribed limitation period u/s 149(1) of the Act for initiating reassessment proceedings for AY 2013-14 - determination of date of issuance of the notice u/s 148
HELD THAT:- Notice had been signed digitally on the system on 31.03.2021 and was, thus, placed on the portal. However, the email was despatched to the petitioner on the morning of 01.04.2021 at 07:30:47 AM and was delivered at 7:30:48 AM. The notice was also despatched to the petitioner by speed post on 01.04.2021.
It is material to note that it is not the petitioner’s case that he had, in fact, received the notice on 31.03.2021.
Section 149 (1) of the Act proscribes issuance of notice beyond the period as stipulated in the said section. In Suman Jeet Agarwal [2022 (9) TMI 1384 - DELHI HIGH COURT] had considered the question regarding as to the date of issue of a notice under Section 148 of the Act for ascertaining the period of limitation for issuance of such a notice.
It is material to note that a notice under Section 148 of the Act is a jurisdictional notice and issuance of such notice is necessary for the AO to assume jurisdiction to assess/re-assess the income under Section 147 of the Act. If the notice under Section 148 is found to be invalid, it would vitiate the proceedings commenced pursuant thereto. Thus, merely because the parties had laboured under a misconception at the initial stage that the initial notice issued under Section 148 of the Act was valid, would not invalidate the subsequent steps taken by the Revenue in conformity with the decision of the Supreme Court in Union of India and Ors. v. Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT] as well as the decision of this Court in Suman Jeet Agarwal v. Income Tax Officer and Ors. (supra).
Viewed from another perspective, if an adverse re-assessment order was passed pursuant to the notice dated 31.03.2021 (issued on 01.04.2021), the same would be vulnerable to a challenge by the Assessee on the ground that the proceedings were not in compliance with the directions issued by the Supreme Court in Union of India and Ors. v. Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT]
We find it difficult to sustain the petitioner’s challenge in the present petition. The petition is, accordingly, dismissed.
Prohibition of Benami Property Transactions - Submissions have been made that as the property in question is cash, the same does not fall within the definition of 'benami transaction' u/s 2(9) of the Act.
HELD THAT:- Besides the above, apparently, the case of the respondent is that the cash in question belongs to the petitioner and in those circumstances, the petitioner does not fall within the definition of 'benamidar' u/s 2(10) of the Act.
Matter requires consideration. Counter affidavit may be filed by the next date.
List the petition on 04.08.2025.
Prohibition of Benami Property Transactions - Submissions have been made that as the property in question is cash, the same does not fall within the definition of 'benami transaction' u/s 2(9) of the Act.
HELD THAT:- Besides the above, apparently, the case of the respondent is that the cash in question belongs to the petitioner and in those circumstances, the petitioner does not fall within the definition of 'benamidar' u/s 2(10) of the Act.
Matter requires consideration. Counter affidavit may be filed by the next date.
List the petition on 04.08.2025.
- Whether the notice issued under Section 148 of the Income Tax Act, 1961, for reopening the assessment for AY 2016-17 is valid and within the limitation period prescribed under Section 149 of the Act.
- Whether the decision of the Supreme Court in Principal Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.) Ltd. constitutes a "finding or direction" enabling the Revenue to issue reassessment notices beyond the limitation period under Section 149.
- Whether the reassessment proceedings initiated under Sections 148 and 153C of the Act are justified in the absence of incriminating material found during the search under Section 132.
- The applicability and scope of Section 150 of the Income Tax Act and CBDT Instruction No.1/2023 in extending the limitation period for issuance of reassessment notices.
2. ISSUE-WISE DETAILED ANALYSIS
Validity and Limitation of the Notice under Section 148:
The petitioner challenged the notice dated 30.08.2024 issued under Section 148 for reopening the assessment for AY 2016-17, contending that it was barred by limitation as per Section 149(1) of the Income Tax Act. The Revenue, however, relied on Section 150 of the Act and CBDT Instruction No.1/2023, asserting that the notice was valid as it was issued pursuant to a "finding or direction" contained in the Supreme Court's decision in Abhisar Buildwell.
The Court examined the statutory framework governing reassessment proceedings. Section 149(1) prescribes a three-year limitation period for issuance of notices under Section 148, subject to exceptions. Section 150, a non-obstante provision, allows issuance of notices beyond the limitation period if done "as a consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law."
The Court analyzed the scope of Section 150 in light of the Supreme Court's ruling in Abhisar Buildwell, which held that the Revenue could exercise reassessment powers under Sections 147/148 even in cases related to searches under Section 132 or requisitions under Section 132A, subject to fulfillment of the conditions in Sections 147/148. However, the Supreme Court cautioned that this power was not a carte blanche to override the limitation period prescribed in Section 149.
Relying on the Delhi High Court's earlier decision in ARN Infrastructures India Ltd., the Court emphasized that the Supreme Court's observations in Abhisar Buildwell merely preserved the Revenue's inherent power to reassess but did not constitute a "finding or direction" under Section 150 that would extend the limitation period. The Court quoted extensively from ARN Infrastructures, highlighting that the Supreme Court explicitly stated reassessment must comply with the statutory conditions, including limitation.
Therefore, the Court concluded that the impugned notice issued beyond the limitation period was not saved by Section 150 as there was no specific finding or direction from the Supreme Court mandating reopening beyond the prescribed time.
Reassessment Proceedings in Absence of Incriminating Material Found During Search:
The petitioner contended that since no incriminating material was found during the search under Section 132, the initiation of reassessment proceedings under Section 148 and subsequent proceedings under Section 153C were unjustified.
The Court noted that the search conducted on 14.10.2020 did not yield any incriminating evidence against the petitioner, who is a Hindu Undivided Family. The initial assessment declared income of Rs. 15,97,840/-, but the Assessing Officer assessed income at Rs. 1,89,75,946/- under Section 153A read with Section 143(3) after invoking Section 153C.
On appeal, the Commissioner of Income Tax (Appeals) annulled the proceedings under Section 153C and deleted the additions, relying on authoritative precedents including the Supreme Court judgment in Commissioner of Income Tax-III, Pune v. Sinhgad Technical Education Society and the Madras High Court's decision in Agni Vishnu Ventures Pvt. Ltd. These judgments establish that reassessment under Section 153C cannot be initiated without incriminating material being found during search in the premises of the searched person.
The Court observed that the annulment of reassessment proceedings under Section 153C further undermined the Revenue's claim to reopen the assessment under Section 148, especially beyond the limitation period.
Interpretation of Supreme Court's Decision in Abhisar Buildwell:
The Revenue's principal argument rested on interpreting the Supreme Court's decision in Abhisar Buildwell as a "finding or direction" under Section 150 permitting issuance of reassessment notices beyond the limitation period. The Court critically examined this contention.
Paragraphs 33, 36.4, and 39 of Abhisar Buildwell were scrutinized, where the Supreme Court acknowledged the Revenue's power to reassess in cases where searches did not reveal incriminating material, but emphasized that such power is "subject to fulfilment of the conditions mentioned in Sections 147/148." The Court underscored that the Supreme Court's observations were intended to preserve the Revenue's statutory powers and not to override limitation provisions.
Consequently, the Court held that the decision in Abhisar Buildwell does not constitute a "finding or direction" as envisaged under Section 150 of the Act to justify issuance of notices beyond the limitation period.
Application of Section 150 and CBDT Instruction No.1/2023:
The Revenue relied on Section 150 and CBDT Instruction No.1/2023 to contend that the limitation period was extended. The Court held that Section 150's non-obstante clause applies only when there is a "finding or direction" in an order passed by a competent authority or Court. Since no such finding or direction existed in the present facts, Section 150 could not be invoked to validate the impugned notice.
Further, the Court observed that CBDT Instruction No.1/2023 cannot override the statutory provisions and limitations prescribed under the Act.
Treatment of Competing Arguments:
The petitioner's argument that limitation barred the proceedings and that no incriminating material justified reassessment was accepted. The Revenue's contention that the Supreme Court's decision in Abhisar Buildwell constituted a direction under Section 150 was rejected based on authoritative precedents and statutory interpretation. The Court relied on the principle that limitation provisions are mandatory and cannot be circumvented by administrative instructions or broad judicial observations.
3. SIGNIFICANT HOLDINGS
"The observations of the Supreme Court in Abhisar Buildwell were thus intended to merely convey that the annulment of the search assessments would not deprive or denude the Revenue of its power to reassess and which independently existed. However, the Supreme Court being mindful of the statutory prescriptions, which otherwise imbue the commencement of reassessment, qualified that observation by providing that such an action would have to be in accordance with law. This note of caution appears at more than one place in that judgment and is apparent from the Supreme Court observing that the power to reassess would be subject to the fulfilment of the conditions mentioned in Sections 147 and 148 of the Act."
"The observations of the Supreme Court cannot possibly be read or construed as a carte blanche enabling the respondents to overcome and override the restrictions that otherwise appear in Section 149 of the Act."
"The contention that the time period as stipulated under Section 149 of the Act is not applicable, in the given facts, is erroneous and thus rejected."
The Court conclusively held that the impugned notice issued beyond the limitation period under Section 149 was invalid and set aside the notice under Section 148. The principles established confirm that reassessment notices must comply strictly with limitation periods unless there is a clear, specific finding or direction by a competent authority or Court under Section 150, which was absent in this case.
Reopening of assessment u/s 147 - limitation period prescribed u/s 149 - HELD THAT:- The petitioner claimed that the proceedings are barred by limitation and Section 150 (1) of the Act would be inapplicable, as there was no direction from the Supreme Court to reopen the case, citing the rejection of such a prayer advanced by the Revenue
AO rejected the petitioner’s reply and passed an order dated 30.08.2024 u/s 148A(d) of the Act, deeming it a fit case for reopening the assessment. AO also issued the impugned notice dated 30.08.2024, requiring the petitioner to furnish its return within a period of 90 days from date.
The impugned notice is clearly beyond the period as stipulated u/s 149 (1) of the Act. However, it is the Revenue’s case that the impugned notice has been issued within the stipulated time by virtue of the non-obstante clause u/s 150 of the Act.
Revenue claims that the impugned notice is premised on the ‘findings and directions’ as embodied in the decision of Abhisar Buildwell (P.) Ltd [2023 (4) TMI 1056 - SUPREME COURT] In the said decision, the Supreme Court had held that in certain cases, the assessing officer could exercise its powers u/s 147/148 of the Act, even in cases which are related to a search conducted u/s 132 of the Act or a requisition made under Section 132A of the Act.
Revenue construes the said decision as constituting a finding or a direction for issuing such notices in respect of cases such as that of the assessee’s.
The question whether the decision in the case of Abhisar Buildwell (P.) Ltd., (supra) constitutes a finding and/or a direction for issuance of notices u/s 148 of the Act in cases, which are otherwise beyond the period as stipulated under Section 149 of the Act is no longer res integra.
Plainly, the controversy involved in this petition is covered by the decision of this court in ARN Infrastructures India Ltd. [2024 (9) TMI 1573 - DELHI HIGH COURT]. The contention that the time period as stipulated under Section 149 of the Act is not applicable, in the given facts, is erroneous and thus rejected. WP allowed.
Reopening of assessment u/s 147 - limitation period prescribed u/s 149 - HELD THAT:- The petitioner claimed that the proceedings are barred by limitation and Section 150 (1) of the Act would be inapplicable, as there was no direction from the Supreme Court to reopen the case, citing the rejection of such a prayer advanced by the Revenue
AO rejected the petitioner’s reply and passed an order dated 30.08.2024 u/s 148A(d) of the Act, deeming it a fit case for reopening the assessment. AO also issued the impugned notice dated 30.08.2024, requiring the petitioner to furnish its return within a period of 90 days from date.
The impugned notice is clearly beyond the period as stipulated u/s 149 (1) of the Act. However, it is the Revenue’s case that the impugned notice has been issued within the stipulated time by virtue of the non-obstante clause u/s 150 of the Act.
Revenue claims that the impugned notice is premised on the ‘findings and directions’ as embodied in the decision of Abhisar Buildwell (P.) Ltd [2023 (4) TMI 1056 - SUPREME COURT] In the said decision, the Supreme Court had held that in certain cases, the assessing officer could exercise its powers u/s 147/148 of the Act, even in cases which are related to a search conducted u/s 132 of the Act or a requisition made under Section 132A of the Act.
Revenue construes the said decision as constituting a finding or a direction for issuing such notices in respect of cases such as that of the assessee’s.
The question whether the decision in the case of Abhisar Buildwell (P.) Ltd., (supra) constitutes a finding and/or a direction for issuance of notices u/s 148 of the Act in cases, which are otherwise beyond the period as stipulated under Section 149 of the Act is no longer res integra.
Plainly, the controversy involved in this petition is covered by the decision of this court in ARN Infrastructures India Ltd. [2024 (9) TMI 1573 - DELHI HIGH COURT]. The contention that the time period as stipulated under Section 149 of the Act is not applicable, in the given facts, is erroneous and thus rejected. WP allowed.
The core legal questions considered by the Court are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Permissibility of Reassessment Proceedings on the Basis of Audit Objections When the Issue Has Been Examined in Original Assessment
The legal framework governing reassessment is primarily found in Sections 147, 148, 148A, and 149 of the Act. Section 147 empowers the AO to reassess income that has escaped assessment, subject to the conditions and procedure prescribed. Explanation 1 to Section 148 clarifies that "information" suggesting escaped income includes audit objections.
Precedents such as Commissioner of Income Tax, Delhi v. Kelvinator of India Limited and Commissioner of Income Tax v. Techspan India (P) Ltd. have established that reassessment cannot be used as a tool for review or change of opinion. The Supreme Court emphasized that reassessment must be based on tangible material indicating escapement of income and not merely on a change of opinion by the AO.
In the present case, the AO initiated reassessment proceedings based on audit objections alleging that the petitioner's receipts should be treated as FTS and thus taxable. However, the Court found that the identical issue had been examined in detail during the original assessment proceedings, including issuance of notices under Section 142(1) and show cause notices under Section 143(2). The petitioner had responded comprehensively, explaining why the receipts did not constitute FTS under the Act or DTAA.
The Court held that reopening the assessment on the same issue, without any new tangible material, amounted to a change of opinion, which is impermissible. The audit objection, while constituting "information," does not automatically mandate issuance of reassessment notice if the AO's earlier assessment was informed and conclusive.
The Revenue's contention that audit objections justify reassessment was rejected. The Court clarified that audit observations do not expand or alter the AO's power to reassess beyond the statutory limits and safeguards.
Issue 2: Interpretation of "Information" under Explanation 1 to Section 148 and the Procedure under Section 148A
Explanation 1 to Section 148 defines "information" as including audit objections indicating that the assessment was not made in accordance with law. Section 148A prescribes a mandatory procedure before issuing a notice under Section 148, including conducting enquiry (if required), issuing a show cause notice to the assessee, considering the assessee's reply, and passing a reasoned order with prior approval.
The Court observed that the AO must apply independent mind to the audit objection and not treat it as a mandatory command to issue a notice. The AO is obliged to provide the assessee with the basis of the information and an opportunity to respond, which must be duly considered before deciding to issue a notice under Section 148.
In the case at hand, the petitioner's response to the notice under Section 148A(b) was not considered earlier, leading to the setting aside of the initial reassessment notice on grounds of violation of natural justice. Upon re-issuance of the notice under Section 148A(b), the petitioner again furnished detailed explanations, which were rejected by the AO without adequate consideration.
The Court emphasized that the AO's decision to issue notice under Section 148 must be based on material including the assessee's reply, and not merely on audit objections. The purpose of the procedure under Section 148A is to prevent arbitrary reopening and ensure fairness.
Issue 3: Limitation Period for Issuance of Notice under Section 148
Section 149(1) prescribes limitation periods for issuance of notice under Section 148. The extended six-year period applies only where there is failure to disclose material facts. Otherwise, the limitation is four years from the end of the relevant assessment year.
In this matter, there was no allegation of concealment or failure to disclose material facts by the petitioner. Therefore, the limitation period was four years. The impugned notices were issued beyond this period, making them time-barred.
The Court relied on a recent decision of the same High Court which held similarly, reinforcing that notices issued beyond the prescribed limitation period without valid grounds are invalid.
Issue 4: Taxability of Finance, Sales and Corporate Service Charges as Fees for Technical Services (FTS) under the Act and the India-UK DTAA
The petitioner contended that the receipts of Rs. 1,44,34,773/- from its Indian associated enterprise were not taxable as FTS because:
The AO had examined these contentions during original assessment and had accepted the petitioner's return without taxing the receipts as FTS. The reassessment attempt to revisit this issue was held to be a change of opinion, impermissible in law.
3. SIGNIFICANT HOLDINGS
"The power under Section 147 of the Act is to reassess the income that has escaped assessment and cannot be misunderstood as a power of review."
"Reassessment must be based on tangible material indicating escapement of income and not merely on a change of opinion by the Assessing Officer."
"An audit objection may be 'information' for the purposes of Section 148 but does not mandate issuance of notice under Section 148 if the issue has been examined and concluded in the original assessment."
"The procedure under Section 148A requires the Assessing Officer to consider the assessee's response before issuing a notice under Section 148 and to form an independent opinion based on material on record."
"Issuance of notice under Section 148 beyond the prescribed limitation period without valid grounds is invalid."
"The term 'fees for technical services' under the India-UK DTAA requires that the services must make available technical knowledge, experience, skill, know-how or processes; mere provision of general management or corporate services does not qualify."
The Court concluded that the reassessment proceedings initiated were invalid as they were based on a mere change of opinion, triggered solely by audit objections already examined in original assessment, and were time-barred. Consequently, the impugned notice and consequential proceedings were set aside.
Reassessment proceedings - receipt of finance, sales and corporate services charges were taxable under the Act or the India-UK DTAA - HELD THAT:- As petitioner had received during the previous year relevant to AY 2017-18, which was not surrendered to tax, was not only within the AO’s knowledge, but was subject matter of examination as to whether the said amount was now held to be chargeable to tax under the Act. Concededly, all relevant facts regarding the aspect of taxability of the aforesaid amount were examined by the AO. There is no additional material that has been discovered subsequently, which was not within the knowledge of the AO at the material time.
Undeniably, this would be a case of change of opinion, if the said amount is now held as chargeable to tax under the Act.
We must, note that there is no cavil that the exercise initiated pursuant to the impugned notice is for all intents and purpose an attempt to review the decision the AO in the assessment proceedings. However, it is contended by the Revenue that the same is permissible as the initiation was triggered by audit observations and the same constitutes information that can trigger the reassessment proceedings. We find no merit in the said contention. The fact that audit observation may be deemed to be information suggestive of the assessee’s income escaping assessment does not enhance or expand the power available with the AO to assess/ reassess the assessee’s income that has escaped assessment. It does not alter the very nature of power to assess/ reassess under Section 147 of the Act, to a power to review a concluded assessment.
The term “information” is used in the first proviso to Section 148 of the Act. The said proviso proscribes issuance of notice under Section 148 of the Act unless there is “information” with the AO, which suggests that an assessee’s income chargeable to tax has escaped the assessment for the relevant AY. Thus, if the AO is in receipt of an audit objection, the same is required to be construed as information that suggests that the income of the assessee has escaped assessment.
The proviso to Section 148 of the Act is couched in the negative. Whilst, the AO is proscribed from issuance of the notice under Section 148 of the Act, unless it has the “information” that suggests that the assessee’s income has escaped assessment, it is not mandatory for the AO to issue such a notice, or to review the assessment order merely because issues were flagged in an audit objection. The AO is required to apply its mind to the audit objection and form an independent, informed view.
The provisions of Section 148A of the Act are also required to be construed by imputing the meaning of the term “information” as provided under Explanation I to Section 148 of the Act. Section 148A of the Act prescribes the procedure to be followed prior to issuance of notice under Section 148 of the Act.
The expression “escaped assessment” by its very nature, means that the income has not been subjected to an assessment. The expression would not include a case where the AO made an informed assessment of the assessee’s income.
Clause (c) of the proviso to Section 148A of the Act excludes the procedure under Section 148A of the Act where the information available with the AO is contained in the books of accounts, documents or material seized in a search conducted under Section 132 of the Act or requisitioned under Section 132A of the Act on or after 01.04.2021. This clause is not applicable to the facts of the present case.
Whether the impugned notice has been issued beyond the period of limitation as stipulated under Section 149(1)? - The first proviso to Section 149(1) of the Act proscribes the issuance of any notice under Section 148 of the Act for a period prior to 31.03.2021, which could not be issued at that time. This requires us to examine whether the impugned notice could be issued under Section 148 of the Act as it was in force prior to 31.03.2021.
There is no allegation that there was a failure on the part of the petitioner to redisclose any material fact in its return. Thus, the extended period of limitation of six years for reopening assessment would not be available under Section 147 of the Act as it was in force prior to 31.03.2021.
The period of limitation is, thus, extended to ten years from the end of the relevant AY 2017–18, and concededly, the impugned notices have been issued beyond this period. Thus, by virtue of the first proviso of Section 149 of the Act, no notice could have been issued under Section 148 of the Act as no such notice could have been issued on the basis provisions for reassessment that were in force prior to 31.03.2021. This issue is covered in favour of the petitioner by a recent decision of this Court in Ratnagiri Gas and Power Private Limited [2025 (5) TMI 449 - DELHI HIGH COURT]
Reassessment proceedings - receipt of finance, sales and corporate services charges were taxable under the Act or the India-UK DTAA - HELD THAT:- As petitioner had received during the previous year relevant to AY 2017-18, which was not surrendered to tax, was not only within the AO’s knowledge, but was subject matter of examination as to whether the said amount was now held to be chargeable to tax under the Act. Concededly, all relevant facts regarding the aspect of taxability of the aforesaid amount were examined by the AO. There is no additional material that has been discovered subsequently, which was not within the knowledge of the AO at the material time.
Undeniably, this would be a case of change of opinion, if the said amount is now held as chargeable to tax under the Act.
We must, note that there is no cavil that the exercise initiated pursuant to the impugned notice is for all intents and purpose an attempt to review the decision the AO in the assessment proceedings. However, it is contended by the Revenue that the same is permissible as the initiation was triggered by audit observations and the same constitutes information that can trigger the reassessment proceedings. We find no merit in the said contention. The fact that audit observation may be deemed to be information suggestive of the assessee’s income escaping assessment does not enhance or expand the power available with the AO to assess/ reassess the assessee’s income that has escaped assessment. It does not alter the very nature of power to assess/ reassess under Section 147 of the Act, to a power to review a concluded assessment.
The term “information” is used in the first proviso to Section 148 of the Act. The said proviso proscribes issuance of notice under Section 148 of the Act unless there is “information” with the AO, which suggests that an assessee’s income chargeable to tax has escaped the assessment for the relevant AY. Thus, if the AO is in receipt of an audit objection, the same is required to be construed as information that suggests that the income of the assessee has escaped assessment.
The proviso to Section 148 of the Act is couched in the negative. Whilst, the AO is proscribed from issuance of the notice under Section 148 of the Act, unless it has the “information” that suggests that the assessee’s income has escaped assessment, it is not mandatory for the AO to issue such a notice, or to review the assessment order merely because issues were flagged in an audit objection. The AO is required to apply its mind to the audit objection and form an independent, informed view.
The provisions of Section 148A of the Act are also required to be construed by imputing the meaning of the term “information” as provided under Explanation I to Section 148 of the Act. Section 148A of the Act prescribes the procedure to be followed prior to issuance of notice under Section 148 of the Act.
The expression “escaped assessment” by its very nature, means that the income has not been subjected to an assessment. The expression would not include a case where the AO made an informed assessment of the assessee’s income.
Clause (c) of the proviso to Section 148A of the Act excludes the procedure under Section 148A of the Act where the information available with the AO is contained in the books of accounts, documents or material seized in a search conducted under Section 132 of the Act or requisitioned under Section 132A of the Act on or after 01.04.2021. This clause is not applicable to the facts of the present case.
Whether the impugned notice has been issued beyond the period of limitation as stipulated under Section 149(1)? - The first proviso to Section 149(1) of the Act proscribes the issuance of any notice under Section 148 of the Act for a period prior to 31.03.2021, which could not be issued at that time. This requires us to examine whether the impugned notice could be issued under Section 148 of the Act as it was in force prior to 31.03.2021.
There is no allegation that there was a failure on the part of the petitioner to redisclose any material fact in its return. Thus, the extended period of limitation of six years for reopening assessment would not be available under Section 147 of the Act as it was in force prior to 31.03.2021.
The period of limitation is, thus, extended to ten years from the end of the relevant AY 2017–18, and concededly, the impugned notices have been issued beyond this period. Thus, by virtue of the first proviso of Section 149 of the Act, no notice could have been issued under Section 148 of the Act as no such notice could have been issued on the basis provisions for reassessment that were in force prior to 31.03.2021. This issue is covered in favour of the petitioner by a recent decision of this Court in Ratnagiri Gas and Power Private Limited [2025 (5) TMI 449 - DELHI HIGH COURT]
1. Whether the cost cross charges made by the petitioner, a foreign company, to its Indian associated enterprises (AIPL and AIGSPL) for corporate services constitute "fees for technical services" (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961.
2. Whether such charges qualify as "fees for included services" (FIS) under Article 12(4) of the India-US Double Taxation Avoidance Agreement (DTAA).
3. Whether the cross charges could be characterized as royalties under Article 12(3) of the India-US DTAA.
4. The applicability and interpretation of the "make available" criterion in determining whether the services rendered amount to FIS under the DTAA.
5. The correctness of the Assessing Officer's (AO) rejection of the petitioner's application for a 'nil' withholding tax certificate under Section 197 of the Act.
Issue-wise Detailed Analysis:
1. Characterization of Cost Cross Charges as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act
The AO held that the services rendered by the petitioner were highly technical, managerial, and consultancy in nature, requiring special skills and technical qualifications. The AO concluded that these services made available knowledge, experience, and know-how to the Indian associated enterprises, thus falling within the ambit of FTS and FIS, and accordingly rejected the petitioner's application for a nil withholding tax certificate.
The petitioner disputed this characterization, emphasizing that the cross charges were on a pure cost-to-cost basis and did not constitute income chargeable to tax. It contended that the services rendered did not amount to FTS under the Act.
The Court, however, did not find it necessary to delve into the question of whether the charges constituted FTS under the Act since the charges clearly did not satisfy the definition of FIS under the DTAA, which was determinative for the withholding tax certificate application.
2. Applicability of Fees for Included Services (FIS) under Article 12(4) of the India-US DTAA
Article 12 of the India-US DTAA defines "fees for included services" as payments for technical or consultancy services that either:
The Court emphasized that the expression "make available" requires that the service provider transfers technical knowledge, experience, skill, or know-how in a manner that enables the recipient to absorb and utilize it independently in the future.
The petitioner provided detailed explanations of the services rendered, including human resources, IT and digital solutions, management and operations, finance and accounting, legal and compliance, procurement, and risk management. The services primarily involved administrative support, software maintenance, advisory functions, and coordination activities rather than the transfer of technical knowledge or know-how.
The Court found that these services were not ancillary or subsidiary to any royalty-bearing rights, nor did they "make available" any technical knowledge or processes to the Indian associated enterprises. The services were ongoing and did not confer any enduring technical capability or rights to the recipients.
In support, the Court relied on precedent decisions interpreting the "make available" test, including:
The Court concluded that the petitioner's services did not meet this standard and therefore did not fall within the scope of FIS under the DTAA.
3. Characterization of Cross Charges as Royalties under Article 12(3) of the DTAA
The AO also contended that part of the charges could be taxable as royalties, reasoning that the petitioner centrally procured software and tools used by the Indian associated enterprises and cross-charged them.
The Court rejected this view, noting that there was no transfer of copyright or any proprietary rights in the software or tools to the Indian enterprises. The cross charges were reimbursements of actual costs and did not amount to royalties within the meaning of Article 12(3).
This conclusion was supported by the binding Supreme Court precedent which held that mere use or access to software without transfer of rights does not constitute royalty income.
The Court further observed that the AO's reliance on a pending review petition against the Supreme Court decision was misplaced, as the binding nature of Supreme Court judgments under Article 141 of the Constitution of India precluded disregarding the precedent on such grounds.
4. Interpretation and Application of the "Make Available" Test
The Court extensively analyzed the "make available" test, which is pivotal in determining whether payments for services qualify as FIS under the DTAA.
The Court reiterated that the test requires a transfer of technical knowledge or skill that enables the recipient to apply the technology independently in the future. The petitioner's services, which involved ongoing support and administrative functions, did not satisfy this test.
The Court noted that if the services had indeed made available technical knowledge or processes, the Indian associated enterprises would not require such services repeatedly over multiple years, as the knowledge would be absorbed and utilized independently.
The Court's reasoning drew from authoritative rulings which emphasized that mere incidental benefits or access to services do not amount to making available technical knowledge or skill.
5. Rejection of the Assessing Officer's Order and Grant of Nil Withholding Tax Certificate
Given the above analysis, the Court found the AO's order rejecting the petitioner's application for a nil withholding tax certificate unsustainable.
The Court set aside the impugned order and directed the AO to issue the necessary nil withholding tax certificate in respect of the cross-cost charges received by the petitioner from the Indian associated enterprises.
The Court clarified that this order was confined to the issuance of the certificate under Section 197 of the Act and did not preclude the Revenue from examining the taxability of the receipts in the normal course of assessment.
Significant Holdings:
"The expression 'make available' must be understood to mean transfer of technical knowledge, experience, skill, know-how, or process, which enables the recipient to absorb and utilise the same."
"If the service provided does not confer any right in favour of the recipient in respect of the knowledge, experience, skill or know-how; the condition that the services 'make available' such technical knowledge, know-how, skill, or process so as to fall within the sweep of FIS are not satisfied."
"Payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied."
"Given the fact that AIPL and AIGSPL did not acquire any copyright in the software, the cross charges paid by them could not be construed as royalties within the scope of Article 12(3) of the India-US DTAA."
"As long as the judgment of the Supreme Court is in force, the concerned authority could not have side stepped the judgment, based on the fact that the review petition had been preferred."
"The impugned order is not sustainable and therefore, is set aside. We, accordingly, direct the AO to issue the necessary certificate or 'NIL' withholding Tax Certificate in respect of the cross-cost charges."
Order passed by AO u/s 197 - petitioner’s application for ‘NIL’ withholding tax, was rejected - cross charges considered as FTS or not? - Withhold tax at the rate of 15% (including surcharge and cess) on the payment - AO concluded that the charges paid to the petitioner by its AEs are taxable as FTS and FIS
HELD THAT:- Petitioner renders wide range of services to AEs. None of the services can be considered as ‘included services’ within the meaning of paragraph no.4 of Article 12 of the India-US DTAA as the same is not ancillary and subsidiary to the application or enjoyment of the right, property or information for which the petitioner receives royalty as covered under Article 12 (3) of the India-US DTAA.
The services rendered by the petitioner also do not make available technical knowledge, experience, skill, know-how, or processes to AIPL and AIGSPL. The expression ‘make available’ must be understood to mean transfer of technical knowledge, experience, skill or know-how, or process, which enables the recipient to absorb and utilise the same. If the service provided does confer any right in favour of the recipient in respect of the knowledge, experience, skill or know-how; the condition that the services ‘make available’ such technical knowledge, know-how, skill, or process so as to fall with the sweep of FIS are not satisfied.
Given the fact that AIPL and AIGSPL did not acquire any copyright in the software, the cross charges paid by them could not be construed as royalties within the scope of Article 12 (3) of the India-US DTAA. This issue is covered by the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [2021 (3) TMI 138 - SUPREME COURT] against which Revenue’s review petition is pending before the Supreme Court. The decision of the Supreme Court is binding under Article 141 of the Constitution of India and could not have been disregarded on the ground that a review petition is pending.
Thus the impugned order is not sustainable and therefore, is, set aside. We, accordingly, direct the AO to issue the necessary certificate or ‘NIL’ withholding Tax Certificate in respect of the cross-cost charges as received by the petitioner from AIPL and AIGSPL.
Order passed by AO u/s 197 - petitioner’s application for ‘NIL’ withholding tax, was rejected - cross charges considered as FTS or not? - Withhold tax at the rate of 15% (including surcharge and cess) on the payment - AO concluded that the charges paid to the petitioner by its AEs are taxable as FTS and FIS
HELD THAT:- Petitioner renders wide range of services to AEs. None of the services can be considered as ‘included services’ within the meaning of paragraph no.4 of Article 12 of the India-US DTAA as the same is not ancillary and subsidiary to the application or enjoyment of the right, property or information for which the petitioner receives royalty as covered under Article 12 (3) of the India-US DTAA.
The services rendered by the petitioner also do not make available technical knowledge, experience, skill, know-how, or processes to AIPL and AIGSPL. The expression ‘make available’ must be understood to mean transfer of technical knowledge, experience, skill or know-how, or process, which enables the recipient to absorb and utilise the same. If the service provided does confer any right in favour of the recipient in respect of the knowledge, experience, skill or know-how; the condition that the services ‘make available’ such technical knowledge, know-how, skill, or process so as to fall with the sweep of FIS are not satisfied.
Given the fact that AIPL and AIGSPL did not acquire any copyright in the software, the cross charges paid by them could not be construed as royalties within the scope of Article 12 (3) of the India-US DTAA. This issue is covered by the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [2021 (3) TMI 138 - SUPREME COURT] against which Revenue’s review petition is pending before the Supreme Court. The decision of the Supreme Court is binding under Article 141 of the Constitution of India and could not have been disregarded on the ground that a review petition is pending.
Thus the impugned order is not sustainable and therefore, is, set aside. We, accordingly, direct the AO to issue the necessary certificate or ‘NIL’ withholding Tax Certificate in respect of the cross-cost charges as received by the petitioner from AIPL and AIGSPL.
The core legal questions considered by the Court in this matter are:
(a) Whether the notice issued under section 148 of the Income Tax Act, 1961 for reopening the assessment for the Assessment Year (AY) 2016-17 is valid and legal;
(b) Whether the Assessing Officer had jurisdiction to reopen the assessment for AY 2016-17 on the ground that deduction under section 80-IB(10) claimed by the petitioner was not allowable because the residential project "Venus Parkland" was not completed within the prescribed time limit as per the findings in AY 2012-13;
(c) Whether the earlier orders passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) in favor of the petitioner with respect to disallowance under section 80-IB(10) for AY 2012-13 operate as res judicata or bar the reopening of assessment for AY 2016-17;
(d) Whether the conditions laid down under section 80-IB(10) regarding project completion timelines and allotment restrictions were complied with by the petitioner;
(e) Whether the Assessing Officer's reasons recorded for reopening the assessment for AY 2016-17 are sufficient and justified in law.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Validity and Jurisdiction for Reopening Assessment under Section 148 for AY 2016-17
Relevant legal framework and precedents: Section 148 of the Income Tax Act empowers the Assessing Officer to reopen an assessment if he has reason to believe that income chargeable to tax has escaped assessment. The reopening must be based on tangible material or information indicating escapement of income. Jurisdiction to reopen is circumscribed by previous final orders and principles of res judicata, especially where identical issues have been adjudicated upon.
Court's interpretation and reasoning: The Court noted that the petitioner's claim for deduction under section 80-IB(10) for AY 2012-13 had been scrutinized and disallowed by the Assessing Officer initially, but subsequently allowed by the Commissioner of Income Tax (Appeals) and upheld by the ITAT. These orders had attained finality. The reopening for AY 2016-17 was premised solely on the ground that the project was not completed within the prescribed time limit, a fact which had been conclusively decided in favor of the petitioner in AY 2012-13.
The Court reasoned that since the identical issue regarding project completion and eligibility for deduction under section 80-IB(10) was already adjudicated and decided in petitioner's favor, the Assessing Officer could not assume jurisdiction to reopen the assessment for AY 2016-17 on the same ground. The reopening notice dated 31.03.2021 was therefore without jurisdiction and liable to be quashed.
Key evidence and findings: The petitioner's project "Venus Parkland" was approved by the local authority on 30.03.2007 with a prescribed completion deadline of 31.03.2012. The Assessing Officer for AY 2012-13 had found that the project was incomplete as on 31.03.2012, disallowing deduction under section 80-IB(10). However, the CIT(A) and ITAT reversed this finding based on facts and submissions, allowing the deduction.
For AY 2016-17, the petitioner claimed deduction under section 80-IB(10) again, paid tax under section 115JB on book profits, and filed return. No scrutiny assessment was made initially. The reopening notice was issued relying on the earlier disallowance for AY 2012-13. The Court found this reliance misplaced given the appellate orders in favor of the petitioner.
Application of law to facts: The Court applied the principle that reopening cannot be based on a matter already conclusively decided in earlier assessments and appeals. The Assessing Officer's reasons for reopening were essentially a re-examination of the same facts and issue already adjudicated, which is impermissible.
Treatment of competing arguments: The Revenue argued that the reopening was justified based on information collected regarding non-completion of the project and breach of conditions under section 80-IB(10). The Court rejected this, emphasizing that the appellate findings in AY 2012-13 were binding and precluded re-opening on the same issue for AY 2016-17.
Conclusions: The reopening notice under section 148 for AY 2016-17 was invalid and without jurisdiction. The Court quashed the notice.
Issue (c): Res Judicata and Effect of Earlier Appellate Orders
Relevant legal framework and precedents: The doctrine of res judicata bars re-litigation of issues that have been finally decided between the same parties. The final orders of the CIT(A) and ITAT on AY 2012-13 constitute binding precedent for subsequent assessments involving the same facts and legal questions.
Court's interpretation and reasoning: The Court held that the earlier appellate orders allowing the deduction under section 80-IB(10) for AY 2012-13 conclusively decided the question of project completion and eligibility. The reopening for AY 2016-17 on identical grounds violates the principle of finality and is barred by res judicata.
Key evidence and findings: The CIT(A) order dated 31.07.2019 and ITAT order dated 17.09.2021 were relied upon. Both had found the project completed within the prescribed time and allowed the deduction.
Application of law to facts: Since the issue was conclusively decided, the Assessing Officer could not revisit the same issue in a later year's assessment.
Treatment of competing arguments: Revenue's contention that the reopening was based on fresh information was rejected as the information related to the same facts already adjudicated.
Conclusions: The principle of res judicata applies, barring reopening on the same issue.
Issue (d): Compliance with Conditions under Section 80-IB(10)
Relevant legal framework: Section 80-IB(10) provides deduction for profits derived from residential housing projects subject to conditions including completion within 5 years from the end of the financial year in which the project was approved and restrictions on allotment of units to certain persons.
Court's interpretation and reasoning: The Assessing Officer's reasons recorded non-completion of the project as on 31.03.2012 and violation of allotment conditions, including block booking of multiple flats by a single non-individual entity, which contravened the Act's eligibility criteria.
However, these findings had been examined and negatived by the CIT(A) and ITAT for AY 2012-13. The Court observed that the petitioner had been held entitled to the deduction after due scrutiny of these conditions.
Key evidence: AUDA's approval letter, building permissions, and letters regarding incomplete blocks were considered. The petitioner's submissions and the appellate orders were also examined.
Application of law to facts: The Court found that the petitioner had complied with the conditions as per the appellate findings, and the reopening notice's reliance on alleged non-compliance was not sustainable.
Treatment of competing arguments: Revenue's argument on violation of allotment conditions and incomplete project was rejected in light of appellate findings.
Conclusions: The petitioner complied with conditions under section 80-IB(10) as per final appellate orders.
Issue (e): Sufficiency and Justification of Reasons for Reopening
Relevant legal framework: The Assessing Officer must record valid and sufficient reasons based on tangible material to justify reopening under section 148.
Court's interpretation and reasoning: The reasons recorded for reopening were essentially a reiteration of issues already decided. The Court found that the reasons did not constitute new information or material justifying reopening.
Key evidence: The reasons recorded highlighted non-completion of project and violation of allotment conditions, which were already adjudicated.
Application of law to facts: The Court held that the reasons were insufficient to assume jurisdiction for reopening.
Treatment of competing arguments: Revenue's claim of fresh information was negated by the Court.
Conclusions: Reasons for reopening were inadequate and invalid.
3. SIGNIFICANT HOLDINGS
"Having regard to the controversy involved which is in narrow compass, with the consent of the learned advocates for the parties, the matter is taken up for hearing."
"On perusal of the above reasons, it is clear that before the Assessing Officer have assumed the jurisdiction to reopen the assessment proceedings only on the ground that disallowance was made by the Assessing Officer in the Year 2012-13, the CIT(A), by order dated 31.07.2019, had already allowed such deductions and therefore, the respondent-Assessing Officer could not have assumed the jurisdiction to disallow deduction claimed by the petitioner under section 80IB (10) of the Act for the Assessment Year 2016-17 on the ground that the project was not completed as on 31.03.2012."
"The impugned notice dated 31.03.2021 for reopening is hereby quashed and set aside."
Core principles established include:
- Reopening of assessment under section 148 cannot be based on a matter already conclusively adjudicated upon in earlier assessment years and appellate orders.
- The doctrine of res judicata applies to assessment proceedings where identical issues have been finally decided.
- Reasons recorded for reopening must be based on fresh tangible material and not mere reiteration of previously decided facts.
Final determinations on each issue:
(a) The reopening notice under section 148 for AY 2016-17 is invalid and without jurisdiction.
(b) The Assessing Officer cannot disallow deduction under section 80-IB(10) for AY 2016-17 on grounds already decided in AY 2012-13.
(c) The appellate orders in AY 2012-13 operate as res judicata and bar reopening on the same issue.
(d) The petitioner complied with the conditions under section 80-IB(10) as per final orders.
(e) The reasons recorded for reopening were insufficient and unjustified.
Reopening of assessment u/s 147 - deduction u/s 80-IB(10) claimed by the petitioner was not allowable because the residential project "Venus Parkland" - HELD THAT:- It is clear that before the AO have assumed the jurisdiction to reopen the assessment proceedings only on the ground that disallowance was made by the AO in the Year 2012-13, CIT(A), by order dated 31.07.2019, had already allowed such deductions and therefore, AO could not have assumed the jurisdiction to disallow deduction claimed by the petitioner u/s 80IB (10) on the ground that the project was not completed as on 31.03.2012.
Petition is allowed.
Reopening of assessment u/s 147 - deduction u/s 80-IB(10) claimed by the petitioner was not allowable because the residential project "Venus Parkland" - HELD THAT:- It is clear that before the AO have assumed the jurisdiction to reopen the assessment proceedings only on the ground that disallowance was made by the AO in the Year 2012-13, CIT(A), by order dated 31.07.2019, had already allowed such deductions and therefore, AO could not have assumed the jurisdiction to disallow deduction claimed by the petitioner u/s 80IB (10) on the ground that the project was not completed as on 31.03.2012.
Petition is allowed.
1. Whether the reopening notice under section 148 of the Income Tax Act, 1961, issued on 31.03.2021 but served after 01.04.2021, is valid in light of the amended provisions introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA") effective from 01.04.2021.
2. Whether the assessment order dated 29.03.2022 passed pursuant to the said reopening notice remains valid or becomes infructuous following subsequent reassessment proceedings initiated after the Supreme Court's judgment in Union of India vs. Ashish Agarwal.
3. The legal effect of the quashing of reassessment proceedings initiated pursuant to the Supreme Court's decision in Keenara Industries Private Limited and the subsequent reversal of that decision by the Supreme Court in Union of India vs. Rajiv Bansal.
4. Whether the demand notices and recovery proceedings issued pursuant to the assessment order dated 29.03.2022 and the rectification order dated 04.07.2024 are sustainable.
5. The applicability and levy of interest under sections 234A and 234B of the Income Tax Act in the context of the reopened assessment and rectification orders.
Issue 1: Validity of the reopening notice dated 31.03.2021 served after 01.04.2021 under the new regime introduced by TOLA
The legal framework governing reopening of assessments was substantially amended by TOLA, which came into effect from 01.04.2021. The Act's provisions relating to reassessment notices under sections 147 and 148 were modified, and TOLA introduced transitional provisions for notices issued during the period 01.04.2021 to 30.06.2021.
The Supreme Court in Union of India vs. Ashish Agarwal held that reopening notices issued under the old regime but served after 01.04.2021 are to be treated as deemed notices under the new regime and must comply with the new procedural safeguards. This decision clarified that such notices are valid only if they meet the requirements of the amended law.
In the present case, the reopening notice dated 31.03.2021 was served on 01.04.2021, thus falling within the transitional period governed by TOLA. The Court observed that the reopening notice under section 148, though issued before 01.04.2021, was served after that date and therefore must be considered under the new regime as per the Supreme Court's ruling in Ashish Agarwal.
The Court reasoned that the reopening notice dated 31.03.2021, served on 01.04.2021, does not satisfy the procedural requirements of the new regime and thus, the assessment order passed pursuant to it is not sustainable.
Issue 2: Validity and effect of the assessment order dated 29.03.2022 passed pursuant to the reopening notice dated 31.03.2021
The assessment order dated 29.03.2022 was passed under section 147 read with section 144B of the Act following the reopening notice dated 31.03.2021. The petitioner challenged this order on the ground that it became infructuous after the subsequent reassessment proceedings initiated pursuant to the Supreme Court's decision in Ashish Agarwal.
Following the Apex Court's judgment, the respondent issued a fresh notice under section 148 on 26.07.2022 and passed an order under section 148A(d) confirming escapement of income. The petitioner argued that once the reassessment notice dated 26.07.2022 was issued and the corresponding order passed, the earlier assessment order dated 29.03.2022 ceased to have any legal effect.
The Court agreed with this contention, holding that the assessment order dated 29.03.2022 is void and non-existent in view of the subsequent valid reassessment proceedings initiated on 26.07.2022. Consequently, the appeal filed against the 29.03.2022 order also became infructuous.
Issue 3: Impact of the decisions in Keenara Industries and Rajiv Bansal on the reassessment proceedings
The petitioner had earlier succeeded in quashing the reassessment proceedings based on the decision in Keenara Industries Private Limited, which held certain reopening notices issued during the transitional period to be invalid. However, the Supreme Court later stayed the Keenara Industries decision and ultimately reversed it in Union of India vs. Rajiv Bansal.
The Rajiv Bansal judgment clarified that TOLA provisions apply only to extend time limits and procedural requirements for notices issued between 20.03.2020 and 31.03.2021, and that the directions in Ashish Agarwal apply to all reassessment notices issued under the old regime during 01.04.2021 to 30.06.2021. It further held that any notices issued beyond the surviving time limits are time-barred and liable to be set aside.
The Court noted that in light of Rajiv Bansal, the reassessment proceedings initiated on 26.07.2022 are valid, and the assessment order dated 29.03.2022 passed pursuant to the earlier reopening notice cannot survive.
Issue 4: Validity of demand and recovery notices issued pursuant to the assessment and rectification orders
The petitioner challenged the recovery notices dated 20.07.2022, 06.11.2023, 22.12.2023, and subsequent notices calling for payment of outstanding demand raised under the assessment order dated 29.03.2022 and rectification order dated 04.07.2024.
The Court held that since the assessment order dated 29.03.2022 is void and non-existent, the consequential demand and recovery notices issued pursuant to it cannot be sustained. Similarly, the rectification order passed under section 154 of the Act and related demand notices also do not survive.
The Court accordingly quashed the impugned assessment order, rectification order, and all consequential demand and recovery notices.
Issue 5: Levy of interest under sections 234A and 234B of the Income Tax Act
Following the assessment order dated 29.03.2022, the respondent issued a notice dated 17.01.2024 demanding payment of interest under sections 234A and 234B for non-levy or short levy of interest. The petitioner filed a reply opposing the levy, but the respondent rejected the prayer by order dated 04.07.2024.
The Court observed that since the assessment order dated 29.03.2022 is void and non-existent, the basis for levy of interest under sections 234A and 234B also falls away. Therefore, the order levying interest and the consequential demand notice cannot be sustained.
Conclusions and Application of Law to Facts
The Court applied the principles laid down by the Supreme Court in Ashish Agarwal and Rajiv Bansal to the facts of the case, particularly focusing on the timing of the reopening notice and the procedural requirements under the amended law. It concluded that the reopening notice dated 31.03.2021 served after 01.04.2021 did not comply with the new regime, rendering the assessment order dated 29.03.2022 invalid.
Further, the Court held that the reassessment proceedings initiated pursuant to the valid notice dated 26.07.2022 stand, and the earlier assessment order and consequential appeals and recovery actions have no legal effect. The Court also rejected the levy of interest under sections 234A and 234B as based on the void assessment order.
The competing arguments of the parties were considered with reference to the Apex Court's binding precedents. The petitioner's reliance on the quashing of reassessment proceedings under Keenara Industries was noted but superseded by the Rajiv Bansal decision reversing that position. The respondent's contention to sustain the assessment under Rajiv Bansal was accepted only for the reassessment notice dated 26.07.2022 and not for the earlier assessment order.
Significant Holdings
"The assessment order dated 29.03.2022 passed pursuant to the notice dated 31.03.2021 shall not survive and consequently, the appeal preferred by the petitioner would also not survive as the assessment order passed pursuant to the notice dated 31.03.2021 would not be a valid assessment order."
"The petition succeeds and the impugned order dated 29.03.2022 is declared as void and non existent order in view of the subsequent notice issued by the respondent under section 148 of the Act dated 26.07.2022."
"The respondent shall be at liberty to conclude assessment proceedings as per the notice dated 26.07.2022 issued under section 148 of the Act as per the decision in case of Rajeev Bansal (supra)."
Core principles established include the recognition that reopening notices issued before but served after 01.04.2021 must comply with the new procedural safeguards under TOLA and the amended Income Tax Act provisions, and that assessment orders passed pursuant to invalid reopening notices are void and cannot sustain appeals or recovery actions. The judgment also confirms the binding effect of the Supreme Court's rulings in Ashish Agarwal and Rajiv Bansal on the validity of reopening notices and assessment proceedings in the transitional period.
Reopening of assessment u/s 147 as barred by limitation -application of TOLA - scope of new law/regime - HELD THAT:- The fact remains that once the notice u/s 148 dated 31.01.2021 was served upon the assessee on 01.04.2021, the same is issued and served after 31.03.2021 i.e. during the period from 01.04.2021 to 30.06.2021 as per TOLA.
Therefore, the assessment order passed pursuant to the notice u/s 148 dated 29.03.2022 would become infructuous in view of the decision of Hon’ble Apex Court in case of Ashish Agarwal [2024 (10) TMI 264 - SUPREME COURT (LB)]
The respondent has thereafter issued notice under section 148 of the Act pursuant to the order dated 26.07.2022 passed under section 148A(d) of the Act. Therefore, the assessment order dated 29.03.2022 passed pursuant to the notice dated 31.03.2021 shall not survive and consequently, the appeal preferred by the petitioner would also not survive as the assessment order passed pursuant to the notice dated 31.03.2021 would not be a valid assessment order passed pursuant to such notice and a fresh assessment order will have to be passed as per the reassessment notice issued under section 148 of the Act on 26.07.2022 in view of the decision of the Apex Court in case of Rajiv Bansal [2022 (5) TMI 240 - SUPREME COURT]
Petition succeeds and the impugned order dated 29.03.2022 is declared as void and non existent order in view of the subsequent notice issued by the respondent u/s 148.
Reopening of assessment u/s 147 as barred by limitation -application of TOLA - scope of new law/regime - HELD THAT:- The fact remains that once the notice u/s 148 dated 31.01.2021 was served upon the assessee on 01.04.2021, the same is issued and served after 31.03.2021 i.e. during the period from 01.04.2021 to 30.06.2021 as per TOLA.
Therefore, the assessment order passed pursuant to the notice u/s 148 dated 29.03.2022 would become infructuous in view of the decision of Hon’ble Apex Court in case of Ashish Agarwal [2024 (10) TMI 264 - SUPREME COURT (LB)]
The respondent has thereafter issued notice under section 148 of the Act pursuant to the order dated 26.07.2022 passed under section 148A(d) of the Act. Therefore, the assessment order dated 29.03.2022 passed pursuant to the notice dated 31.03.2021 shall not survive and consequently, the appeal preferred by the petitioner would also not survive as the assessment order passed pursuant to the notice dated 31.03.2021 would not be a valid assessment order passed pursuant to such notice and a fresh assessment order will have to be passed as per the reassessment notice issued under section 148 of the Act on 26.07.2022 in view of the decision of the Apex Court in case of Rajiv Bansal [2022 (5) TMI 240 - SUPREME COURT]
Petition succeeds and the impugned order dated 29.03.2022 is declared as void and non existent order in view of the subsequent notice issued by the respondent u/s 148.
The core legal questions considered by the Tribunal in these appeals pertain to:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Delay in filing the appeal before CIT(A) and condonation of delay
Relevant legal framework and precedents: The limitation period for filing appeals before the Commissioner of Income Tax (Appeals) is prescribed under the Income Tax Act, 1961. The Supreme Court and various High Courts have held that limitation periods must be strictly adhered to, but courts possess discretion to condone delay if sufficient cause is shown. Further, during the Covid-19 pandemic, the Supreme Court directed exclusion of the period of limitation till 28 February 2022 in certain cases.
Court's interpretation and reasoning: The CIT(A) held that the appeals were filed late by 919 days and refused to condone the delay, also observing that the closure of the CPGRAM grievance was not an appealable order. The assessee contended that the appeal was filed within time considering the exclusion of limitation period due to Covid-19 and that the grievance closure date (23-04-2024) triggered the limitation period for filing appeal.
Key evidence and findings: The appeals were filed on 29-05-2024, against the grievance closure dated 23-04-2024, and the assessee submitted that the rectification application was filed timely on 13-04-2023. The Tribunal noted the assessee's explanation regarding Covid-19 related extension and the sequence of events.
Application of law to facts: The Tribunal found the assessee's explanation for delay genuine and condoned the delay in filing the appeal before the Tribunal (delayed by 104 days) due to inadvertence in submission of the CIT(A) order to the chartered accountant. The Tribunal implicitly recognized the Covid-19 extension and the grievance closure date as relevant for limitation calculation.
Treatment of competing arguments: The Revenue relied on the assessment order and CPGRAM disposal to justify non-entitlement to appeal and non-condonation of delay. The Tribunal disagreed with the CIT(A)'s refusal to condone delay and held the delay explanation satisfactory.
Conclusions: Delay in filing the appeal before the Tribunal was condoned. The question of delay before the CIT(A) was not explicitly reversed but the Tribunal's directions effectively allowed reconsideration on merits.
Issue 2: Entitlement to credit of TDS and rejection of refund claim
Relevant legal framework and precedents: Section 143(1) of the Income Tax Act deals with intimation and adjustment of refunds or demands. Section 154 provides for rectification of mistakes apparent from record. The credit of TDS is allowable only if reflected in the correct PAN and properly claimed. The Supreme Court and Tribunal decisions emphasize that TDS credit must be allowed if the amount is rightly attributable to the assessee.
Court's interpretation and reasoning: The Assessing Officer did not allow the TDS credit of Rs. 35,493 (AY 2020-21) and similarly for other years, claiming that the TDS was reflected in the name of a trustee (Hasmukhbhai S Dave) and not the trust itself. The rectification application filed under section 154 was neither accepted nor rejected by the AO but the CPGRAM grievance was closed without resolution. The CIT(A) dismissed the appeal on procedural grounds without addressing the merits.
Key evidence and findings: The assessee submitted Form 26AS of the trustee showing the TDS credit and contended that the trustee had not claimed this TDS in his own assessment and had credited the amount to the trust. The rectification application was filed timely. The Tribunal noted absence of any order on merits by the AO or CIT(A).
Application of law to facts: The Tribunal found that the merits of the TDS credit claim were not adjudicated by the CIT(A). It held that if the TDS credit is in the name of the trustee and the trustee has transferred the amount to the trust account, then the trust is entitled to claim the credit. The Tribunal directed remand to the AO to consider these facts and grant due credit accordingly.
Treatment of competing arguments: The Revenue relied on the initial assessment and CPGRAM disposal to deny credit. The Tribunal rejected the procedural dismissal and emphasized the need for merits examination and proper consideration of the assessee's claim.
Conclusions: The Tribunal set aside the orders and remanded the matter to the AO for fresh consideration of TDS credit claim in the name of the trust, directing that credit be given if justified.
Issue 3: Legality of raising demand on account of non-credit of TDS
Relevant legal framework and precedents: Demand notices under the Income Tax Act are issued when there is a shortfall in tax paid or credited. However, if TDS credit is rightly attributable to the assessee, raising demand is erroneous.
Court's interpretation and reasoning: The demand raised (Rs. 5,467 for AY 2020-21 and corresponding amounts for other years) was based on non-credit of TDS. Since the Tribunal directed remand for fresh consideration of TDS credit, the demand's legality depends on the outcome of that exercise.
Key evidence and findings: No fresh findings on demand legality were made by the Tribunal; rather, the demand was linked to the TDS credit issue.
Application of law to facts: The Tribunal's direction to re-examine TDS credit implies that the demand may be withdrawn if credit is allowed.
Treatment of competing arguments: The Revenue defended the demand based on existing orders; the Tribunal prioritized correct crediting of TDS over procedural dismissal.
Conclusions: The demand is stayed pending fresh adjudication on TDS credit by the AO.
Issue 4: Whether closure of CPGRAM grievance is an appealable order
Relevant legal framework and precedents: Generally, orders passed by CPGRAM are not statutory orders under the Income Tax Act and hence not appealable before the CIT(A). Appeals lie against orders passed under the Act.
Court's interpretation and reasoning: The CIT(A) held that CPGRAM closure is not appealable and dismissed the appeals on that ground. The Tribunal did not expressly overturn this finding but noted that the grievance closure date was relevant for limitation purposes.
Key evidence and findings: The grievance closure was on 23-04-2024, and the appeals were filed on 29-05-2024.
Application of law to facts: The Tribunal implicitly accepted that while CPGRAM closure is not appealable, the grievance closure date can be relevant to determine when the cause of action arose for filing appeal.
Treatment of competing arguments: The Revenue relied on the non-appealability of CPGRAM orders; the Tribunal focused on substantive rights and limitation computations.
Conclusions: CPGRAM closure itself is not appealable, but the date is relevant for limitation calculation for filing appeal against statutory orders.
3. SIGNIFICANT HOLDINGS
"Since the CIT(A) has not commented anything on the merits of the case related to the refund in respect of TDS credit to the assessee trust... it will be appropriate that the matter may be remanded back to the Assessing Officer with the direction that if the credit of TDS is in the name of trustee and the trust being given the details whether money are credited by trustee into the account of the trust, the same should be taken into account and the due credit to the assessee trust be given accordingly."
"The delay before the Tribunal has been explained by the assessee trust and it appears genuine, hence the delay is condoned."
Core principles established include:
Final determinations on each issue:
Denial of credit of TDS - HELD THAT:- CIT(A) has not commented anything on the merits of the case related to the refund in respect of TDS credit to the assessee trust. The rectification application filed by the assessee on 08-02-2023 was not rejected or accepted by the AO. On 23-04-2024, the CPGRAM disposed of the complaint of the assessee trust dated 11-04-2024 thereby stating the case ‘closed’. It will be appropriate that the matter may be remanded back to the AO with the direction that if the credit of TDS is in the name of trustee and the trust being given the details whether money are credited by trustee into the account of the trust, the same should be taken into account and the due credit to the assessee trust be given accordingly.
Denial of credit of TDS - HELD THAT:- CIT(A) has not commented anything on the merits of the case related to the refund in respect of TDS credit to the assessee trust. The rectification application filed by the assessee on 08-02-2023 was not rejected or accepted by the AO. On 23-04-2024, the CPGRAM disposed of the complaint of the assessee trust dated 11-04-2024 thereby stating the case ‘closed’. It will be appropriate that the matter may be remanded back to the AO with the direction that if the credit of TDS is in the name of trustee and the trust being given the details whether money are credited by trustee into the account of the trust, the same should be taken into account and the due credit to the assessee trust be given accordingly.
Specifically, the issues are:
Issue-wise Detailed Analysis:
1. Date of Search and Applicability of Section 153C for Non-Searched Person
The legal framework governing assessments arising from search and seizure operations is primarily contained in sections 153A, 153C, and 153D of the Act. Section 153C applies to a person other than the searched person, where books of account or documents or assets seized during the search of one person are relevant for assessing the income of another person.
The Supreme Court's ruling in the cited precedent clarified that for the non-searched person, the date of search is not the date of the physical search on the searched person but the date when the AO having jurisdiction over the non-searched person receives the seized material. This date triggers the limitation period and the commencement of assessment proceedings under section 153C.
The Delhi High Court further elucidated that the "satisfaction" recorded by the AO under section 153C is the cornerstone for initiating proceedings, and the actual physical transmission of seized material is a procedural step subordinate to this satisfaction. The date of recording such satisfaction becomes the deemed date of search for the non-searched person, especially where the AO for both searched and non-searched persons is the same.
In the present case, the satisfaction note was recorded on 06.12.2013, establishing the deemed date of search for the non-searched person (the assessee) as AY 2014-15. Therefore, any assessment related to the seized gold jewellery should have been completed under section 153C for AY 2014-15, not under section 143(3) for AY 2013-14.
2. Validity of Assessment Order Passed Under Section 143(3) Instead of Section 153C
The AO passed the assessment order under section 143(3) of the Act. However, the assessment related to the seized assets connected with the block search should have been completed under section 153C, which specifically deals with assessments arising from search and seizure operations involving other persons.
Moreover, the assessment order did not mention issuance of any notice under section 153C, which is mandatory for assumption of jurisdiction in such cases. The records confirmed that no such notice was issued. The AO's reference to having obtained prior approval under section 153D was noted, but the approval appeared to be granted mechanically without proper application of mind.
This procedural lapse is significant because section 153C assessments require strict adherence to the prescribed steps, including issuance of notice and recording of satisfaction, failing which the assessment is invalid.
3. Jurisdictional Validity and Admission of Additional Grounds
The assessee challenged the assessment order on grounds including wrongful assumption of jurisdiction due to absence of notice under section 153C and mechanical approval under section 153D. However, the specific ground that the assessment should have been completed under section 153C and not section 143(3) was not raised before the lower authorities.
Recognizing that jurisdictional challenges go to the root of the matter, the Tribunal admitted the additional ground for the first time on appeal, relying on the Supreme Court's precedent that such grounds can be entertained even if raised belatedly, especially when they do not require additional fact-finding and are apparent from the record.
Upon examination, the Tribunal found the AO's assumption of jurisdiction under section 143(3) without issuing a section 153C notice to be unsustainable, rendering the assessment order invalid.
4. Consequential Validity of Penalty Order
Since the penalty order was predicated on the impugned assessment order, the quashing of the assessment order necessarily invalidated the penalty order. The Tribunal accordingly held that the penalty order could not be sustained independently.
5. Application of Law to Facts and Treatment of Competing Arguments
The Tribunal carefully analyzed the satisfaction note recorded on 06.12.2013, the absence of section 153C notice issuance, and the procedural irregularities in the approval under section 153D. It applied the settled legal principles from the Supreme Court and Delhi High Court judgments to these facts.
The Revenue's argument that the assessment order was valid under section 143(3) was rejected on the basis that the block search triggered section 153C proceedings, which were not followed. The assessee's contention regarding jurisdictional defect was accepted, and the additional ground was admitted despite being raised for the first time, given its fundamental nature.
Significant Holdings:
"...in the case of the other person, which in the present case is the petitioner herein, such date will be the date of receiving the books of account or documents or assets seized or requisition by the Assessing Officer having jurisdiction over such other person. In the case of the other person, the question of pendency and abatement of the proceedings of assessment or reassessment to the six assessment years will be examined with reference to such date."
"It is the satisfaction arrived at under Section 153C which constitutes the cornerstone of that provision and the primary ingredient for Section 153C being set into motion... it would be the date when the AO records its satisfaction with respect to the non-searched entity which would be of seminal importance and constitute the bedrock for commencement of action under Section 153C."
"The assessment order passed under section 143(3) of the Act is not sustainable as being part of the block search six years assessment should have been done under section 153C of the Act."
"No notice under section 153C of the Act was issued for assumption of jurisdiction and the approval, if any, granted under section 153D was without application of mind."
"The additional grounds challenging jurisdiction are admitted and decided in favour of the assessee since they go to the root of the matter and require no further verification of facts."
Consequently, the Tribunal quashed both the assessment and penalty orders, holding that the AO lacked jurisdiction to pass the assessment under section 143(3) without issuing the mandatory notice under section 153C and that the date of satisfaction recording under section 153C is the deemed date of search for the non-searched person.
Assessment u/s 153C - invalid approval granted u/s 153D - HELD THAT:- As one hand if the AO has passed the orders u/s 143(3) of the Act the same is not sustainable as being part of the block search six years assessment should have been done u/s 153C of the Act. At the same time, no notice u/s 153C has been issued for assumption of jurisdiction and quite apparently these facts indicate that the approval, if any, was granted u/s 153D of the Act was without application of mind.
In the light of the aforesaid, the additional grounds are decided in favour of the assessee.
Assessment u/s 153C - invalid approval granted u/s 153D - HELD THAT:- As one hand if the AO has passed the orders u/s 143(3) of the Act the same is not sustainable as being part of the block search six years assessment should have been done u/s 153C of the Act. At the same time, no notice u/s 153C has been issued for assumption of jurisdiction and quite apparently these facts indicate that the approval, if any, was granted u/s 153D of the Act was without application of mind.
In the light of the aforesaid, the additional grounds are decided in favour of the assessee.
1. Whether the Assessing Officer (AO) can invoke Section 153A to reopen and make additions to a completed assessment when no incriminating material or evidence was found during the search under Section 132.
2. The evidentiary value and legal effect of statements recorded under Section 132(4) during search proceedings as incriminating material.
3. The correctness of additions made on account of unexplained loans received from a paper company identified during investigation.
4. The validity of making additions based on differences between the declared cost of construction and valuation by the Departmental Valuation Officer (DVO).
5. The onus on the assessee to prove the creditworthiness of entities from whom loans or credits are received, especially when such entities are alleged to be shell companies.
Issue 1: Validity of Reopening Completed Assessment under Section 153A Without Incriminating Material
The relevant legal framework includes Section 153A of the Income Tax Act, which permits reopening of assessments in cases where a search under Section 132 has been conducted. However, the reopening is permissible only if incriminating material is found during the search. The Supreme Court's ruling in the case of PCIT vs. Abhisar Buildwell Pvt. Ltd. (2023) 454 ITR 212 (SC) is pivotal. It held that:
"In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments."
The Court emphasized that completed assessments cannot be disturbed under Section 153A in the absence of incriminating material found during search or requisition under Section 132 or 132A.
The Tribunal, relying on this precedent, noted that the assessment year under consideration had attained finality before the search, and the time limit for issuing notice under Section 143(2) had expired. Since no incriminating documents or materials were found or seized during the search relating to the assessee, the reopening of the assessment under Section 153A was not sustainable. The Tribunal further observed that statements recorded under Section 132(4) alone do not constitute incriminating material without corroborative evidence, citing various High Court and Supreme Court decisions.
The Tribunal applied the law to the facts by quashing the assessment order and the appellate order, holding that additions made without incriminating material found during search are bad in law.
Issue 2: Evidentiary Value of Statements Recorded Under Section 132(4) as Incriminating Material
The AO had relied on statements recorded under Section 132(4) during search proceedings as incriminating material to justify additions. However, the Tribunal referred to binding judicial precedents which clarify that such statements, in the absence of corroborative evidence, cannot be treated as incriminating material. The judgments cited include:
The Tribunal emphasized that statements recorded under Section 132(4) are not self-sufficient to constitute incriminating material unless supported by other evidence. The Tribunal found that the AO failed to produce corroborative evidence to substantiate the statements and therefore the additions based solely on these statements were unsustainable.
Issue 3: Additions on Account of Unexplained Loans from a Paper Company
The AO made additions under Section 68 on account of unexplained loans received from M/s Rajat Fincap Private Limited, which was identified as a shell or paper company during investigation. The assessee was required to establish the creditworthiness of this entity. The Tribunal noted that the assessee failed to discharge this onus satisfactorily.
During investigation, it was revealed that SRS Group had accepted large amounts of unaccounted cash routed through multiple shell companies, including Rajat Fincap Pvt. Ltd., which was one among seventy-one such entities identified. The Tribunal accepted the AO's contention that the creditworthiness of Rajat Fincap Pvt. Ltd. was not proved and therefore the addition on this account was justified.
The Tribunal's reasoning was consistent with the principle that where a loan or credit is unexplained and the lender is a sham entity, the amount is liable to be treated as income of the borrower.
Issue 4: Additions Based on Difference in Valuation of Construction Cost
The AO relied on the Departmental Valuation Officer's (DVO) report under Section 142A to make additions based on a difference of Rs. 25,57,321 between the assessee's declared cost of construction and the DVO's estimated valuation.
The Tribunal examined the valuation difference and the assessee's explanation that the valuation was only an estimate and minor variations are acceptable. The Tribunal cited the Supreme Court decision in Smt. Amiya Bala Paul v. CIT (2003) 262 ITR 407, which held that the AO cannot make additions solely based on the DVO's valuation report without conducting an independent inquiry.
The Tribunal concluded that the difference was marginal and did not warrant any addition. It held that the AO's addition on this ground was not sustainable.
Issue 5: Onus on Assessee to Prove Creditworthiness of Loan Providers
The Tribunal reiterated the well-established principle that the assessee must prove the creditworthiness of entities from whom loans or credits are received. In the present case, since M/s Rajat Fincap Pvt. Ltd. was found to be a shell company created during investigations, and the assessee failed to provide satisfactory evidence of its financial capacity, the addition under Section 68 was justified.
The Tribunal also noted the cash transactions and fund routing through shell companies as evidence of unaccounted income being funneled into the assessee's accounts.
Significant Holdings
"In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments."
"The statement recorded under Section 132(4) alone cannot be regarded as incriminating unless supported by corroborative evidence substantiating the same."
"Addition in respect of variation in valuation in between cost of construction of building as indicated by the DVO is not significant and no addition is required against this proposed addition."
"The creditworthiness of the lender has to be proved by the assessee, failing which the loan amount is liable to be treated as income."
Applying these principles, the Tribunal quashed the additions made under Section 153A in the absence of incriminating material found during search, deleted the addition based on valuation difference, but upheld the addition on account of unexplained loans from a shell company due to the assessee's failure to prove creditworthiness.
Assessment u/s 153A - incriminating material unearthed during a search or not - HELD THAT:- The statement recorded u/s 132 as relied upon by the AO does not constitute incriminating material in the absence of any other corroborative evidence as also submitted by him. Judgments relied upon also laid down that the statement recorded during the course of search alone cannot be regarded as incriminating unless supported by corroborative evidence substantiating the same.
So far as the addition made by the AO u/s 153A is concerned in the absence of any incriminating material referred by the AO the same is not found to be sustainable in the eyes of law keeping in view the judgment passed by the Hon’ble Apex Court in the case of Abhisar Buildwell.[2023 (4) TMI 1056 - SUPREME COURT]
Further that we have already observed that the statement in the absence of corroborative evidence cannot be said to be incriminating in nature, the entire assessment in the case in hand without having support of any incriminating material unearthed during the course of search is found to be unsustainable in the eyes of law and thus, the consequent addition made by the AO is found to be bad in law and deleted. Appeal of the assessee is allowed.
Assessment u/s 153A - incriminating material unearthed during a search or not - HELD THAT:- The statement recorded u/s 132 as relied upon by the AO does not constitute incriminating material in the absence of any other corroborative evidence as also submitted by him. Judgments relied upon also laid down that the statement recorded during the course of search alone cannot be regarded as incriminating unless supported by corroborative evidence substantiating the same.
So far as the addition made by the AO u/s 153A is concerned in the absence of any incriminating material referred by the AO the same is not found to be sustainable in the eyes of law keeping in view the judgment passed by the Hon’ble Apex Court in the case of Abhisar Buildwell.[2023 (4) TMI 1056 - SUPREME COURT]
Further that we have already observed that the statement in the absence of corroborative evidence cannot be said to be incriminating in nature, the entire assessment in the case in hand without having support of any incriminating material unearthed during the course of search is found to be unsustainable in the eyes of law and thus, the consequent addition made by the AO is found to be bad in law and deleted. Appeal of the assessee is allowed.
Delay of 275 days in filing of this appeal against order of NFAC / CIT(A) - assessee is a State Cooperative Bank and hence it must be having battery of lawyers, and therefore, it is expected from such assessee to be vigilant in pursuing the tax matters diligently - HELD THAT:- The reasons given by the assessee would itself prove that the assessee has received the order of CIT(A) on 6th October, 2023, therefore, it is not a case where the order of the CIT(A) has not been served upon the assessee. In our view, merely because merger proceedings were going on between the assessee and the Kerala Bank, that cannot be a ground for not following the Income Tax matters with due diligence.
It is settled position of law that power to condone delay should be exercised having regard to the facts of the case, the power cannot be exercised to frustrate the substantial law of limitation as held by the Apex Court recently in the case of H. Guruswamy Vs A.Krishna [2025 (1) TMI 1524 - SUPREME COURT]. The Hon’ble Apex Court in yet another case of Mool Chandra v. Union of India [2024 (8) TMI 1528 - SUPREME COURT] has held that it is not he length of the delay rather the cause behind the delay, which is to be seen while condoning he delay.
In the case of Commissioner, Nagar Parishad, Bhilwara v. Labour Court, Bhilwara, [2009 (1) TMI 933 - SUPREME COURT] it was opined that while deciding an application for condonation of delay the High Court ought not to have gone into the merits of the case.
In the present case the cause responsible for the delay would not fall under the ambit of “reasonable cause”. Therefore, we are not convinced with the reasons given by the assessee for condonation of appeal, and hence, the present appeal is dismissed as barred by limitation. Appeal filed by the assessee is dismissed.
Delay of 275 days in filing of this appeal against order of NFAC / CIT(A) - assessee is a State Cooperative Bank and hence it must be having battery of lawyers, and therefore, it is expected from such assessee to be vigilant in pursuing the tax matters diligently - HELD THAT:- The reasons given by the assessee would itself prove that the assessee has received the order of CIT(A) on 6th October, 2023, therefore, it is not a case where the order of the CIT(A) has not been served upon the assessee. In our view, merely because merger proceedings were going on between the assessee and the Kerala Bank, that cannot be a ground for not following the Income Tax matters with due diligence.
It is settled position of law that power to condone delay should be exercised having regard to the facts of the case, the power cannot be exercised to frustrate the substantial law of limitation as held by the Apex Court recently in the case of H. Guruswamy Vs A.Krishna [2025 (1) TMI 1524 - SUPREME COURT]. The Hon’ble Apex Court in yet another case of Mool Chandra v. Union of India [2024 (8) TMI 1528 - SUPREME COURT] has held that it is not he length of the delay rather the cause behind the delay, which is to be seen while condoning he delay.
In the case of Commissioner, Nagar Parishad, Bhilwara v. Labour Court, Bhilwara, [2009 (1) TMI 933 - SUPREME COURT] it was opined that while deciding an application for condonation of delay the High Court ought not to have gone into the merits of the case.
In the present case the cause responsible for the delay would not fall under the ambit of “reasonable cause”. Therefore, we are not convinced with the reasons given by the assessee for condonation of appeal, and hence, the present appeal is dismissed as barred by limitation. Appeal filed by the assessee is dismissed.
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Applicability and Sustainability of Addition under Section 2(22)(e) of the Act
Relevant Legal Framework and Precedents: Section 2(22)(e) of the Act deems certain loans or advances made by a closely held company to its shareholders or their relatives as deemed dividend, taxable in the hands of the recipient. The provision aims to prevent diversion of accumulated profits by way of disguised dividends. However, judicial precedents and Circular No. 19 of 2017 issued by the Central Board of Direct Taxes (CBDT) clarify that commercial transactions in the ordinary course of business are excluded from this deeming provision.
Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had invoked Section 2(22)(e) on the basis that a closely held company, Decon Mercantile Pvt. Ltd., had extended a loan/advance of INR 1,33,05,699 to another closely held company, Francis Klein & Co. (Bombay) Pvt. Ltd., during the relevant financial year. The Assessee held significant shares in both companies, thus prima facie attracting the deeming provisions. However, the Tribunal observed that the nature of the transaction - whether it was a regular commercial transaction or a deemed dividend - was not properly examined due to the Assessee's failure to produce relevant documents before the lower authorities.
Key Evidence and Findings: The AO issued notices under Sections 148, 142(1), and a show-cause notice, which the Assessee failed to comply with adequately. Consequently, the AO proceeded ex-parte to make a best judgment assessment. The Assessee contended that the advances were in the ordinary course of business and relied on the Allahabad High Court judgment in Kishori Lal Agrawal's case and CBDT Circular No. 19 of 2017 to support the contention that such commercial loans should not be treated as deemed dividends.
Application of Law to Facts: The Tribunal recognized that the Assessee's failure to submit relevant documents such as loan ledgers, bank statements, or agreements before the AO and CIT(A) prevented a proper examination of the transaction's nature. The Tribunal acknowledged the legal position that trade advances or commercial transactions are excluded from Section 2(22)(e), but since the Assessee did not place these documents before the CIT(A), the issue remained unadjudicated on merits.
Treatment of Competing Arguments: The Department emphasized the Assessee's non-cooperation and non-compliance with notices, asserting that the Assessee was responsible for the adverse inference. The Assessee argued that the documents were available and had been submitted before the Tribunal but not before the CIT(A), and that the transaction was commercial in nature, not attracting Section 2(22)(e).
Conclusions: The Tribunal held that since the documents were not placed before the CIT(A), the issue could not be decided on merits. The Tribunal directed the matter to be restored to the CIT(A) for fresh adjudication after granting the Assessee a reasonable opportunity to produce all relevant documents and make submissions. The Tribunal clarified that failure to cooperate in the appellate proceedings would entitle the CIT(A) to decide the issue on the basis of material on record.
Issue 2: Adequacy of Opportunity of Being Heard
Relevant Legal Framework: The principles of natural justice and fair play require that an assessee be given adequate opportunity to present his case before adverse orders are passed. The issuance of notices and the chance to respond are essential components of such opportunity.
Court's Interpretation and Reasoning: The Assessee contended that adequate opportunity was not granted during the assessment and appellate proceedings, which led to an ex-parte best judgment assessment. The Tribunal noted that although notices were issued under Sections 148, 142(1), and show-cause notices, the Assessee failed to respond or respond adequately. The Department contended that the Assessee was the author of his own predicament by not complying with notices.
Key Evidence and Findings: The record showed multiple notices sent to the Assessee, including during the appellate stage. The Assessee's failure to respond or only piecemeal responses were noted. However, the Tribunal also noted that the Assessee's contention of non-grant of opportunity was partly founded on the fact that documents were not considered by the CIT(A) due to non-filing before that authority.
Application of Law to Facts: The Tribunal balanced the Department's assertion of non-cooperation with the Assessee's plea for an opportunity to place documents on record. The Tribunal found that the failure to consider documents at the CIT(A) stage was a procedural lapse that warranted restoration of the appeal for fresh adjudication with proper opportunity.
Treatment of Competing Arguments: The Department's argument that the Assessee was non-cooperative was accepted to the extent that notices were ignored or inadequately responded to. However, the Tribunal emphasized that procedural fairness requires that the Assessee be given a chance to place relevant documents before the appellate authority.
Conclusions: The Tribunal concluded that the Assessee must be granted a reasonable opportunity of hearing before the CIT(A) and directed the appellate authority to adjudicate afresh after considering all documents and submissions.
3. SIGNIFICANT HOLDINGS
The Tribunal set aside the order of the CIT(A) dated 19/06/2024 and remanded the matter for fresh adjudication with the following key determinations:
Thus, the Tribunal emphasized the importance of procedural fairness and the necessity of adjudicating the merits of the case based on full evidence. The appeal was allowed for statistical purposes, preserving the Assessee's right to contest the addition on merits before the CIT(A).
Deemed dividend u/s 2(22)(e) - diversion of accumulated profits by way of disguised dividends - HELD THAT:- We find that the submission made by the Assessee that the relevant transactions were undertaken during the ordinary course of business has not been tested on account of failure of the Assessee to produced relevant documents/details. At the same time we note that Circular No.19 of 2017, dated 17/06/2017, gives instances where trade advances/commercial transactions were held by the Courts to fall outside the ambit of the provisions contained in Section 2(22)(e) of the Act.
During the course of hearing Assessee had pleaded for an opportunity to make out a case on merits by placing reliance upon the documents forming part of Paper-Book. However, since the same documents were not placed before CIT(A), we deem it appropriate to restore the issue back to the file of CIT(A) with the directions to adjudicate the same afresh after taking into consideration the documents/details to be furnished by the Assessee. Accordingly, the Order passed by the CIT(A) is set aside with the directions to adjudicate the appeal afresh after granting the Assessee a reasonable opportunity of being heard. Appeal preferred by the Assessee is treated as allowed for statistical purposes.
Deemed dividend u/s 2(22)(e) - diversion of accumulated profits by way of disguised dividends - HELD THAT:- We find that the submission made by the Assessee that the relevant transactions were undertaken during the ordinary course of business has not been tested on account of failure of the Assessee to produced relevant documents/details. At the same time we note that Circular No.19 of 2017, dated 17/06/2017, gives instances where trade advances/commercial transactions were held by the Courts to fall outside the ambit of the provisions contained in Section 2(22)(e) of the Act.
During the course of hearing Assessee had pleaded for an opportunity to make out a case on merits by placing reliance upon the documents forming part of Paper-Book. However, since the same documents were not placed before CIT(A), we deem it appropriate to restore the issue back to the file of CIT(A) with the directions to adjudicate the same afresh after taking into consideration the documents/details to be furnished by the Assessee. Accordingly, the Order passed by the CIT(A) is set aside with the directions to adjudicate the appeal afresh after granting the Assessee a reasonable opportunity of being heard. Appeal preferred by the Assessee is treated as allowed for statistical purposes.
The first two issues concerning procedural compliance and the debatable nature of disallowance under section 36(1)(va) were not pressed by the appellant and thus dismissed as not pressed. The Tribunal's detailed analysis focuses primarily on the third and fourth issues related to the set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets.
Regarding the third issue, the Tribunal examined the scope of permissible adjustments under section 143(1) of the Act. The income-tax return filed by the assessee declared a short term capital gain of Rs.94,03,288/- from the sale of depreciable business assets, computed under section 50 of the Act. The assessee claimed set off of brought forward business losses against this gain. The Tribunal noted that section 72(1)(i) permits set off of brought forward business losses only against profits and gains from business or profession assessable in the relevant year. The short term capital gain in question, though arising from sale of business assets, is classified under the head 'Capital Gains' and not 'Business Income'. The Tribunal further observed that the income-tax return form and the Central Processing Centre (CPC) processing system do not provide a mechanism to set off brought forward business losses against short term capital gains, particularly gains computed under section 50. The CPC processes returns automatically based on prescribed software commands and does not account for such debatable issues.
The Tribunal rejected the appellant's contention that the issue was debatable and thus such adjustment was impermissible under section 143(1), reasoning that numerous issues may be debatable, but the CPC cannot be programmed to accommodate every such exception. The Tribunal emphasized that the assessee has recourse to appeal before the Commissioner of Income Tax (Appeals) or to file objections if aggrieved by such adjustments, and in case of assessment under section 143(3), there is an opportunity for detailed adjudication. Hence, the Tribunal dismissed this ground.
On the fourth issue concerning the substantive entitlement to set off brought forward business losses against short term capital gains from sale of depreciable business assets, the assessee relied on two High Court decisions: (i) the Hon'ble Jurisdictional Bombay High Court in PCIT v. Alcon Developers, and (ii) the Hon'ble Karnataka High Court in Nandi Steels Ltd. v. ACIT. The Tribunal noted that the appellant had relied on the Bombay High Court decision before the Commissioner (Appeals), but the latter had not addressed this precedent in the appellate order. The Karnataka High Court decision was not relied upon before the Commissioner (Appeals).
The Tribunal distinguished the facts of the Alcon Developers case, which involved revisionary proceedings under section 263 of the Act and the question whether the Assessing Officer had taken a permissible view, whereas the present case concerns a return processed under section 143(1)(a). The Tribunal also highlighted the absence of any explicit provision in the Act allowing set off of short term capital gains computed under section 50 against brought forward business losses. It pointed out that such a claim raises interpretative questions, including whether short term capital losses under section 50 can be set off against business income, and the intent of section 50 which provides special computation rules for capital gains on depreciable assets.
The Tribunal further referred to section 71(3) of the Act, which restricts set off of capital losses against income under other heads, underscoring the legislative intent to segregate capital gains and business income for loss set off purposes. Given these complexities and the divergent judicial views, the Tribunal found it appropriate to remit the issue to the jurisdictional Assessing Officer for fresh adjudication after affording the assessee a reasonable opportunity of hearing and upon filing requisite details.
The Tribunal thus allowed the fourth ground for statistical purposes, directing the Assessing Officer to dispose of the issue in accordance with law and the directions given. The remaining grounds were either dismissed or not pressed, and the appeal was partly allowed for statistical purposes.
Significant holdings include the Tribunal's affirmation that adjustments made under section 143(1) of the Act by the CPC are governed by the prescribed automated processing system and that debatable issues may not be accommodated at this stage, with remedies available through appeals or assessments under section 143(3). The Tribunal emphasized that the absence of a mechanism in the return filing system and the CPC processing to allow set off of brought forward business losses against short term capital gains computed under section 50 is a practical limitation, not a legal denial of the claim.
Further, the Tribunal established that the question of set off of brought forward business losses against short term capital gains arising from sale of depreciable business assets is a complex legal issue lacking explicit statutory provision and marked by conflicting judicial interpretations. It recognized the need for detailed examination by the Assessing Officer with due opportunity to the assessee rather than a summary disallowance at the stage of return processing under section 143(1).
In conclusion, the Tribunal held:
"We deem it proper to remit back this issue to the file of Jurisdictional Assessing Officer before whom assessee shall file requisite details. Jurisdictional Assessing Officer is directed to dispose of the issue in light of our directions and in accordance with law after affording reasonable opportunity of hearing to the assessee."
This preserves the principle that substantive disputes involving complex legal questions and conflicting precedents require adjudication beyond the automated processing stage, ensuring procedural fairness and adherence to legal standards.
Adjustments made u/s 143(1) - set off of business losses against short term capital gain - assessee has contended the issue of set off of brought forward business losses against the short term capital gain from sale of assets used for business is a debatable issue and therefore such prima-facie adjustments cannot be made in the returns processed u/s.143(1)(a)
HELD THAT:- We fail to find any merit in such contention of ld. Counsel for the assessee for the reason that there are numerous cases where due to interpretation by the Hon’ble Courts divergent views on same issue are available along with change of facts. It is not possible for the CPC to give command for each and every type of such debatable issues in the computer system to prevent the prima-facie adjustments.
Returns processed by CPC are governed by the provisions of section 143(1)(a) of the Act and in case there is any issue and the assessee is aggrieved with the adjustments made by CPC then the assessee is not left remediless as the option is very much available to the assessee to file appeal before CIT(A) and raise relevant grounds. In case, income assessed u/s.143(3) of the Act, then the assessee has proper opportunity to make submissions before Assessing Authority and the issue can be decided by the Assessing Authority as per the judicial precedents. In view thereof, the ground No.3 raised by the assessee is dismissed.
Assessee’s claim of setting off of brought forward business losses against the short term capital gain from sale of business asset - There are no specific provisions under the Act which clearly provides that the short term capital gains assessable u/s.50 of the Act can be set off against the brought forward business losses because if claim of assessee is considered, then the question will arise whether short term capital loss u/s.50 of the Act can be set off against the business income.
It will further question the intent of section 50 of the Act which deals with the special provisions for computation of capital gains in case of depreciable assets.
Question will also arise about section 71(3) of the Act which provided that if the net result of the computation under the head capital gain is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against the income under the other head.
Thus, we deem it proper to remit back this issue to the file of Jurisdictional Assessing Officer before whom assessee shall file requisite details. Jurisdictional Assessing Officer is directed to dispose of the issue in light of our directions and in accordance with law after affording reasonable opportunity of hearing to the assessee. Ground No.4 raised by the assessee is allowed for statistical purposes.
Adjustments made u/s 143(1) - set off of business losses against short term capital gain - assessee has contended the issue of set off of brought forward business losses against the short term capital gain from sale of assets used for business is a debatable issue and therefore such prima-facie adjustments cannot be made in the returns processed u/s.143(1)(a)
HELD THAT:- We fail to find any merit in such contention of ld. Counsel for the assessee for the reason that there are numerous cases where due to interpretation by the Hon’ble Courts divergent views on same issue are available along with change of facts. It is not possible for the CPC to give command for each and every type of such debatable issues in the computer system to prevent the prima-facie adjustments.
Returns processed by CPC are governed by the provisions of section 143(1)(a) of the Act and in case there is any issue and the assessee is aggrieved with the adjustments made by CPC then the assessee is not left remediless as the option is very much available to the assessee to file appeal before CIT(A) and raise relevant grounds. In case, income assessed u/s.143(3) of the Act, then the assessee has proper opportunity to make submissions before Assessing Authority and the issue can be decided by the Assessing Authority as per the judicial precedents. In view thereof, the ground No.3 raised by the assessee is dismissed.
Assessee’s claim of setting off of brought forward business losses against the short term capital gain from sale of business asset - There are no specific provisions under the Act which clearly provides that the short term capital gains assessable u/s.50 of the Act can be set off against the brought forward business losses because if claim of assessee is considered, then the question will arise whether short term capital loss u/s.50 of the Act can be set off against the business income.
It will further question the intent of section 50 of the Act which deals with the special provisions for computation of capital gains in case of depreciable assets.
Question will also arise about section 71(3) of the Act which provided that if the net result of the computation under the head capital gain is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against the income under the other head.
Thus, we deem it proper to remit back this issue to the file of Jurisdictional Assessing Officer before whom assessee shall file requisite details. Jurisdictional Assessing Officer is directed to dispose of the issue in light of our directions and in accordance with law after affording reasonable opportunity of hearing to the assessee. Ground No.4 raised by the assessee is allowed for statistical purposes.
The core legal questions considered by the Tribunal in this appeal are as follows:
(a) Whether the notice issued under section 274 read with section 271(1)(c) of the Income-tax Act, 1961 ("the Act") was defective due to failure to specify the precise grounds or limb of violation for which penalty was proposed to be imposed, thereby vitiating the penalty proceedings;
(b) Whether the penalty levied under section 271(1)(c) of the Act was justified and in accordance with the provisions of the Act, considering the facts and circumstances of the case;
(c) Whether the quantum of addition made by the Assessing Officer (AO) to the returned income was correct and whether penalty proceedings emanating from such addition were valid;
(d) Ancillary issues relating to the adequacy of evidence furnished by the assessee to justify the excess receipts declared as repayable to co-investors in a joint land purchase arrangement;
(e) Whether the principles of natural justice and statutory requirements for imposition of penalty under section 271(1)(c) read with section 274 were complied with.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Validity of the Penalty Notice under Section 274 read with Section 271(1)(c)
Relevant legal framework and precedents: Section 271(1)(c) empowers the AO to impose penalty for concealment of particulars of income or furnishing inaccurate particulars of income. Section 274 mandates issuance of a notice specifying the grounds of penalty and providing an opportunity of hearing before imposing penalty. The notice must clearly state the specific charge-whether concealment or furnishing inaccurate particulars-to enable the assessee to effectively respond.
Precedents cited include the Supreme Court decisions in Mak Data Private Limited and D. M. Manasri, which emphasize that the AO's satisfaction recorded in the assessment order suffices for initiation of penalty proceedings, and that the assessee must be given reasonable opportunity of hearing. However, the jurisdictional High Court's Full Bench decision in Mohammed Farhan vs. DCIT and subsequent ruling in DCIT vs. Times Global Broadcasting Ltd. clarified that a vague or omnibus notice failing to specify the exact grounds of penalty (concealment or inaccurate particulars) is defective and vitiates penalty proceedings. The Full Bench held that penalty proceedings must stand on their own and cannot be cured by referring to the assessment order; strict construction of penal provisions demands clarity in notice.
Court's interpretation and reasoning: The Tribunal analyzed the penalty notice issued in the present case and found that it did not specify which limb of section 271(1)(c) was invoked-whether concealment of income or furnishing inaccurate particulars. The notice contained both allegations without ticking the relevant box, creating ambiguity. The Tribunal noted that the assessee was thus deprived of clear knowledge of the case to be met, violating principles of natural justice.
The Tribunal observed that while the AO recorded satisfaction in the assessment order regarding concealment and initiated penalty proceedings accordingly, the statutory notice under section 274 must independently inform the assessee of the grounds of penalty. The Full Bench decision of the Bombay High Court in Mohammed Farhan was found squarely applicable, which held that a mere reference to the assessment order cannot cure a defective notice. The Tribunal rejected the Revenue's reliance on other precedents that allowed initiation of penalty proceedings based on assessment order satisfaction alone.
Treatment of competing arguments: The Revenue argued that the assessment order clearly recorded concealment and that the notice under section 274 was consequential and sufficient. The assessee contended that the notice was vague and defective. The Tribunal sided with the assessee, emphasizing the statutory scheme and the need for explicitness in the notice to meet the penal nature of section 271(1)(c).
Conclusion: The Tribunal held that the penalty notice was defective for non-specification of the precise grounds of penalty, thereby vitiating the penalty proceedings under section 271(1)(c).
Issue (b): Justification and Validity of Penalty Imposed under Section 271(1)(c)
Relevant legal framework and precedents: Section 271(1)(c) penalizes concealment or furnishing inaccurate particulars of income. The AO must establish concealment or inaccuracy beyond reasonable doubt. The penalty amount is linked to the tax sought to be evaded or the amount of income concealed.
Key evidence and findings: The AO found a discrepancy between the sales declared by the assessee and the amounts received, resulting in an addition of Rs. 43,51,400/- as unexplained income. The assessee explained that the excess was repayable to a group of persons jointly purchasing land, not a partnership firm, but failed to provide satisfactory evidence such as bank statements or proof of payments to substantiate this claim.
Court's interpretation and reasoning: The CIT(A) upheld the addition and penalty, noting that the assessee accepted the addition and did not appeal against it, thereby acquiescing to the AO's view. The Tribunal did not disturb the addition but focused on the penalty notice defect.
Treatment of competing arguments: The assessee argued that the penalty was not justified as the notice was defective and the addition was incorrect. The Revenue maintained the penalty was valid given the concealment. The Tribunal, while upholding the addition, allowed the appeal on the ground of defective notice, thereby directing deletion of the penalty.
Conclusion: The penalty was not sustained due to defective notice, despite the correctness of the addition.
Issue (c): Correctness of Quantum Addition and Its Impact on Penalty Proceedings
The addition of Rs. 43,51,400/- was made on the basis of unexplained excess receipts. The assessee's claim that the amount was repayable to co-investors was not supported by conclusive evidence. The Tribunal upheld the addition as justified. Since the penalty proceedings emanated from this addition, the validity of the addition was relevant but did not override the requirement of a valid penalty notice.
Issue (d): Adequacy of Evidence Furnished by Assessee to Justify Excess Receipts
The assessee furnished partial documents such as returns of two persons and some bank statements but failed to conclusively prove that the excess amount was repaid to others. The Tribunal found that the evidence was insufficient to rebut the addition made by the AO.
Issue (e): Compliance with Principles of Natural Justice and Statutory Requirements
The Tribunal noted that the assessee was heard during penalty proceedings and made submissions, satisfying the requirement of opportunity of hearing under section 274. However, the defective notice deprived the assessee of clear information on the grounds of penalty, undermining the principle of fair hearing.
3. SIGNIFICANT HOLDINGS
"The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other's defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness." (Bombay High Court Full Bench in Mohammed Farhan)
"A penal provision, even with civil consequences, must be construed strictly. And ambiguity, if any, must be resolved in the affected assessee's favour." (Mohammed Farhan Full Bench)
"When the Assessing Officer had recorded in the assessment order the particulars of concealed income/undisclosed income of the assessee and on that basis initiated penalty proceeding under section 271(1)(c) then consequential notice under section 274 issued by Assessing Officer to the assessee to afford him opportunity of hearing, was specifically a notice for penalty for concealment of particulars of income/undisclosed income. Such a notice complied with the principles of natural justice and was a valid notice under section 274." (CIT(A) relying on Supreme Court precedents)
However, the Tribunal in the present case distinguished the above on facts, holding that the notice issued did not specify the grounds, thereby violating the statutory mandate.
Core principles established:
(i) The penalty notice under section 274 read with section 271(1)(c) must explicitly specify the grounds of penalty (concealment or furnishing inaccurate particulars) to enable the assessee to know and meet the case.
(ii) Defect or ambiguity in the penalty notice cannot be cured by reference to the assessment order; penalty proceedings must stand on their own statutory footing.
(iii) Penal provisions must be strictly construed, and ambiguity resolved in favour of the assessee.
(iv) The AO's satisfaction recorded in the assessment order is necessary but not sufficient; the statutory notice is a distinct and essential procedural requirement.
(v) The assessee must be given a reasonable opportunity of hearing, but such opportunity is meaningful only if the notice clearly states the grounds of penalty.
Final determinations:
The Tribunal allowed the appeal and directed deletion of the penalty of Rs. 13,44,580/- imposed under section 271(1)(c) of the Act on the ground that the penalty notice was defective for non-specification of the precise grounds of penalty. The addition of Rs. 43,51,400/- to income was upheld due to insufficient evidence to rebut it. The principles of natural justice were found to be complied with except for the defect in the notice. The appeal was allowed accordingly.
Penalty proceedings u/s 271(1)(c) - defective notice - not specify the specific charge or violation of particular limb for which the penalty was required to be imposed
HELD THAT:- As relying on Times Global Broadcasting Ltd [2025 (3) TMI 229 - BOMBAY HIGH COURT] delete the penalty imposed u/s 271(1)(c) of the IT Act on the ground of incorrect notice. Appeal filed by the assessee is allowed.
Penalty proceedings u/s 271(1)(c) - defective notice - not specify the specific charge or violation of particular limb for which the penalty was required to be imposed
HELD THAT:- As relying on Times Global Broadcasting Ltd [2025 (3) TMI 229 - BOMBAY HIGH COURT] delete the penalty imposed u/s 271(1)(c) of the IT Act on the ground of incorrect notice. Appeal filed by the assessee is allowed.
1. Whether the order passed by the Commissioner of Income Tax (Appeals) upholding the AO's addition under Sections 143(3)/147 is legally valid and consistent with principles of natural justice.
2. Whether the addition of Rs. 17,00,076 as bogus purchases under Section 69C was justified, particularly in light of the assessee's opportunity to cross-examine third-party statements and the absence of such opportunity.
3. Whether the addition was properly based solely on third-party investigation reports without further inquiry or verification by the AO or CIT(A).
4. Whether the disallowance of the entire amount of purchases as bogus was appropriate despite the genuineness of sales not being doubted, and whether the corresponding purchases should be presumed genuine if sales are genuine.
Regarding the first issue concerning the validity of the order and adherence to principles of natural justice, the assessee contended that the order was void ab initio due to non-provision of opportunity to cross-examine third-party witnesses and non-supply of statements relied upon. The legal framework mandates adherence to principles of natural justice, including the right to be heard and to cross-examine witnesses where adverse material is relied upon. However, the Court noted that the assessee had actively participated in the assessment proceedings and furnished detailed explanations and documentary evidence, including purchase invoices, bank statements, and tax audit reports. The Court found no indication that the assessee was denied a reasonable opportunity to present its case. The reliance on statements from third-party investigating agencies did not, in itself, violate natural justice where the assessee was given a chance to rebut the allegations. Thus, the Court did not find the order to be void on grounds of natural justice.
On the second and third issues concerning the basis of addition under Section 69C and the reliance on third-party investigation reports, the legal framework under Section 69C permits addition of unexplained expenditure or investment, including accommodation entries, if the assessee fails to satisfactorily explain the nature and source of such transactions. Precedents emphasize that the AO must make a thorough inquiry and not rely solely on third-party reports without independent verification. In this case, the AO relied on information from the Directorate of Income Tax (Investigation) and the Sales Tax Department, which identified the sellers as "Hawala dealers," and concluded the purchases were bogus. The AO noted the assessee failed to produce the sellers for verification and did not provide delivery challans, octroi receipts, or other corroborative documents typically accompanying genuine purchases. The AO rejected the assessee's submission that payments made by account pay cheques and presence of purchase bills were conclusive proof of genuineness. The Court observed that the AO's approach was consistent with the statutory mandate to disallow unexplained accommodation entries and was supported by the lack of adequate documentary evidence to establish genuineness.
However, the Court noted a significant factual distinction from a cited precedent where the assessee failed to participate in reassessment proceedings. Here, the assessee actively participated and furnished evidence. The Court also noted the assessee had already written back Rs. 14,09,614 of the alleged bogus purchases and offered the same to tax in Assessment Year 2014-15, arguing that taxing the same amount again would amount to double taxation. This contention was ignored by both the AO and CIT(A). The Court found merit in this argument and held that the addition could not be sustained to the extent of the amount already offered to tax in a subsequent year.
Regarding the fourth issue on the disallowance of the entire purchases despite undisputed genuineness of sales, the assessee argued that if sales are genuine, then corresponding purchases must also be genuine. The Court examined the gross profit margin calculations submitted by the assessee, which showed a gross profit of 10.39% on sales of Rs. 1.67 crore and purchases of Rs. 1.68 crore. The AO's addition of the entire Rs. 17,00,076 as bogus purchases would inflate the gross profit margin to an unrealistic 20.53%, which the assessee contended was unreasonable for the nature of the business. The Court found this argument persuasive and noted that in the case of the assessee's spouse, on similar facts, the AO had applied only a 12.5% profit margin on the alleged bogus purchases to determine the addition rather than disallowing the entire amount. The Court directed that the same approach be applied to the balance disputed amount of Rs. 2,90,462 (Rs. 17,00,076 less Rs. 14,09,614 already taxed), thereby reducing the addition accordingly.
The Court also distinguished the cited decision of the Hon'ble Bombay High Court in Kanak Impex (India) Ltd., relied upon by the Revenue, on the ground that in that case the assessee had not participated in the reassessment proceedings and had failed to prove genuineness of purchases, whereas in the present case, the assessee participated fully and furnished evidence. The Court quoted the High Court's observation that an assessee who chooses not to participate cannot later complain of lack of opportunity. Since the present assessee did participate, the precedent was not applicable.
In conclusion, the Court partly allowed the appeal by deleting the addition of Rs. 14,09,614 already offered to tax in AY 2014-15 and directing the AO to apply a 12.5% profit margin on the remaining Rs. 2,90,462 as addition under Section 69C, consistent with the treatment in the spouse's case. The grounds of appeal challenging the addition on principles of natural justice and on the basis of the AO's reliance on third-party reports were rejected. The Court thus balanced the need to curb bogus purchases with the assessee's right to avoid double taxation and to have additions made on a reasonable basis.
Significant holdings include the following verbatim excerpt from the Court's reasoning:
"We delete the addition to the extent of Rs. 14,09,614/- which the assessee has written back and offered to tax in the return for AY 2014-15 out of the total addition of Rs. 17,00,076/-. For the balance amount of Rs. 2,90,462/-, we direct the Ld.AO to apply the same margin of 12.5% as applied in the case of spouse of the assessee, to make the addition in the hands of the assessee and delete the balance."
Core principles established are:
Final determinations were that the addition of Rs. 17,00,076 was partly deleted to the extent of Rs. 14,09,614 and on the remaining Rs. 2,90,462, addition was to be made applying a 12.5% margin, thereby reducing the addition significantly. The appeal was partly allowed accordingly.
Estimation of income - bogus purchases - HELD THAT:- We delete the addition to the extent of Rs. 14,09,614/- which the assessee has written back and offered to tax in the return for AY 2014-15 out of the total addition of Rs. 17,00,076/.
For the balance amount of Rs. 2,90,462/-, we direct the Ld.AO to apply the same margin of 12.5% as applied in the case of spouse of the assessee, to make the addition in the hands of the assessee and delete the balance. Accordingly, grounds raised by the assessee in this respect are partly allowed.
Estimation of income - bogus purchases - HELD THAT:- We delete the addition to the extent of Rs. 14,09,614/- which the assessee has written back and offered to tax in the return for AY 2014-15 out of the total addition of Rs. 17,00,076/.
For the balance amount of Rs. 2,90,462/-, we direct the Ld.AO to apply the same margin of 12.5% as applied in the case of spouse of the assessee, to make the addition in the hands of the assessee and delete the balance. Accordingly, grounds raised by the assessee in this respect are partly allowed.
The core legal questions considered by the Tribunal in this appeal are:
(a) Whether the addition made by the Assessing Officer (AO) of 12.5% of the total alleged bogus purchases amounting to Rs. 3,33,69,047/- is justified in the absence of confirmation letters from the parties and failure of the assessee to produce the parties for cross-examination;
(b) Whether the reduction of the addition from 12.5% to 4% by the Commissioner of Income Tax (Appeals) [CIT(A)] is legally sustainable;
(c) Whether the affidavit filed by Mr. Pravin Kumar Jain retracting his earlier statement can be relied upon or should be disregarded as a self-serving document;
(d) Whether the decision of the Hon'ble Bombay High Court in the case of PCIT vs Kanak Impex (India) Ltd., which upheld 100% addition on account of non-genuine purchases, is applicable to the facts of the present case;
(e) Whether the AO can make additions based on statements of third parties without corroborative evidence and without providing an opportunity to cross-examine;
(f) The applicability of principles under the Evidence Act, 1872, and the procedural fairness owed by the quasi-judicial authority while making such additions;
(g) The extent of addition that can be made on account of alleged bogus purchases in the light of the evidence and submissions made by the assessee.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Justification and quantum of addition on alleged bogus purchases
Relevant legal framework and precedents: The Income-tax Act, 1961 empowers the AO to make additions to the income if purchases are found to be bogus. The burden lies on the assessee to prove the genuineness of purchases. However, mere suspicion or non-production of parties is not sufficient to treat purchases as bogus if the assessee furnishes credible evidence. The Hon'ble Bombay High Court in Nikunj Eximp Enterprises Pvt Ltd. vs. CIT(A) [2015] 372 ITR 619 (Bom) held that purchases cannot be disallowed merely on suspicion when the assessee has furnished letters of confirmation, bank statements showing payments, invoices, and stock reconciliation statements, and there is no fault found in books of accounts or sales.
Court's interpretation and reasoning: The Tribunal noted that the assessee had furnished extensive documentary evidence including purchase bills ledger accounts, bank statements showing payments, stock registers, and details from the MCA website regarding the parties. The AO did not disprove these documents or find any fault with the books of accounts or sales. The AO's addition was based solely on the apprehension that the parties were not produced for cross-examination and disregarded the affidavit of Mr. Pravin Kumar Jain as self-serving. The CIT(A) reduced the addition from 12.5% to 4% considering the VAT rates applicable in Maharashtra, which were lower than the 12.5% profit margin assumed by the AO based on Gujarat sales tax rates.
Key evidence and findings: The assessee submitted detailed documents and explanations, including changes in company names of the alleged suppliers, TIN details, certificates of incorporation, and director details showing Mr. Pravin Kumar Jain was not a director in these companies. The affidavit retracting earlier statements was also submitted. The AO did not find any material to disprove these submissions.
Application of law to facts: Applying the principles from the Nikunj Eximp Enterprises case, the Tribunal held that the addition cannot be sustained merely on suspicion or failure to produce parties when credible documentary evidence is on record. The CIT(A)'s reduction of addition to 4% was found reasonable and in line with industry practice and VAT rates.
Treatment of competing arguments: The revenue argued for full addition of 12.5% or even 100% based on non-production of parties and reliance on statements of Mr. Pravin Kumar Jain. The assessee argued that the evidence on record disproved the allegations and the affidavit retracted the statements. The Tribunal found the assessee's submissions more credible and distinguished the revenue's reliance on the Kanak Impex case.
Conclusions: The addition of 12.5% was excessive and unsupported by evidence. The CIT(A)'s reduction to 4% addition was upheld.
Issue (c) and (e): Reliance on affidavit of Mr. Pravin Kumar Jain and statements of third parties without cross-examination
Relevant legal framework: Affidavits, especially those retracting statements, are considered self-serving unless corroborated. The principles of natural justice require that adverse findings based on statements of third parties must be tested by providing an opportunity for cross-examination.
Court's interpretation and reasoning: The AO disregarded the affidavit of Mr. Pravin Kumar Jain on the ground that it was self-serving. The Tribunal noted that the affidavit was a relevant piece of evidence and should not be discarded without consideration. Further, the AO's failure to provide an opportunity to cross-examine Mr. Jain or the alleged bogus suppliers was a procedural lapse. The Tribunal emphasized that the AO as a quasi-judicial authority must adhere to principles of fair hearing.
Key evidence and findings: The affidavit retracted earlier statements made under coercion. The assessee's inability to produce parties for cross-examination was due to circumstances beyond its control. The AO did not record any material adverse finding against the genuineness of the documents submitted.
Application of law to facts: The Tribunal held that adverse additions cannot be made solely on statements of third parties without corroborative evidence and without affording the assessee a chance to cross-examine.
Treatment of competing arguments: The revenue contended that the affidavit should be disregarded and additions made on the basis of statements recorded during search and seizure. The Tribunal found this approach inconsistent with principles of evidence and fair procedure.
Conclusions: The affidavit was relevant evidence, and the AO's failure to provide cross-examination opportunity was a procedural defect. The addition based on such statements was not sustainable.
Issue (d): Applicability of the Kanak Impex (India) Ltd. decision
Relevant legal framework and precedent: The Kanak Impex case upheld 100% addition on account of non-genuine purchases where the assessee failed to appear before the AO and did not prove the genuineness of purchases. The assessment was completed ex-parte under section 144 read with section 147 of the Act.
Court's interpretation and reasoning: The Tribunal distinguished the present case from Kanak Impex on facts. In Kanak Impex, the assessee deliberately did not participate in reassessment proceedings, failed to produce evidence, and did not discharge the initial onus. The Tribunal noted that in the present case, the assessee actively participated, furnished detailed evidence, and the AO did not disprove the submissions.
Key evidence and findings: The assessee furnished confirmations, bank statements, invoices, and other documents. The AO did not complete the assessment ex-parte. The assessee challenged the addition and made submissions before the CIT(A).
Application of law to facts: The Tribunal held that the Kanak Impex decision is not applicable as the factual matrix is different. The principle that an assessee who does not participate cannot complain about lack of details before addition was inapplicable here.
Treatment of competing arguments: The revenue sought to rely on Kanak Impex to justify 100% addition. The Tribunal rejected this reliance on grounds of factual distinction.
Conclusions: The Kanak Impex decision is distinguishable and not applicable to the present facts.
Issue (f): Applicability of the Evidence Act and procedural fairness
Relevant legal framework: Section 3 of the Indian Evidence Act, 1872, requires that facts must be proved by evidence. Affidavits are not substantive evidence unless corroborated. Quasi-judicial authorities must follow principles of natural justice including the right to cross-examine.
Court's interpretation and reasoning: The Tribunal observed that the AO ignored the procedural safeguards by relying on statements without cross-examination and disregarding the affidavit. The Tribunal emphasized that the AO's role as a quasi-judicial authority requires adherence to evidentiary rules and fair procedure.
Key evidence and findings: The AO's addition was based on untested statements and suspicion. The assessee's evidence was not disproved.
Application of law to facts: The Tribunal held that addition based on untested evidence and without affording opportunity to cross-examine is not sustainable.
Treatment of competing arguments: The revenue argued that affidavit is not evidence before AO. The Tribunal agreed but noted that the affidavit was part of the overall evidence and the AO should have considered it rather than ignoring it outright.
Conclusions: Procedural fairness and evidentiary requirements were not complied with, rendering the addition unsustainable.
Issue (g): Extent of addition on alleged bogus purchases
Relevant legal framework: Additions must be based on cogent evidence and reasonable basis. The addition should reflect the actual benefit derived from bogus transactions.
Court's interpretation and reasoning: The CIT(A) considered the VAT rates in Maharashtra and the assessee's submissions regarding gross profit margins to reduce the addition from 12.5% to 4%. The Tribunal found this approach reasonable and in line with industry standards.
Key evidence and findings: The assessee's declared gross profit was 8.51%, higher than the average of 8.47% for previous years. The AO's addition of 12.5% was based on Gujarat sales tax rates, not applicable here.
Application of law to facts: The Tribunal upheld the reduction to 4% addition as justified and proportional.
Treatment of competing arguments: Revenue sought higher or full addition; assessee argued for minimal addition based on actual profit margins. Tribunal sided with the assessee's submissions.
Conclusions: Addition restricted to 4% of alleged bogus purchases is upheld.
3. SIGNIFICANT HOLDINGS
"The respondent assessee having been filed letters of confirmation of suppliers, copies of bank statement showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and stock statement i.e. stock reconciliation statement giving complete details with regard to opening stock, purchases, sales and closing stock and no fault with regard to it being found and the books of accounts not being rejected and the sales not being doubted, the purchases cannot be treated as bogus and be disallowed merely on the basis of suspicion. One cannot conclude that the purchases were not made by the respondent assessee merely because the parties were not produced, when there are materials on record to prove otherwise." (Nikunj Eximp Enterprises Pvt Ltd. vs. CIT(A))
"We fail to understand that the respondent-assessee having consciously and intentionally decided not to join the investigation, cannot now contend that the appellant-revenue should have given them all the details before making the addition. In our view, such a conduct of the respondent-assessee cannot be accepted. It was incumbent upon the respondent-assessee to have joined the re-assessment proceedings, discharge the initial onus of proving the purchases and seek details, if any." (Kanak Impex (India) Ltd. case, distinguished)
Core principles established include:
Final determinations on each issue are as follows:
Estimation of income - bogus purchases - CIT(A) restricting the addition from 12.5% to 4% of the total purchases - HELD THAT:-As considering the detailed submissions and documentary evidences placed on record which have been duly considered by CIT(A) for granting relief to the assessee by reducing the addition from 12.5% to 4% based on the alternate plea raised by the assessee, we do not find any reason to interfere with the same. Accordingly, finding arrived at Ld. CIT(A) is up held. Appeal of the revenue is dismissed.
Estimation of income - bogus purchases - CIT(A) restricting the addition from 12.5% to 4% of the total purchases - HELD THAT:-As considering the detailed submissions and documentary evidences placed on record which have been duly considered by CIT(A) for granting relief to the assessee by reducing the addition from 12.5% to 4% based on the alternate plea raised by the assessee, we do not find any reason to interfere with the same. Accordingly, finding arrived at Ld. CIT(A) is up held. Appeal of the revenue is dismissed.
The core legal questions considered by the Court are:
- Whether the Directorate of Revenue Intelligence (DRI) officers qualify as "proper officers" under the Customs Act, 1962, specifically for issuing show cause notices under Section 28 of the Act.
- Whether the summons issued by the DRI under Section 108 of the Customs Act, 1962, and the arrest made under Section 104, were valid in light of the question of conferment of "proper officer" status.
- The impact of the Apex Court's judgment in the case of Commissioner of Customs vs. M/s Canon India Pvt. Ltd. (referred to as Canon India), which held that DRI officers were not "proper officers" for initiating proceedings under Section 104 of the Customs Act, 1962.
- The effect of the Finance Act, 2022 (Section 97) which retrospectively validated show cause notices issued under Section 28 of the Customs Act, 1962, and whether this retrospective validation cured the defect pointed out in the Canon India judgment.
- The procedural directions for disposal of writ petitions and appeals challenging the maintainability of show cause notices and adjudication orders issued by DRI officers on the ground of lack of jurisdiction due to non-"proper officer" status.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether DRI officers are "proper officers" under the Customs Act, 1962 for issuing show cause notices under Section 28
Relevant legal framework and precedents: Section 28 of the Customs Act, 1962 empowers "proper officers" to issue show cause notices for adjudication of customs-related matters. The Apex Court in the Canon India judgment had held that DRI officers were not "proper officers" under the Act and therefore lacked jurisdiction to initiate proceedings under Section 104 and issue summons or arrest.
Court's interpretation and reasoning: The present Court considered the subsequent Review Petition judgment of the Apex Court dated 07.11.2024, which revisited the Canon India decision. The Apex Court upheld the constitutional validity of Section 97 of the Finance Act, 2022, which retrospectively validated all show cause notices issued under Section 28. It further clarified that officers of the DRI and other similar agencies are "proper officers" for purposes of Section 28 and competent to issue show cause notices.
Key evidence and findings: The Court relied heavily on the authoritative pronouncement in the Review Petition judgment, which explicitly overruled the earlier position in Canon India regarding jurisdictional competence of DRI officers.
Application of law to facts: Since the summons and show cause notices impugned in the present petitions were issued by DRI officers, the Court held that these officers were validly empowered as "proper officers" under Section 28. Therefore, the summons and related proceedings were not without jurisdiction.
Treatment of competing arguments: The petitioners' reliance on the Canon India judgment to challenge the jurisdiction of DRI officers was addressed by the Court in light of the Review Petition's overruling and retrospective validation. The Court did not find merit in the challenge based on lack of jurisdiction.
Conclusions: DRI officers are "proper officers" under Section 28 of the Customs Act, 1962, and competent to issue show cause notices. The summons issued under Section 108 and arrest under Section 104 by DRI officers are valid.
Issue 2: Validity and effect of retrospective validation under Section 97 of the Finance Act, 2022
Relevant legal framework and precedents: Section 97 of the Finance Act, 2022 retrospectively validates all show cause notices issued under Section 28 of the Customs Act, 1962. The Apex Court in the Review Petition judgment upheld the constitutionality of this provision.
Court's interpretation and reasoning: The Court noted that the retrospective validation cannot be declared unconstitutional as it cures the defect of jurisdiction pointed out in the Canon India judgment. The Court emphasized that the validation is not manifestly arbitrary, disproportionate, or overbroad.
Key evidence and findings: The Court relied on the Apex Court's express observations that Section 97 cures the jurisdictional defect and validates the show cause notices issued by DRI officers.
Application of law to facts: The retrospective validation applies directly to the notices issued to the petitioners, thereby legitimizing the proceedings initiated by DRI officers.
Treatment of competing arguments: The petitioners' challenge to the notices on grounds of jurisdictional defect was negated by the retrospective validation upheld by the Apex Court.
Conclusions: Section 97 of the Finance Act, 2022 validly and retrospectively cures the jurisdictional defect in show cause notices issued by DRI officers under Section 28 of the Customs Act.
Issue 3: Procedural directions for disposal of writ petitions and appeals challenging jurisdiction of DRI officers
Relevant legal framework and precedents: The Apex Court's Review Petition judgment provided detailed procedural guidance for pending writ petitions and appeals challenging the maintainability of show cause notices and adjudication orders on the ground of lack of jurisdiction of the "proper officer."
Court's interpretation and reasoning: The Court applied the procedural directions from the Apex Court judgment, which include:
Key evidence and findings: The Court noted that the present writ petitions were filed challenging summons and notices on jurisdictional grounds, which are now addressed by the Apex Court's directions.
Application of law to facts: The Court disposed of the writ petitions with directions to restore the show cause notices for adjudication and granted eight weeks to the petitioners to prefer appeals before CESTAT against any adjudication orders.
Treatment of competing arguments: The Court acknowledged the petitioners' submissions for disposal in light of the Apex Court's final order and did not entertain further jurisdictional challenges.
Conclusions: The writ petitions challenging the jurisdiction of DRI officers are disposed of with directions to restore notices for adjudication, and petitioners are granted time to appeal before CESTAT.
3. SIGNIFICANT HOLDINGS
The Court's crucial legal reasoning includes the following verbatim excerpts from the Apex Court's Review Petition judgment:
"Section 97 of the Finance Act, 2022 which, inter-alia, retrospectively validated all show cause notices issued under Section 28 of the Act, 1962 cannot be said to be unconstitutional. It cannot be said that Section 97 fails to cure the defect pointed out in Canon India (supra) nor is it manifestly arbitrary, disproportionate and overbroad, for the reasons recorded in the foregoing parts of this judgment."
"Subject to the observations made in this judgment, the officers of Directorate of Revenue Intelligence, Commissionerate of Customs (Preventive), Directorate General of Central Excise Intelligence and Commissionerate of Central Excise and other similarly situated officers are proper officers for the purposes of Section 28 and are competent to issue show cause notice thereunder."
"Where the show cause notices issued under Section 28 of the Act, 1962 have been challenged before the High Courts directly by way of a writ petition, the respective High Court shall dispose of such writ petitions in accordance with the observations made in this judgment and restore such notices for adjudication by the proper officer under Section 28."
Core principles established:
Seeking for quashing of Summons issued by the Respondent No. 2 (DRI) under Section 108 of the Customs Act, 1962 - proper officer forthe purpose of issuance of SCN - DRI are proper officers or not - HELD THAT:- DRI Officers were the “Proper Officers” for the purpose of Section 28 Customs Act, 1962 and were competent to issue the Show Cause Notices thereunder. Therefore, the present Petitions are hereby disposed of with the directions that the Notices are restored for the purpose of adjudication by the Proper Officers under Section 28 Customs Act, 1962.
Further, the Orders passed by the Adjudicatory Authority under Section 28 Customs Act, 1962, may be challenged by way of Appeal before the Customs Excise and Services Tax Appellate Tribunal (for short “CESTAT”), which are under challenge before this Court on the ground of maintainability due to lack of jurisdiction of Proper Officer to issue Show Cause Notices. Eight weeks time is granted to the Petitioners, to prefer their appropriate Appeal before the CESTAT.
Petition disposed off.
Seeking for quashing of Summons issued by the Respondent No. 2 (DRI) under Section 108 of the Customs Act, 1962 - proper officer forthe purpose of issuance of SCN - DRI are proper officers or not - HELD THAT:- DRI Officers were the “Proper Officers” for the purpose of Section 28 Customs Act, 1962 and were competent to issue the Show Cause Notices thereunder. Therefore, the present Petitions are hereby disposed of with the directions that the Notices are restored for the purpose of adjudication by the Proper Officers under Section 28 Customs Act, 1962.
Further, the Orders passed by the Adjudicatory Authority under Section 28 Customs Act, 1962, may be challenged by way of Appeal before the Customs Excise and Services Tax Appellate Tribunal (for short “CESTAT”), which are under challenge before this Court on the ground of maintainability due to lack of jurisdiction of Proper Officer to issue Show Cause Notices. Eight weeks time is granted to the Petitioners, to prefer their appropriate Appeal before the CESTAT.
Petition disposed off.
1. Whether the importation of second-hand or refurbished goods bearing the plaintiffs' registered trademarks by the defendant amounts to trademark infringement under Section 29(6) of the Trade Marks Act, 1999.
2. The applicability of the principle of international exhaustion of trademark rights under Sections 30(3) and 30(4) of the Trade Marks Act to the import and resale of such goods.
3. The extent to which the defendant can lawfully import and deal in genuine goods bearing the plaintiffs' trademarks without the plaintiffs' authorization, particularly in light of the Customs Rules and relevant circulars.
4. Whether the judgment in a Coordinate Bench decision (referred to as Daichi) is applicable to the present case involving importation, and how it interacts with earlier precedent (Kapil Wadhwa).
5. The conditions under which refurbished or second-hand goods bearing registered trademarks may be sold without constituting infringement, including the requirements for "full disclosure" to consumers.
6. The treatment of goods seized at customs and the rights of the importer regarding such goods, including demurrage charges and disposal.
Issue-wise Detailed Analysis
1. Trademark Infringement by Importation of Second-Hand Goods
Legal Framework and Precedents: Section 29(6) of the Trade Marks Act prohibits unauthorized use of a registered trademark in relation to importation. However, Sections 30(3) and 30(4) provide exceptions under the principle of international exhaustion, allowing lawful import and resale of goods bearing the trademark if certain conditions are met. The Division Bench judgment in Kapil Wadhwa and the Coordinate Bench judgment in Daichi provide authoritative guidance on these issues.
Court's Interpretation and Reasoning: The Court recognized that while Section 29(6) prohibits unauthorized use, the defense under Section 30(3) applies if the goods were lawfully acquired bearing the registered trademark. The Court emphasized that India adopts the principle of international exhaustion, meaning once goods are sold legitimately abroad, the trademark owner's rights over those goods are exhausted internationally.
Key Evidence and Findings: The plaintiffs admitted the goods imported were originally manufactured by them and purchased from their OEMs abroad. There was no evidence of any agreement preventing OEMs from selling these goods or prohibiting their import into India. The plaintiffs failed to show any statutory prohibition against import of second-hand or refurbished goods.
Application of Law to Facts: Since the defendant lawfully imported genuine goods from OEMs, the importation itself did not constitute infringement, subject to compliance with disclosure requirements and non-impairment of the goods' condition.
Treatment of Competing Arguments: The plaintiffs argued that the goods were second-hand and not lawfully acquired, relying on Section 29(6) and alleging consumer deception. The defendant relied on the Customs Circular permitting parallel imports and the principle of international exhaustion. The Court found the defendant's position consistent with the law and rejected the plaintiffs' argument that Daichi was inapplicable due to importation, noting that the Daichi judgment explicitly involved importers.
Conclusion: Importation of genuine second-hand goods bearing the plaintiffs' trademarks from abroad does not amount to infringement if the goods are lawfully acquired and not materially altered or impaired.
2. Applicability and Scope of the Principle of International Exhaustion (Sections 30(3) and 30(4))
Legal Framework and Precedents: Section 30(3) protects lawful purchasers of trademarked goods from infringement claims if the goods were put on the market by the trademark owner or with their consent. Section 30(4) excludes goods whose condition has been changed or impaired after market entry. Kapil Wadhwa held that India adopts international exhaustion, and Daichi extended this to refurbished goods.
Court's Interpretation and Reasoning: The Court reiterated that the principle of international exhaustion applies, permitting import and resale of genuine goods bearing registered trademarks. The exception under Section 30(4) applies if the goods are materially altered or impaired, which could mislead consumers or harm the trademark owner's goodwill.
Key Evidence and Findings: The plaintiffs did not prove that the imported goods had been altered or impaired. The technical report showed some drives were non-functional, but the defendant had not taken possession or sold them, so no misrepresentation to consumers was established.
Application of Law to Facts: The defendant's import of second-hand goods falls within the protection of Section 30(3), as the goods were lawfully acquired and not materially altered by the defendant. The defendant had not yet sold or represented the goods to consumers, so no infringement arose at this stage.
Treatment of Competing Arguments: Plaintiffs contended that the goods were not "lawfully acquired" and that the defendant's import and potential resale would cause consumer deception. The Court found no evidence of such deception or impairment and noted that full disclosure requirements mitigate consumer confusion.
Conclusion: The principle of international exhaustion protects lawful importers of genuine goods, including second-hand and refurbished goods, provided the goods are not materially altered or misrepresented.
3. Importation of Refurbished Goods and Disclosure Requirements
Legal Framework and Precedents: Daichi judgment specifically addressed the import and sale of refurbished HDDs, permitting such sales subject to stringent disclosure requirements to avoid consumer deception. The Court also referred to Xerox Corporation v. Shailesh Patel, where disclosure norms for second-hand imported goods were laid down.
Court's Interpretation and Reasoning: The Court endorsed the directions in Daichi requiring that refurbished goods' packaging and promotional materials clearly identify the goods as refurbished, specify absence of manufacturer's warranty, and avoid use of logos likely to deceive consumers. The defendant's willingness to comply with such norms was noted.
Key Evidence and Findings: The plaintiffs' engineer's report showed some imported drives were non-functional, supporting the need for clear disclosure. The defendant had not yet sold the goods, so no consumer confusion was demonstrated.
Application of Law to Facts: If the defendant refurbishes and sells the imported goods, compliance with the Daichi disclosure norms is mandatory to avoid infringement. If the goods are sold as-is without refurbishment, Xerox disclosure norms apply.
Treatment of Competing Arguments: Plaintiffs argued that the Daichi directions permitting use of word marks and promotional references were contrary to the Trade Marks Act. The Court found these directions consistent with the law's intent to balance trademark rights with legitimate secondary markets.
Conclusion: Refurbished goods bearing registered trademarks may be imported and sold subject to full disclosure and compliance with packaging and promotional norms to prevent consumer deception and protect trademark goodwill.
4. Seizure and Custody of Imported Goods at Customs
Legal Framework and Precedents: The Court's interim order restrained the defendant from dealing with the goods and placed them in notional custody of a Local Commissioner at the customs warehouse. The defendant is liable for demurrage charges.
Court's Interpretation and Reasoning: Since the goods remain in customs custody and have not been released to the defendant, no infringement or misrepresentation has occurred. The Court permitted release of the goods to the defendant on condition that they be sold only as scrap after removal of plaintiffs' marks.
Key Evidence and Findings: The goods seized are genuine but second-hand and lying in customs warehouse. The defendant has not taken possession or sold them.
Application of Law to Facts: The Court balanced the parties' interests by allowing release subject to conditions preventing trademark infringement and consumer deception. The defendant may pursue remedies for demurrage charges separately.
Treatment of Competing Arguments: Plaintiffs sought continued restraint to prevent infringement. The Court found that conditional release with undertakings protects their rights while allowing defendant to mitigate losses.
Conclusion: Goods seized at customs may be released to the importer subject to conditions ensuring no trademark infringement or consumer deception.
Significant Holdings
"This is also an indication of India adopting the Principle of International Exhaustion of Rights in the field of the Trade Mark Law."
"Import and resale of goods bearing the trademark of the registered proprietor is permissible as long as the condition of said goods is not changed or impaired."
"Section 30 provisions are essentially prescribing a limitation on the rights of a registered trademark proprietor... Section 30(4) is an exception to Section 30(3), and excludes its applicability in a situation where the condition of the goods has been changed or impaired, after they are put in the market."
"Refurbished, second-hand, pre-owned goods exist in most countries of the world since it caters to a different market... The only caveat is in Section 30(4) where, if the marks are removed from the original product or it is disfigured or changed... the manufacturer's right kicks in to prevent the same."
"The defendants will be permitted to sell the refurbished HDDs, provided they comply with the following: (i) Packaging to identify the source of the product... (iii) Packaging must specify that there is no original manufacturer's warranty... (iv) Packaging must specify that the product is 'Used and Refurbished'... (vii) All of the above should also be complied with by the defendants on promotional literature, website, e-commerce listings, brochures and manuals."
"The goods seized by the Local Commissioner and now lying with the Custom Authority are permitted to be released to the defendant, subject to the defendant filing an undertaking that the said goods shall be sold only as scrap after removing all marks of the plaintiffs."
The Court's final determinations are that the defendant's importation of second-hand goods bearing the plaintiffs' trademarks does not constitute trademark infringement under Section 29(6), subject to the principle of international exhaustion under Sections 30(3) and 30(4). The defendant is entitled to import and deal in such goods with appropriate disclosures to avoid consumer deception, following the norms laid down in Daichi and Xerox. The seized goods may be released to the defendant on condition they are sold only as scrap after removal of trademark marks, safeguarding the plaintiffs' rights. The judgment clarifies that the principle of international exhaustion and the legal framework permit lawful parallel imports and resale of genuine goods, including refurbished products, balancing trademark protection with legitimate commercial practices.
Infringement of registered trademark u/s 29(6) of the Trade Marks Act, 1999 - importation of second-hand or refurbished goods bearing the plaintiffs' registered trademarks by the defendant - causing injury to the consumers in India who were led to believe that they were purchasing an authorized Samsung product in India, sold with the permission of Samsung - HELD THAT:- From a reading of the Division Bench judgment in Kapil Wadhwa [2012 (10) TMI 1246 - DELHI HIGH COURT], the position which emerges is that import and resale of goods bearing the trademark of the registered proprietor is permissible as long as the condition of said goods is not changed or impaired.
Kapil Wadhwa [2012 (10) TMI 1246 - DELHI HIGH COURT] was not a case where the defendants were refurbishing the imported goods. In the said case, the imported goods were sold on an ‘as is’ basis. In Daichi [2024 (5) TMI 1573 - DELHI HIGH COURT], the Coordinate Bench extended the reasoning and rationale adopted in Kapil Wadhwa to cases involving refurbishment of imported products (HDDs).
The legal position that emerges from reading of the judgment of the Division Bench in Kapil Wadhwa and the Coordinate Bench in Daichi is that there is no statutory bar against the import of ‘end-of-life’ goods in India. Any person in India has the right to legally import goods from abroad bearing the trademarks of an entity and sell the same in India. The principle of international exhaustion is duly recognized under Section 30 (3) and 30 (4) of the Trade Marks Act. The only caveat which the aforesaid judgments seek to place on such importers is that there should be a complete disclosure as to the facts that the goods are second hand goods and are not covered by the original manufacturer’s warranty. In terms of Daichi, even refurbished goods can be sold with proper disclosure.
Applying the aforesaid legal position in the facts of the present case, it is an undisputed position that the defendant herein was an importer of second-hand goods from abroad, purchased from OEMs of the plaintiffs. It is not the case of the plaintiffs that the goods imported by the defendant were not genuine goods. Before the imported goods could be released to the defendant, the present proceedings were initiated by the plaintiffs which resulted in the goods being seized at the customs clearance stage. The goods were taken into custody and have ever since been lying at the customs warehouse - Since the imported goods never reached the defendant, it cannot be ascertained as to whether the aforesaid imports were made by the defendant for the purposes of reselling directly or indirectly, or the intention of the defendant was to refurbish the goods and sell the same further. Therefore, it cannot be said that the defendant has made any misrepresentation to the public at large or the consumers with regard to the status of the goods.
Insofar as the goods already imported by defendant are concerned, it is an admitted position that they are still lying in a customs warehouse since the time of their import. This Court, while passing an ex-parte interim order dated 21st October, 2019, has specifically provided that the demurrage or other charges payable to Custom Authority, shall be paid by the defendant.
Conclusion - The goods seized by the Local Commissioner and now lying with the Custom Authority are permitted to be released to the defendant, subject to the defendant filing an undertaking that the said goods shall be sold only as scrap after removing all marks of the plaintiffs. The defendant shall be free to pursue his remedies that may be available in law with regard to demurrage charges payable to the customs.
Application disposed off.
Infringement of registered trademark u/s 29(6) of the Trade Marks Act, 1999 - importation of second-hand or refurbished goods bearing the plaintiffs' registered trademarks by the defendant - causing injury to the consumers in India who were led to believe that they were purchasing an authorized Samsung product in India, sold with the permission of Samsung - HELD THAT:- From a reading of the Division Bench judgment in Kapil Wadhwa [2012 (10) TMI 1246 - DELHI HIGH COURT], the position which emerges is that import and resale of goods bearing the trademark of the registered proprietor is permissible as long as the condition of said goods is not changed or impaired.
Kapil Wadhwa [2012 (10) TMI 1246 - DELHI HIGH COURT] was not a case where the defendants were refurbishing the imported goods. In the said case, the imported goods were sold on an ‘as is’ basis. In Daichi [2024 (5) TMI 1573 - DELHI HIGH COURT], the Coordinate Bench extended the reasoning and rationale adopted in Kapil Wadhwa to cases involving refurbishment of imported products (HDDs).
The legal position that emerges from reading of the judgment of the Division Bench in Kapil Wadhwa and the Coordinate Bench in Daichi is that there is no statutory bar against the import of ‘end-of-life’ goods in India. Any person in India has the right to legally import goods from abroad bearing the trademarks of an entity and sell the same in India. The principle of international exhaustion is duly recognized under Section 30 (3) and 30 (4) of the Trade Marks Act. The only caveat which the aforesaid judgments seek to place on such importers is that there should be a complete disclosure as to the facts that the goods are second hand goods and are not covered by the original manufacturer’s warranty. In terms of Daichi, even refurbished goods can be sold with proper disclosure.
Applying the aforesaid legal position in the facts of the present case, it is an undisputed position that the defendant herein was an importer of second-hand goods from abroad, purchased from OEMs of the plaintiffs. It is not the case of the plaintiffs that the goods imported by the defendant were not genuine goods. Before the imported goods could be released to the defendant, the present proceedings were initiated by the plaintiffs which resulted in the goods being seized at the customs clearance stage. The goods were taken into custody and have ever since been lying at the customs warehouse - Since the imported goods never reached the defendant, it cannot be ascertained as to whether the aforesaid imports were made by the defendant for the purposes of reselling directly or indirectly, or the intention of the defendant was to refurbish the goods and sell the same further. Therefore, it cannot be said that the defendant has made any misrepresentation to the public at large or the consumers with regard to the status of the goods.
Insofar as the goods already imported by defendant are concerned, it is an admitted position that they are still lying in a customs warehouse since the time of their import. This Court, while passing an ex-parte interim order dated 21st October, 2019, has specifically provided that the demurrage or other charges payable to Custom Authority, shall be paid by the defendant.
Conclusion - The goods seized by the Local Commissioner and now lying with the Custom Authority are permitted to be released to the defendant, subject to the defendant filing an undertaking that the said goods shall be sold only as scrap after removing all marks of the plaintiffs. The defendant shall be free to pursue his remedies that may be available in law with regard to demurrage charges payable to the customs.
Application disposed off.
The core legal questions considered by the Tribunal are:
- Whether the advance licences used for clearance of copper scrap were genuine or forged.
- Whether the appellant was involved in the use of forged advance licences to evade customs duty.
- Whether the duty exemption claimed under the advance licences is valid in light of the alleged forgery.
- Whether the appellant is liable to pay the confirmed customs duty under Section 28 of the Customs Act, 1962.
- Whether confiscation of goods under Section 111(o) of the Customs Act is justified due to non-observance of licence conditions.
- Whether penalty under Section 112 of the Customs Act is warranted against the appellant for abetment of duty evasion using forged licences.
- The applicability of judicial precedents concerning forged licences and duty exemption.
2. ISSUE-WISE DETAILED ANALYSIS
Authenticity of Advance Licences and Duty Evasion
The Tribunal examined the factual matrix showing that multiple advance licences purportedly issued to various entities were used by M/s B.M. Non-Ferrous Alloys Pvt. Ltd. to clear copper scrap duty free. The licences were allegedly transferred multiple times before being used by the appellant's company. The key evidence included written confirmation from the Jurisdictional Directorate of Foreign Trade (JDFT), which stated it had not issued any of the licences in question. Additionally, representatives of the original licence holders denied issuance or transfer of such licences and challenged the genuineness of the letterheads used to show transfer.
The Tribunal relied on these findings to conclude that the licences were bogus and forged. This negated any entitlement to duty exemption under the Customs Act, as the licences were not genuine. The Tribunal applied the legal principle that duty exemption cannot be claimed on the basis of forged or invalid documents, consistent with the statutory framework under the Customs Act and established jurisprudence.
Liability for Customs Duty and Confiscation of Goods
Since the licences were forged, the Tribunal confirmed the demand of customs duty amounting to Rs. 63,71,517/- under Section 28 of the Customs Act, which empowers recovery of duty where exemption is wrongly claimed. The Tribunal further held that the goods cleared under these forged licences were liable for confiscation under Section 111(o) of the Customs Act, which deals with non-observance of conditions specified in the licence.
The Court reasoned that use of forged licences amounted to non-compliance with the conditions of the advance licence scheme, justifying confiscation. This reflects the principle that goods cleared in violation of statutory conditions are liable to be confiscated to uphold the integrity of customs laws.
Penalty Imposition under Section 112 of the Customs Act
The Tribunal considered whether the appellant was liable for penalty under Section 112 for abetment of duty evasion by using forged licences. The Commissioner's order found that the appellant, along with others, connived to evade customs duty by using forged advance licences. The appellant's own letter dated February 7, 2000, admitted active involvement in the racket, reinforcing the findings of culpability.
The Tribunal applied the legal framework under Section 112, which penalizes persons who abet or aid in evasion of customs duty. The Court rejected any possible defense of innocence or lack of knowledge, given the documented admission and corroborative evidence. The penalty of Rs. 15,00,000/- was thus upheld as justified and proportionate.
Judicial Precedents on Forged Licences and Duty Exemption
The Tribunal referred to authoritative Supreme Court decisions which held that exemption benefits cannot accrue from forged or invalid licences. The cited precedent reaffirmed the principle that customs duty exemption is contingent upon the genuineness and validity of the licence, and any forgery negates such benefit. This precedent was applied to reinforce the Tribunal's conclusion that the appellant could not claim exemption and was liable for duty and penalty.
Absence of Appellant's Representation and Decision on Merits
Despite the appellant's absence during hearing, the Tribunal proceeded to decide the appeal on merits based on the record and submissions of the Department. This is consistent with procedural norms allowing adjudication in default when the appellant fails to appear, especially when evidence and findings are cogent and uncontroverted.
3. SIGNIFICANT HOLDINGS
- "From the report of JDFT and the statements of representatives of M/s Vinipa Exports, M/s Oriental Containers, M/s Supriya Chemicals and M/s Star Trading, it is clear that advance licences in question are not genuine. These are bogus and forged licences, which were used by M/s B.M. Non-ferrous Alloys Pvt. Ltd. to import the copper scrap without payment of duty."
- "Since in this case the party availed the exemption of goods against the conditions mentioned in the advance licence and advance licence in question to be found in bogus and forged, I hold it as non-observance of the conditions and accordingly, goods are liable for confiscation under Section 111(o) of the Customs Act and M/s B.M. Non-ferrous Alloys Pvt. Ltd. is liable for penalty under Section 114A of Customs Act and Mr. Anil Goel is liable to penalty under Section 112 of the Customs Act."
- "From the above, it is clear that... have connived along with Anil Goel Collectively and in their individual capacity and aided and abetted in the attempted evasion of customs duty Rs. 63,71,517/-. They have also abetted in obtaining and using the forged and bogus advance licence knowing fully that the goods were actually not permitted against said licences to be cleared duty free."
- The Court affirmed the principle that "exemption benefit cannot accrue on the basis of such a forged licence."
- The final determination was dismissal of the appeal, confirmation of the duty demand under Section 28, confiscation of goods under Section 111(o), and imposition of penalty under Section 112 of the Customs Act on the appellant for abetment in using forged advance licences to evade customs duty.
Levy of penalty u/s 112 of the Customs Act, 1962 - use of forged advance licences to evade customs duty - HELD THAT:- It is this part of the order imposing a penalty of Rs. 15,00,000/- upon the appellant that has been assailed in this appeal under section 112 of the Customs Act. It is clear from the order that forged licence was used for evasion of customs duty and the appellant abetted in obtaining the forged advance licence. The appellant in his letter dated February 07, 2000 also confessed his active role/involvement in the racket.
The Supreme Court in Munjal Showa Ltd. versus Commissioner of Customs and Central Excise (Delhi-IV) and M/s Friends Trading Co. Versus Union of India and Ors.[2022 (9) TMI 1076 - SUPREME COURT], while dealing with a case where a forged scrip was utilized, held that exemption benefit cannot accrue on the basis of such a forged licence.
There is, therefore, no infirmity in the impugned order. The appeal is, accordingly, dismissed.
Levy of penalty u/s 112 of the Customs Act, 1962 - use of forged advance licences to evade customs duty - HELD THAT:- It is this part of the order imposing a penalty of Rs. 15,00,000/- upon the appellant that has been assailed in this appeal under section 112 of the Customs Act. It is clear from the order that forged licence was used for evasion of customs duty and the appellant abetted in obtaining the forged advance licence. The appellant in his letter dated February 07, 2000 also confessed his active role/involvement in the racket.
The Supreme Court in Munjal Showa Ltd. versus Commissioner of Customs and Central Excise (Delhi-IV) and M/s Friends Trading Co. Versus Union of India and Ors.[2022 (9) TMI 1076 - SUPREME COURT], while dealing with a case where a forged scrip was utilized, held that exemption benefit cannot accrue on the basis of such a forged licence.
There is, therefore, no infirmity in the impugned order. The appeal is, accordingly, dismissed.
The core legal questions considered by the Court in this review petition include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the IRP Report dated 09.08.2023 is rendered useless or legally ineffective by the observations in the earlier order
Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016, particularly provisions relating to the appointment and functions of the IRP, and procedural rules under the Code of Civil Procedure for review petitions. The Court also referenced precedents including Arun Dev Upadhyaya v. Integrated Sales Service Limited and Swiss Ribbons Pvt. Ltd. v. Union of India regarding the maintainability of review petitions and the scope of judicial review.
Court's interpretation and reasoning: The Court carefully examined the language of paragraphs (62), (70), and (75)(vii) of the earlier order. It found that nowhere in these paragraphs or the order as a whole was the IRP Report characterized as "waste paper," "useless," or devoid of legal effect. Instead, the Court recognized the report as a significant document that has been considered in multiple forums, including the Supreme Court, the High Court, and the NCLT.
Key evidence and findings: The IRP Report was prepared pursuant to directions by the NCLT and involved verification of claims of secured and unsecured creditors. The report has been subject to scrutiny in various judicial proceedings, indicating its relevance.
Application of law to facts: The Court emphasized that the IRP Report's findings are not conclusive or final. The report serves as a triggering document for further inquiry but requires independent examination and corroboration through additional evidence and materials.
Treatment of competing arguments: The petitioner argued that the Court's observations undermined the report's credibility, while respondents contended that the review petition lacked merit and did not disclose any error apparent on record. The Court sided with the respondents, clarifying the actual intent of the observations.
Conclusions: The Court concluded that the IRP Report retains legal relevance and is not rendered ineffective by the earlier order. The impression that it is useless is a misreading of the Court's observations.
Issue 2: Maintainability of the review petition and presence of any error apparent on the face of the record
Relevant legal framework and precedents: Section 114 read with Order XLVII Rule 1 and Section 151 of the Code of Civil Procedure, 1908 govern review petitions. The threshold for review is the existence of an error apparent on the face of the record. The Court relied on authoritative decisions which restrict review to such errors and do not permit re-agitation of settled issues.
Court's interpretation and reasoning: On examination, the Court found that the review petition did not disclose any such error apparent on the face of the record. The petitioner's grievance stemmed from a misinterpretation of the Court's prior observations rather than any factual or legal mistake.
Key evidence and findings: The Court reviewed the pleadings and submissions, including replies filed by respondents and written submissions by an association of homebuyers, and found no basis to disturb the earlier order.
Application of law to facts: The Court applied the strict standard for review petitions and held that the petition failed to meet the criteria for review.
Treatment of competing arguments: The petitioner urged reconsideration based on perceived injustice, but the Court emphasized the need for finality and adherence to procedural safeguards.
Conclusions: The review petition was dismissed for lack of any error apparent on the face of the record.
Issue 3: Jurisdiction and role of the NCLT regarding the IRP Report and related insolvency proceedings
Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016, particularly Sections 45 and related provisions governing the powers and duties of the IRP and the jurisdiction of the NCLT over insolvency resolution proceedings.
Court's interpretation and reasoning: The Court recognized that the NCLT is the appropriate forum to examine the legality, probative value, and findings of the IRP Report. The NCLT has been seized of the matter following Supreme Court directions and is empowered to assess the report in light of all materials presented.
Key evidence and findings: The corporate insolvency proceedings of the respondent company have been revived by the Supreme Court, and the NCLT has jurisdiction to evaluate the IRP Report and related issues.
Application of law to facts: The Court declined to make any conclusive pronouncements on the IRP Report's findings, deferring to the NCLT's specialized jurisdiction.
Treatment of competing arguments: The petitioner sought judicial endorsement of the IRP Report's findings, while respondents highlighted the ongoing NCLT proceedings. The Court balanced these by affirming the NCLT's primacy in these matters.
Conclusions: The NCLT is the competent authority to decide on the IRP Report's validity and the related insolvency issues.
Issue 4: Directions to investigate the ACE Group of Companies independently of the IRP Report findings
Relevant legal framework and precedents: Sections 206, 209, 216, 217, and 224 of the Companies Act, 2013, which empower the Registrar of Companies and other authorities to investigate company affairs and financial irregularities.
Court's interpretation and reasoning: The Court modified earlier directions to clarify that the investigation against the ACE Group of Companies should proceed uninfluenced by the IRP Report findings. This ensures an independent and unbiased inquiry into alleged financial malpractices.
Key evidence and findings: The IRP Report triggered the investigation but is not conclusive evidence. Independent examination and unearthing of relevant material are necessary to substantiate any wrongdoing.
Application of law to facts: The Court ensured that statutory powers under the Companies Act are exercised on an independent basis, maintaining procedural fairness.
Treatment of competing arguments: The petitioner sought reliance on the IRP Report, whereas the Court emphasized the need for independent evidence-based investigation.
Conclusions: Investigations shall be conducted independently of the IRP Report findings, preserving the integrity of the inquiry process.
3. SIGNIFICANT HOLDINGS
"It has nowhere been observed by the Court that the IRP Report dated 09.08.2023 is in any manner a waste paper, useless or has no legal effect, or that the same can never be acted upon."
"The issue as to whether or not any actions or inactions on the part of the IRP are within or outside the scope of Section 45 and other relevant provisions of the IBC; and additionally, whether or not the findings recorded therein are substantiated or corroborated in any manner, are matters that clearly lie in the domain of the NCLT."
"The findings contained in the report are supposed to be independently examined and relevant material should be unearthed to substantiate the role of the concerned companies and nexus, if any, in the alleged financial malpractices."
"Respondent Nos. 1 & 2 shall investigate the matter against the ACE Group of Companies uninfluenced by the findings in the report of the IRP dated 09.08.2023 in accordance with Sections 206, 209, 216, 217 and 224 of the Companies Act, 2013."
Core principles established include:
Final determinations on each issue were:
Seeking review of the previous order - error apparent on the face of record - Section 114 read with Order XLVII Rule 1 and Section 151 of the Code of Civil Procedure, 1908 - HELD THAT:- It is a matter of record that the IRP was appointed in terms of the directions of the National Company Law Tribunal vide order dated 14.12.2022, and further vide order dated 26.05.2023 it was directed to verify the claims of the secured and unsecured creditors of the respondent no. 3/Three C Shelters Pvt. Ltd. The impugned report dated 09.08.2023 by the IRP has been the subject of consideration in various proceedings leading up to the Supreme Court, this Court as well as the NCLT.
However, the issue as to whether or not any actions or inactions on the part of the IRP are within or outside the scope of Section 45 and other relevant provisions of the IBC; and additionally, whether or not the findings recorded therein are substantiated or corroborated in any manner, are matters that clearly lie in the domain of the NCLT. The NCLT is already seized of the matter pursuant to the direction of the Supreme Court dated 19.11.2024, whereby the corporate insolvency proceedings in respect of the respondent no. 3/Three C Shelters Private Ltd. has been revived.
Likewise, although the impugned report is one of the factors that triggered the inquiry/investigation by respondent No. 1 & 2 against the companies mentioned vide paragraph (75) (vii), but such report is not a conclusive piece of evidence as such. The findings contained in the report are supposed to be independently examined and relevant material should be unearthed to substantiate the role of the concerned companies and nexus, if any, in the alleged financial malpractices.
Conclusion - The review petition is dismissed for failure to disclose any error apparent on the face of the record.
The instant application for review does not disclose any error apparent on the face of the record. Hence, the present review petition is dismissed.
Seeking review of the previous order - error apparent on the face of record - Section 114 read with Order XLVII Rule 1 and Section 151 of the Code of Civil Procedure, 1908 - HELD THAT:- It is a matter of record that the IRP was appointed in terms of the directions of the National Company Law Tribunal vide order dated 14.12.2022, and further vide order dated 26.05.2023 it was directed to verify the claims of the secured and unsecured creditors of the respondent no. 3/Three C Shelters Pvt. Ltd. The impugned report dated 09.08.2023 by the IRP has been the subject of consideration in various proceedings leading up to the Supreme Court, this Court as well as the NCLT.
However, the issue as to whether or not any actions or inactions on the part of the IRP are within or outside the scope of Section 45 and other relevant provisions of the IBC; and additionally, whether or not the findings recorded therein are substantiated or corroborated in any manner, are matters that clearly lie in the domain of the NCLT. The NCLT is already seized of the matter pursuant to the direction of the Supreme Court dated 19.11.2024, whereby the corporate insolvency proceedings in respect of the respondent no. 3/Three C Shelters Private Ltd. has been revived.
Likewise, although the impugned report is one of the factors that triggered the inquiry/investigation by respondent No. 1 & 2 against the companies mentioned vide paragraph (75) (vii), but such report is not a conclusive piece of evidence as such. The findings contained in the report are supposed to be independently examined and relevant material should be unearthed to substantiate the role of the concerned companies and nexus, if any, in the alleged financial malpractices.
Conclusion - The review petition is dismissed for failure to disclose any error apparent on the face of the record.
The instant application for review does not disclose any error apparent on the face of the record. Hence, the present review petition is dismissed.
Seeking restoration of the name of the Appellant company in the register of Registrar of Companies - Section 252(1) read with Section 252(3) of the Companies Act, 2013 - HELD THAT:- The Learned Counsel for the Appellant though has shown two orders dated 08.12.2023 and 08.04.2024 which records the reply was filed by the Appellants herein and rather a date was given to the Income Tax Department to file its rejoinder, but admittedly the presence of the Appellant’s Counsel was not recorded in both these orders. In any case, the reply filed by the Respondents No. 2 to 4 before the Ld. NCLT to the appeal filed by the department also perused, wherein they had not denied assessment order and demand notice but claimed it being beyond limitation.
Where the appellants failed to appear and did not dispute raising of such alleged demand, there are no reason why impugned order be set aside.
Appeal dismissed.
Seeking restoration of the name of the Appellant company in the register of Registrar of Companies - Section 252(1) read with Section 252(3) of the Companies Act, 2013 - HELD THAT:- The Learned Counsel for the Appellant though has shown two orders dated 08.12.2023 and 08.04.2024 which records the reply was filed by the Appellants herein and rather a date was given to the Income Tax Department to file its rejoinder, but admittedly the presence of the Appellant’s Counsel was not recorded in both these orders. In any case, the reply filed by the Respondents No. 2 to 4 before the Ld. NCLT to the appeal filed by the department also perused, wherein they had not denied assessment order and demand notice but claimed it being beyond limitation.
Where the appellants failed to appear and did not dispute raising of such alleged demand, there are no reason why impugned order be set aside.
Appeal dismissed.
1. Whether the Adjudicating Authority had jurisdiction to interfere with the removal of the voluntary liquidator appointed under Section 59 of the Insolvency and Bankruptcy Code, 2016 (IBC) and the corresponding Voluntary Liquidation (VL) Regulations, 2017, when the Corporate Debtor's Board of Directors and shareholders had passed resolutions for replacement of the liquidator.
2. Whether the status quo order directing continuation of the erstwhile liquidator was legally sustainable and within the jurisdiction of the Adjudicating Authority.
3. Whether the Adjudicating Authority was justified in de-reserving its order on procedural grounds relating to the validity of vakalatnamas, powers of attorney, and authorizations filed by the parties, after having earlier reserved judgment.
4. Whether the appeal filed against the impugned orders was barred by limitation or delay.
5. The procedural obligations of the outgoing liquidator to cooperate with the newly appointed liquidator in handing over documents and information as per Regulation 41(4) of the VL Regulations.
Issue-wise Detailed Analysis
Issue 1: Jurisdiction of Adjudicating Authority to Interfere with Removal of Voluntary Liquidator
The legal framework governing voluntary liquidation under the IBC is distinct from the insolvency resolution process or liquidation under other chapters. Section 59 of the IBC authorizes a corporate person to initiate voluntary liquidation if no default has been committed. The process is further regulated by the IBBI (Voluntary Liquidation Process) Regulations, 2017.
Regulation 5 of the VL Regulations explicitly provides that the corporate person may appoint an insolvency professional as liquidator and may also replace him by passing a resolution under Section 59(3)(c). The resolution must specify terms and remuneration but does not require approval of the Adjudicating Authority.
The Court noted that this statutory scheme grants the Board of Directors and shareholders the unfettered right to appoint and replace the liquidator during voluntary liquidation without judicial intervention. The procedure is self-contained and does not contemplate interference by the Adjudicating Authority in the appointment or removal of a voluntary liquidator.
Applying the law to facts, the Corporate Debtor had duly passed Board and EGM resolutions replacing the first liquidator with Respondent No.1, and subsequently replacing Respondent No.1 with Respondent No.6 due to allegations of misconduct and breach of duties. These resolutions complied with the statutory procedure. Therefore, the Adjudicating Authority's order directing status quo of the liquidator was beyond its jurisdiction and contravened the statutory framework.
The competing argument from the Respondent No.1 was that the removal was without proper authorization and violated procedural requirements. However, the Court emphasized that the statutory provisions do not require the Adjudicating Authority's approval or justification for removal in voluntary liquidation, distinguishing it from insolvency resolution processes.
Conclusion: The Adjudicating Authority lacked jurisdiction to interfere with the removal of the voluntary liquidator once the Corporate Debtor complied with the prescribed procedure under Section 59 and VL Regulations.
Issue 2: Legality and Tenability of Status Quo Order
The Adjudicating Authority's order dated 28.03.2025 directed maintenance of status quo with respect to the liquidator, effectively restraining the Corporate Debtor from replacing Respondent No.1. The Appellant challenged this as illegal and beyond jurisdiction.
The Court observed that since the statutory scheme allows replacement of the liquidator by resolution without Adjudicating Authority's approval, the status quo order was a transgression of jurisdiction. It stalled the voluntary liquidation process, which is required to be completed in a time-bound manner under the IBC.
The Court vacated the status quo order, permitting the newly appointed liquidator to proceed with the liquidation process. It also directed the outgoing liquidator to cooperate in handing over documents as mandated by Regulation 41(4) of the VL Regulations.
Conclusion: The status quo order was untenable and vacated to uphold the statutory right of the Corporate Debtor to replace the liquidator and proceed with voluntary liquidation.
Issue 3: De-reservation of Judgment on Procedural Grounds
The Adjudicating Authority initially reserved judgment on 02.04.2025 in the removal application filed by Respondent No.1. Subsequently, on 29.04.2025, it de-reserved the order citing procedural defects in the vakalatnamas, powers of attorney, and authorizations filed by Respondent Nos. 2 to 5 and the Appellant.
The Appellant contended that these procedural issues were known at the time of reservation and could not justify de-reservation, violating the principle that there is no hiatus between reservation and pronouncement of judgment.
The Court noted the contradiction between the two orders of the Adjudicating Authority. It observed that the Adjudicating Authority had earlier accepted the vakalatnama and authorizations on record and failed to apply its mind to the maintainability of the removal application itself, which was the core issue.
The Court directed that on the next hearing, the Adjudicating Authority must first determine the maintainability of the removal application filed by Respondent No.1, who had already been replaced in accordance with the law, before delving into procedural infirmities.
Conclusion: The de-reservation on procedural grounds was improper without addressing the substantive maintainability of the removal challenge. The Adjudicating Authority must prioritize the core jurisdictional issue.
Issue 4: Limitation and Delay in Filing Appeal
The Respondent No.1 alleged delay in filing the appeal against the status quo order. The Appellant explained that the appeal was filed promptly after the Adjudicating Authority de-reserved the order, effectively continuing the status quo.
The Court held that under the proviso to Section 61(2) of the IBC, delay up to 15 days beyond 30 days may be condoned for sufficient cause. The appeal was filed within 45 days and the reasons for delay were bona fide.
The Court also noted the Respondent No.1's counsel did not contest the limitation issue. Delay was accordingly condoned.
Conclusion: The appeal was timely filed and delay, if any, was condoned in the interest of justice.
Issue 5: Obligation of Outgoing Liquidator to Cooperate
The newly appointed liquidator alleged non-cooperation by the outgoing liquidator in handing over documents and information as required under Regulation 41(4) of the VL Regulations.
The Court directed the outgoing liquidator to comply with this obligation to ensure smooth continuation of the voluntary liquidation process.
Conclusion: The outgoing liquidator must cooperate and hand over all relevant documents and information to the new liquidator as per statutory mandate.
Significant Holdings
"A plain reading of Regulation 5 of VL Regulations shows that the Corporate Debtor can appoint a Liquidator and 'wherever required' may replace him by another Liquidator by simply passing a resolution. Thus, in terms of the statutory construct of IBC read with VL Regulations, there is no need for obtaining any approval of the Adjudicating Authority for the appointment or replacement of the Liquidator engaged for the purposes for voluntary liquidation."
"The Adjudicating Authority by the impugned order directing the continuance of Respondent No.1 as Liquidator on the Corporate Debtor acted in violation of the statutory framework of IBC."
"The process of replacement of a Liquidator in the voluntary liquidation process of a solvent Corporate Debtor falls in an entirely different regime from liquidation process undertaken following CIRP."
"The Adjudicating Authority must first look into the maintainability of the petition of the Respondent No.1 who has already been replaced by the Corporate Debtor by following the due process and not bypass this core issue by foraying into procedural deficiencies in the documents submitted."
"The outgoing Liquidator is directed to hand over documents and other information as solicited from him by the new Liquidator in terms of Regulation 41(4) of the Voluntary Liquidation Regulations."
Final determinations include vacating the status quo order directing continuation of the erstwhile liquidator, allowing the newly appointed liquidator to proceed with voluntary liquidation, condoning delay in filing appeal, and directing the Adjudicating Authority to decide on the maintainability of the removal application on merit in the next hearing.
Time limitation - Maintenance of status quo as on date with regard to the Liquidator-Respondent No.1 - de-reserving of earlier order for judgement and pronouncement challenging removal of Respondent No.1-Liquidator - HELD THAT:- It lies within the jurisdiction of this Tribunal under proviso to Section 61(2) of IBC to condone delay when appeals are filed after expiry of a period of 30 days as long as such delay does not exceed 15 days if the Tribunal is satisfied that there was sufficient cause for the delay. In the present facts of the case, the impugned order dated 28.03.2025 was uploaded on the website on 01.04.2025. Even if it is held that the clock of limitation started ticking from 28.03.2025, the 45 days period available under proviso to Section 61(2) of IBC is seen to end on 12.05.2025. Since this application was filed on 12.05.2025, the application was filed well within the period of limitation - there are no reason to hold that the delay in filing was wilful or by design on the part of the Appellant.
Untenability of the continuance of the status quo order - HELD THAT:- In terms of the statutory construct of IBC read with VL Regulations, there is no need for obtaining any approval of the Adjudicating Authority for the appointment or replacement of the Liquidator engaged for the purposes for voluntary liquidation. Nor is there any need for the Director and Shareholder of the Corporate Debtor to communicate any reason for removal of a Liquidator.
Even when the Corporate Debtor had replaced the first Liquidator by Respondent No.1-Liquidator, the same procedure prescribed under Regulation 5 of VL Regulations was followed. Dissatisfied with the performance of Respondent No.1-Liquidator for reasons of acting in an opaque and non-cooperative manner, the Board of Directors passed a resolution on 28.02.2025 replacing Respondent No.1 as Liquidator because of “misconduct, lack of transparency and breach of the Liquidator’s statutory duties”. This resolution for replacement was thereafter ratified by the EGM on 17.03.2025. The same Board Resolution replaced Respondent No.1-Liquidator with a new Liquidator-Respondent No.6. It is therefore unambiguously clear that the Respondent No.1-Liquidator already stood replaced before the orders directing the maintenance of status quo was passed by the Adjudicating Authority on 28.03.2025.
There are force in the contention of the Appellant that the Adjudicating Authority by the impugned order directing the continuance of Respondent No.1 as Liquidator on the Corporate Debtor acted in violation of the statutory framework of IBC. Moreover, when the statutory provisions provide an enabling framework to the Directors and Shareholders of the Corporate Debtor to replace the Liquidator “wherever required”, the Adjudicating Authority did not have the jurisdiction to force status quo upon the Corporate Debtor for continuing with Respondent No.1 as the Liquidator.
The Appellant has vehemently contended that the grounds on which this order of 29.04.2025 de-reserved the final order on the removal application were purely procedural grounds which lack basis. More importantly, it is found that while reserving the order in the Removal Application, the Adjudicating Authority on 02.04.2025 had clearly noted that “the Respondent No.2 who is resident Indian who has signed the vakalatnama himself with respect to Respondent No.2 that can be taken on record.” - if while reserving the order on 02.04.2025, the Adjudicating Authority had taken a conscious decision to proceed basis the vakalatnama and other documents produced by the present Appellant, it remains unexplained why after a gap of 27 days, the Adjudicating Authority suddenly turned volte face and de-reserved the same order by questioning the compliances on the part of Respondent No.2 to 5. Facts concerning the Affidavits and Letters of Authority etc. of the Respondent Nos 3 to 5 were already in the full knowledge of the Adjudicating Authority and only after taking due cognisance of these, it had reserved the judgment. Thus, the impugned order of 29.04.2025 and the earlier order of 02.04.2025 are in contradiction of each other.
Conclusion - i) The Adjudicating Authority lacked jurisdiction to interfere with the removal of the voluntary liquidator once the Corporate Debtor complied with the prescribed procedure under Section 59 and VL Regulations. ii) The status quo order is untenable and vacated to uphold the statutory right of the Corporate Debtor to replace the liquidator and proceed with voluntary liquidation. iii) The de-reservation on procedural grounds is improper without addressing the substantive maintainability of the removal challenge. The Adjudicating Authority must prioritize the core jurisdictional issue. iv) The appeal was timely filed and delay, if any, is condoned in the interest of justice. v) The outgoing liquidator must cooperate and hand over all relevant documents and information to the new liquidator as per statutory mandate.
The impugned order dated 28.03.2025 directing status quo order with regard to the Liquidator-Respondent No.1 is vacated - appeal alowed.
Time limitation - Maintenance of status quo as on date with regard to the Liquidator-Respondent No.1 - de-reserving of earlier order for judgement and pronouncement challenging removal of Respondent No.1-Liquidator - HELD THAT:- It lies within the jurisdiction of this Tribunal under proviso to Section 61(2) of IBC to condone delay when appeals are filed after expiry of a period of 30 days as long as such delay does not exceed 15 days if the Tribunal is satisfied that there was sufficient cause for the delay. In the present facts of the case, the impugned order dated 28.03.2025 was uploaded on the website on 01.04.2025. Even if it is held that the clock of limitation started ticking from 28.03.2025, the 45 days period available under proviso to Section 61(2) of IBC is seen to end on 12.05.2025. Since this application was filed on 12.05.2025, the application was filed well within the period of limitation - there are no reason to hold that the delay in filing was wilful or by design on the part of the Appellant.
Untenability of the continuance of the status quo order - HELD THAT:- In terms of the statutory construct of IBC read with VL Regulations, there is no need for obtaining any approval of the Adjudicating Authority for the appointment or replacement of the Liquidator engaged for the purposes for voluntary liquidation. Nor is there any need for the Director and Shareholder of the Corporate Debtor to communicate any reason for removal of a Liquidator.
Even when the Corporate Debtor had replaced the first Liquidator by Respondent No.1-Liquidator, the same procedure prescribed under Regulation 5 of VL Regulations was followed. Dissatisfied with the performance of Respondent No.1-Liquidator for reasons of acting in an opaque and non-cooperative manner, the Board of Directors passed a resolution on 28.02.2025 replacing Respondent No.1 as Liquidator because of “misconduct, lack of transparency and breach of the Liquidator’s statutory duties”. This resolution for replacement was thereafter ratified by the EGM on 17.03.2025. The same Board Resolution replaced Respondent No.1-Liquidator with a new Liquidator-Respondent No.6. It is therefore unambiguously clear that the Respondent No.1-Liquidator already stood replaced before the orders directing the maintenance of status quo was passed by the Adjudicating Authority on 28.03.2025.
There are force in the contention of the Appellant that the Adjudicating Authority by the impugned order directing the continuance of Respondent No.1 as Liquidator on the Corporate Debtor acted in violation of the statutory framework of IBC. Moreover, when the statutory provisions provide an enabling framework to the Directors and Shareholders of the Corporate Debtor to replace the Liquidator “wherever required”, the Adjudicating Authority did not have the jurisdiction to force status quo upon the Corporate Debtor for continuing with Respondent No.1 as the Liquidator.
The Appellant has vehemently contended that the grounds on which this order of 29.04.2025 de-reserved the final order on the removal application were purely procedural grounds which lack basis. More importantly, it is found that while reserving the order in the Removal Application, the Adjudicating Authority on 02.04.2025 had clearly noted that “the Respondent No.2 who is resident Indian who has signed the vakalatnama himself with respect to Respondent No.2 that can be taken on record.” - if while reserving the order on 02.04.2025, the Adjudicating Authority had taken a conscious decision to proceed basis the vakalatnama and other documents produced by the present Appellant, it remains unexplained why after a gap of 27 days, the Adjudicating Authority suddenly turned volte face and de-reserved the same order by questioning the compliances on the part of Respondent No.2 to 5. Facts concerning the Affidavits and Letters of Authority etc. of the Respondent Nos 3 to 5 were already in the full knowledge of the Adjudicating Authority and only after taking due cognisance of these, it had reserved the judgment. Thus, the impugned order of 29.04.2025 and the earlier order of 02.04.2025 are in contradiction of each other.
Conclusion - i) The Adjudicating Authority lacked jurisdiction to interfere with the removal of the voluntary liquidator once the Corporate Debtor complied with the prescribed procedure under Section 59 and VL Regulations. ii) The status quo order is untenable and vacated to uphold the statutory right of the Corporate Debtor to replace the liquidator and proceed with voluntary liquidation. iii) The de-reservation on procedural grounds is improper without addressing the substantive maintainability of the removal challenge. The Adjudicating Authority must prioritize the core jurisdictional issue. iv) The appeal was timely filed and delay, if any, is condoned in the interest of justice. v) The outgoing liquidator must cooperate and hand over all relevant documents and information to the new liquidator as per statutory mandate.
The impugned order dated 28.03.2025 directing status quo order with regard to the Liquidator-Respondent No.1 is vacated - appeal alowed.
The core legal questions considered by the Appellate Tribunal in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Justification for dismissal of Section 94 petition due to non-appearance
Legal framework and precedents: Section 94 of the Code provides the mechanism for initiation of insolvency resolution process by the debtor. Rule 48(1) of the NCLT Rules, 2016 empowers the Tribunal to dismiss a petition if the applicant does not appear on the date fixed for hearing. The Supreme Court's decision in Dilip B. Jiwarjika vs. Union of India & Ors. (2023) clarified that the interim moratorium under Section 96 is protective in nature, shielding the debtor from legal proceedings, but does not absolve the debtor from prosecuting the petition diligently.
Court's interpretation and reasoning: The Adjudicating Authority dismissed the Section 94 petition on 08.07.2024 for want of prosecution due to non-appearance of the petitioner. The Tribunal noted that the petitioner was absent on three consecutive dates (03.04.2024, 20.05.2024, and 08.07.2024). The Court held that the petitioner's absence was neither justified nor supported by sufficient cause. The Tribunal emphasized that the moratorium under Section 96 does not protect a petitioner who fails to prosecute the petition with due diligence.
Key evidence and findings: The order sheets of the NCLT proceedings recorded non-appearance of the petitioner on the noted dates. The petitioner's counsel failed to provide credible explanations for absence on two of the three dates. The petitioner's claim of presence on 03.04.2024 and 20.05.2024 was not corroborated by the record. The petitioner's reason for absence on 08.07.2024 was due to simultaneous hearings in other courts, which was held insufficient.
Application of law to facts: The Tribunal applied Rule 48(1) to dismiss the petition for non-appearance and invoked the principle that moratorium does not shield a petitioner from prosecutorial negligence. The petitioner's repeated non-appearance was found to be a deliberate attempt to delay proceedings, amounting to abuse of process.
Treatment of competing arguments: The petitioner argued that absence was due to unavoidable circumstances and that they were interested in submitting a repayment plan. The Tribunal rejected these contentions, noting the absence of any proactive steps by the petitioner and the lack of credible explanation for non-appearance.
Conclusions: The dismissal of the Section 94 petition was justified due to the petitioner's failure to appear without sufficient cause, thereby abusing the moratorium and delaying proceedings.
Issue 2: Dismissal of Restoration Application under Rule 48(2) of NCLT Rules, 2016
Legal framework and precedents: Rule 48(2) of the NCLT Rules, 2016 allows restoration of a petition dismissed for default if the applicant files an application within 30 days and satisfies the Tribunal of sufficient cause for non-appearance. The restoration is discretionary but guided by the principle that sufficient cause must be demonstrated.
Court's interpretation and reasoning: The Adjudicating Authority dismissed the restoration application on the grounds that the petitioner failed to show sufficient cause for non-appearance on the date of dismissal. Further, the Tribunal considered the petitioner's conduct over multiple hearings, noting repeated absences and inconsistent explanations, indicating a lack of bona fide prosecution.
Key evidence and findings: The petitioner was absent on three consecutive hearing dates, with explanations only tendered for the last date. The Tribunal found the petitioner's affidavit claiming presence on two dates inconsistent with the records. The petitioner's counsel was also absent on the date of dismissal. The Tribunal also noted the petitioner's inconsistent conduct in other related proceedings.
Application of law to facts: Applying Rule 48(2), the Tribunal found no sufficient cause for non-appearance on the dismissal date and noted the petitioner's pattern of absences as deliberate and obstructive. The Tribunal held that the restoration application deserved dismissal to prevent abuse of process.
Treatment of competing arguments: The petitioner contended that the Adjudicating Authority erred by relying on absences on multiple dates rather than only on the date of dismissal, and that the absence on 08.07.2024 was due to unavoidable court commitments. The Tribunal rejected these arguments, emphasizing the importance of consistent attendance and the need to prevent misuse of moratorium provisions.
Conclusions: The restoration application was rightly dismissed for failure to demonstrate sufficient cause for non-appearance, and the petitioner's conduct was found to be dilatory and abusive of the process.
Issue 3: Interpretation of Rule 48(2) and the scope of sufficient cause
Legal framework and precedents: Rule 48(2) mandates that restoration is contingent on the applicant demonstrating sufficient cause for non-appearance specifically on the date of dismissal. The principle "Vigilantibus non dormientibus jura subveniunt" (law assists those who are vigilant, not those who sleep over their rights) was cited by the Tribunal to underscore the importance of prosecutorial diligence.
Court's interpretation and reasoning: While the rule focuses on the date of dismissal, the Tribunal held that the petitioner's conduct on earlier dates is relevant to assess bona fides and whether the petitioner was genuinely pursuing the matter. The Tribunal reasoned that repeated absences and failure to provide explanations on prior dates indicated a casual and negligent approach, undermining the claim of sufficient cause.
Key evidence and findings: The petitioner's absence on three consecutive dates, with explanations only on the last date, and contradictory claims regarding attendance, were critical in the Tribunal's assessment.
Application of law to facts: The Tribunal applied Rule 48(2) strictly, holding that mere presence on the date of dismissal or a single explanation is insufficient where the overall conduct shows lack of diligence and intent to delay.
Treatment of competing arguments: The petitioner argued that the Adjudicating Authority exceeded its power by considering absences on multiple dates. The Tribunal responded that the petitioner's conduct over the entire period is relevant to determine the genuineness of the restoration application.
Conclusions: The Tribunal established that sufficient cause under Rule 48(2) encompasses an assessment of the petitioner's overall conduct, not merely the date of dismissal, to prevent abuse of process.
Issue 4: Abuse of moratorium under Section 96 of the Code and interplay with SARFAESI proceedings
Legal framework and precedents: Section 96 of the Code provides an interim moratorium protecting the debtor from legal proceedings during pendency of insolvency resolution. The Supreme Court in Dilip B. Jiwarjika emphasized that this moratorium is protective but does not permit abuse or delay. The SARFAESI Act, 2002 allows secured creditors to take possession of secured assets, but such proceedings are stayed by the moratorium under Section 96.
Court's interpretation and reasoning: The Tribunal noted that the petitioner's failure to prosecute the Section 94 petition while enjoying the moratorium effectively stalled the SARFAESI proceedings. The Tribunal found this to be an abuse of process, as the petitioner was neither diligent nor proactive in submitting a repayment plan or pursuing the insolvency process.
Key evidence and findings: The Bank had filed a writ petition seeking possession under SARFAESI Act, which was stayed due to the moratorium. The petitioner's repeated absences and failure to cooperate with the Resolution Professional delayed the insolvency process, thereby prolonging the moratorium unjustifiably.
Application of law to facts: The Tribunal balanced the protective purpose of Section 96 moratorium against the need to prevent misuse. It held that the petitioner's conduct was a deliberate attempt to frustrate the creditor's rights under SARFAESI by misusing the moratorium.
Treatment of competing arguments: The petitioner argued that it was interested in submitting a repayment plan and that the moratorium protected its rights. The Tribunal rejected this, emphasizing that protection under Section 96 requires active prosecution of the insolvency petition, not passive delay.
Conclusions: The Tribunal confirmed that the moratorium under Section 96 cannot be used as a shield for inaction or delay, and abuse of this protection will be dealt with firmly.
3. SIGNIFICANT HOLDINGS
"Law protects those who are vigilant (Vigilantibus non dormientibus jura subveniunt)."
"The filing and non-pursuance of section 94 petition is nothing but the abuse of process of law and needs to be hammered with iron hand."
"The interim moratorium under Section 96 is for the protection of the debtor from further legal proceedings, but it does not absolve the debtor from prosecuting the petition diligently."
"Where the petition is dismissed for default, restoration under Rule 48(2) requires the applicant to show sufficient cause for non-appearance on the date of dismissal; however, the conduct of the applicant on other dates is relevant to assess bona fides and prevent abuse of process."
"Repeated non-appearance without sufficient cause, inconsistent explanations, and casual approach in pursuing insolvency proceedings amount to abuse of process and justify dismissal of restoration application."
"The moratorium under Section 96 cannot be used as a tool to delay or obstruct creditor's rights under SARFAESI Act or other laws."
Final determinations:
Dismissal of Restoration Application filed by the Appellant - non-appearance of the petitioner on the date of hearing - HELD THAT:- The Appellant has relied upon the Dilip B. Jiwarjika vs. Union of India & Ors. The Hon'ble Supreme Court in the said matter while upholding the constitutional validity of Section 95 to 100 has held that the interim moratorium under Section 96 is for the protection of the interest of the guarantors.
There is no doubt that Section 96 provides interim protection to the debtor from further legal proceeding and the Appellant was enjoying the interim protection for long time but it was incumbent upon him to provide a repayment plan which has not happened in this case. It is argued by the Appellant that it was very well interested in submitting the repayment plan upon initiation of Insolvency Resolution Process and on 08.07.2024 the Adjudicating Authority was only to consider the report filed by the Resolution Professional - it is noted that it is the responsibility of the Appellant who has to work out a repayment plan and that he does it proactively and that can happen only if the Appellant is present in the proceedings. With three absents in the court proceedings on frivolous grounds, there is no proactiveness and initiative on the part of the Appellant.
It is found that for finalizing a repayment plan it is important that the legal proceedings are pursued diligently and in a vigilant manner. The Appellant has been very casual in his approach. Appellant has been absent for last three hearings which shows that the applicant was not interested in pursuing the matter further. And was trying to abuse the process of law by misusing the moratorium available to him under Section 96 of the Code. Furthermore, no satisfactory explanation has been provided by the Appellant for his non-appearance in the restoration application - the Appellant does not deserve any protection and restoration application needs to be dismissed for reasons as discussed herein.
Conclusion - i) The dismissal of the Section 94 petition for non-appearance is justified. ii) The Restoration Application is rightly dismissed for failure to demonstrate sufficient cause and due to the petitioner's dilatory conduct.
There are no infirmity in the orders of the Adjudicating Authority in dismissing the restoration petition in both the related Appeals - the Appeals against dismissal of the restoration application are hereby dismissed.
Dismissal of Restoration Application filed by the Appellant - non-appearance of the petitioner on the date of hearing - HELD THAT:- The Appellant has relied upon the Dilip B. Jiwarjika vs. Union of India & Ors. The Hon'ble Supreme Court in the said matter while upholding the constitutional validity of Section 95 to 100 has held that the interim moratorium under Section 96 is for the protection of the interest of the guarantors.
There is no doubt that Section 96 provides interim protection to the debtor from further legal proceeding and the Appellant was enjoying the interim protection for long time but it was incumbent upon him to provide a repayment plan which has not happened in this case. It is argued by the Appellant that it was very well interested in submitting the repayment plan upon initiation of Insolvency Resolution Process and on 08.07.2024 the Adjudicating Authority was only to consider the report filed by the Resolution Professional - it is noted that it is the responsibility of the Appellant who has to work out a repayment plan and that he does it proactively and that can happen only if the Appellant is present in the proceedings. With three absents in the court proceedings on frivolous grounds, there is no proactiveness and initiative on the part of the Appellant.
It is found that for finalizing a repayment plan it is important that the legal proceedings are pursued diligently and in a vigilant manner. The Appellant has been very casual in his approach. Appellant has been absent for last three hearings which shows that the applicant was not interested in pursuing the matter further. And was trying to abuse the process of law by misusing the moratorium available to him under Section 96 of the Code. Furthermore, no satisfactory explanation has been provided by the Appellant for his non-appearance in the restoration application - the Appellant does not deserve any protection and restoration application needs to be dismissed for reasons as discussed herein.
Conclusion - i) The dismissal of the Section 94 petition for non-appearance is justified. ii) The Restoration Application is rightly dismissed for failure to demonstrate sufficient cause and due to the petitioner's dilatory conduct.
There are no infirmity in the orders of the Adjudicating Authority in dismissing the restoration petition in both the related Appeals - the Appeals against dismissal of the restoration application are hereby dismissed.
The core legal questions considered by the Tribunal are:
(i) Whether the Section 7 Application filed by the Financial Creditor (SBI) against the Corporate Debtor (JCCL) is barred by limitation or is maintainable within the prescribed time frame;
(ii) Whether there exists a debt and default on the part of the Corporate Debtor (JCCL) to meet the criteria for admission of the Section 7 Application under the Insolvency and Bankruptcy Code ("IBC");
(iii) Whether the debt of JCCL stood extinguished or discharged by virtue of the Comprehensive Reorganization and Restructuring Plan ("CRRP") and the Master Restructuring Agreement ("MRA") dated 31.10.2017, including the contention of novation under Section 62 of the Indian Contract Act, 1872;
(iv) Whether the failure to create security interest as stipulated under Clause 5.8 of the MRA affects the validity and enforceability of the debt and the restructuring agreement;
(v) Whether initiation of Corporate Insolvency Resolution Process ("CIRP") against the holding company (JAL) precludes initiation of CIRP against the subsidiary (JCCL) for the same debt;
(vi) The legal effect of failure of the restructuring scheme and the implications on the outstanding debt of JCCL;
(vii) The applicability and interpretation of novation principles under Section 62 of the Indian Contract Act, 1872 in the context of restructuring agreements and debt transfer between JCCL and JAL.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i): Maintainability of Section 7 Application and Limitation
The Adjudicating Authority held that the Section 7 Application was filed within the limitation period. This finding was not challenged before the Tribunal and hence was accepted as correct. The date of default was recorded as 03.03.2016 as per the NESL certificate authenticated in 2022. The application was filed in 2023, which was held to be within the prescribed limitation period under the IBC framework.
Issue (ii): Existence of Debt and Default on the part of JCCL
The Tribunal examined the existence of debt and default, which are sine qua non for admission of a Section 7 Application. The Financial Creditor (SBI) relied on the NESL certificate and letters of acknowledgment issued by JCCL and JAL between 2020 and 2022, admitting the liability and default. The Adjudicating Authority found that despite the restructuring attempts, the debt of JCCL remained unpaid and defaulted.
The Tribunal noted that the restructuring plan was composite, involving both JAL and JCCL, and the failure of restructuring resulted in revival of the original debt and default. The Tribunal rejected the contention that initiation of CIRP against the holding company (JAL) precluded initiation of insolvency proceedings against the subsidiary (JCCL).
Issue (iii): Effect of CRRP and MRA dated 31.10.2017 on Debt and Novation Claim
The Appellant contended that the CRRP and the MRA executed on 31.10.2017 constituted a novation of the original debt, transferring all liabilities of JCCL to JAL, thereby extinguishing JCCL's debt and default. Reliance was placed on Section 62 of the Indian Contract Act, 1872, which provides that substitution of a new contract discharges the original contract.
The Tribunal analyzed the MRA and found that JCCL was not a party to the MRA, which was executed between JAL and the lenders. The Tribunal referred to established legal principles that novation requires the same parties to agree to substitute the contract. Since JCCL was not a party to the MRA, the condition for novation was not satisfied.
The Tribunal also examined the precedent of the Supreme Court in United Bank of India vs. Ramdas Mahadeo Prashad, where it was held that novation requires compliance with the terms of the new contract, and non-compliance negates novation. The Tribunal found that the conditions of the MRA were not fulfilled, and the restructuring failed, thereby negating any claim of novation.
Issue (iv): Failure to Create Security Interest under Clause 5.8 of the MRA
The Adjudicating Authority and the Tribunal noted that Clause 5.8 of the MRA mandated creation of security interest as a condition precedent for the MRA's effectiveness. The evidence showed that the security interest was not fully created and was put on hold as per JLF minutes dated 15.10.2018, due to ongoing litigation and regulatory interventions.
The failure to create security interest was held to be fatal to the implementation of the MRA. The Tribunal observed that without creation of security, the MRA could not be enforced, and the restructuring plan was rendered ineffective. This supported the conclusion that the debt and default of JCCL remained extant.
Issue (v): Effect of Initiation of CIRP against Holding Company (JAL) on Proceedings against Subsidiary (JCCL)
The Appellant argued that since CIRP had commenced against JAL, which had undertaken to discharge JCCL's liabilities, no separate insolvency proceedings could be initiated against JCCL. The Tribunal rejected this argument, holding that JAL and JCCL are distinct legal entities. The failure of the restructuring plan and the rejection of the scheme of arrangement under Sections 230-232 of the Companies Act, 2013, meant that the debt of JCCL was not extinguished.
The Tribunal further held that the Financial Creditor could invoke securities given by JCCL and initiate proceedings independently. The insolvency of the holding company did not preclude insolvency proceedings against the subsidiary for its own outstanding debt.
Issue (vi): Legal Effect of Failure of Restructuring Scheme
The Tribunal noted that the Composite Scheme of Debt Realignment Plan divided the debts of JAL and JCCL into three buckets, with various restructuring mechanisms including asset divestment, debt transfer, and creation of SPVs. However, the scheme failed due to non-implementation of key conditions, regulatory orders, and rejection by the NCLT and the Tribunal.
The failure of the restructuring plan revived the original debt and default obligations of JCCL. The Tribunal emphasized that the debt did not evaporate due to the failure of the scheme, and the Financial Creditor was entitled to initiate insolvency proceedings under Section 7 of the IBC.
Issue (vii): Applicability of Section 62 of the Indian Contract Act, 1872
The Tribunal examined the applicability of Section 62 which deals with novation, rescission, and alteration of contract. It reiterated that novation requires substitution of the original contract by a new contract with the consent of the parties involved.
Since JCCL was not a party to the MRA and the MRA was never implemented due to failure to create security, the Tribunal held that the conditions for novation were not met. The Tribunal relied on Supreme Court precedents to conclude that non-fulfillment of conditions of the new contract negates novation and the original debt remains enforceable.
3. SIGNIFICANT HOLDINGS
"We are not satisfied with the submissions made by the Ld. Sr. Counsel representing the Corporate Debtor on the point of transfer of debt of the Corporate Debtor to JAL, in view of the fact that creation of a security interest was a sine qua non in terms of clause 5.8 of the aforesaid MRA."
"The factum of the security interest having not been created is clearly visible from the meeting of JLF held on 15.10.2018... The creation of security was not fully implemented, and therefore creation of the security in terms of MRA was put on hold until a way forward could be ascertained with respect to the CIRP application."
"The bringing into the said restructuring proposal was necessitated only in view of the fact that the earlier MRA dated 31.10.2017 could never see the light of the day in so far as the Applicant/ Financial Creditor is concerned... Even this restructuring proposal of 2023 also could not materialize and could never take off."
"With respect to Bucket 2B, scheme under Section 230-232 of the Companies Act was proposed by JAL and SPV, which scheme admittedly has finally been rejected by NCLT on 03.06.2024... The debt of Bucket 2B, thus, admittedly has not been resolved and it is outstanding."
"The debt which was owned by JCCL to the Lenders, shall not be evaporated and the mere fact that JAL has taken the liability to discharge the debts of JCCL, does not in any manner shall prohibit the Lenders to take proceedings under Section 7 against JCCL, whose debts are in default, due to failure of restructuring proposal."
"The restructuring was a mechanism to discharge the entire debt of JAL and JCCL. Admittedly, restructuring has failed and neither the debt of JAL, nor the debt of JCCL have been discharged."
"Section 62 of the Indian Contract Act... The basic principle behind the concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the same... The MRA dated 31.10.2017 was not executed between the parties, since JCCL was not the party to the Agreement."
"The Adjudicating Authority after considering all the relevant facts and circumstances, has come to the conclusion that debt and default on the part of the CD - JCCL is proved. When the debt and default is proved, the admission of Section 7 Application against JCCL, cannot be faulted."
The Tribunal concluded that the Section 7 Application filed by SBI against JCCL was maintainable and rightly admitted by the Adjudicating Authority. The debt and default on the part of JCCL were established, the restructuring plan and MRA failed due to non-implementation of essential conditions, including creation of security interest, and the claim of novation was rejected. The insolvency proceedings against the holding company did not preclude separate proceedings against the subsidiary. The appeal was dismissed with no order as to costs.
Admission of section 7 application - application is filed within the limitation period or not - existence of debt and default to meet the criteria of Section 7 Application or not.
Whether the present application is filed within the limitation period? - HELD THAT:- The submission of the Appellant that JAL having undertaken the liability to clear the debts and defaults of JCCL, hence, JCCL has no liability and no application was maintainable against JCCL, also does not commend. Restructuring was a mechanism to discharge the entire dent of JAL and JCCL. Admittedly, restructuring has failed and neither the debt of JAL, nor the debt of JCCL have been discharged. Initiation of CIRP proceedings against JAL cannot be a ground to contend that no proceedings can be initiated against JCCL. JCCL has also given its securities for obtaining the various facilities from the SBI between 2012 to 2015. The Financial Creditor can always invoke the securities given by JCCL to realise the debt. The Financial Creditor has never shown the debt of JCCL to be transferred to the JAL in its Financial Statements and the fact that JAL and JCCL in their Financial Statements have treated the debt to be discharged, is not binding on the Financial Creditors.
The Hon’ble Supreme Court had occasion to consider Section 62 of the Indian Contract Act United bank of India vs. Ramdas Mahadeo Prashad & Ors. [2003 (11) TMI 333 - SUPREME COURT], which judgment has been relied by learned Counsel for the SBI. In the above case, a MoU was signed by the parties of the original contract and it was contended that in view of the MoU, the earlier contract stood novated - Ultimately, the Hon’ble Supreme Court held in paragraph 9 that non-compliance with the terms and conditions of the MoU by the respondents and a party in breach can hardly seek to enforce contract.
Whether there is existence of debt and default to meet the criteria of Section 7 Application? - HELD THAT:- In the present case, conditions of MRA itself are not fulfilled and furthermore in the MRA, the JCCL was not even the party. The above judgment of the Hon’ble Supreme Court does not in any manner comes to the aid of the Appellant. The Adjudicating Authority after considering all the relevant facts and circumstances, has come to the conclusion that debt and default on the part of the CD – JCCL is proved. When the debt and default is proved, the admission of Section 7 Application against JCCl, cannot be faulted. There are no error in the order of the Adjudicating Authority admitting Section 7 Application.
Conclusion - Section 7 Application filed by SBI against JCCL was maintainable and rightly admitted by the Adjudicating Authority. The debt and default on the part of JCCL were established, the restructuring plan and MRA failed due to non-implementation of essential conditions, including creation of security interest, and the claim of novation was rejected.
Appeal dismissed.
Admission of section 7 application - application is filed within the limitation period or not - existence of debt and default to meet the criteria of Section 7 Application or not.
Whether the present application is filed within the limitation period? - HELD THAT:- The submission of the Appellant that JAL having undertaken the liability to clear the debts and defaults of JCCL, hence, JCCL has no liability and no application was maintainable against JCCL, also does not commend. Restructuring was a mechanism to discharge the entire dent of JAL and JCCL. Admittedly, restructuring has failed and neither the debt of JAL, nor the debt of JCCL have been discharged. Initiation of CIRP proceedings against JAL cannot be a ground to contend that no proceedings can be initiated against JCCL. JCCL has also given its securities for obtaining the various facilities from the SBI between 2012 to 2015. The Financial Creditor can always invoke the securities given by JCCL to realise the debt. The Financial Creditor has never shown the debt of JCCL to be transferred to the JAL in its Financial Statements and the fact that JAL and JCCL in their Financial Statements have treated the debt to be discharged, is not binding on the Financial Creditors.
The Hon’ble Supreme Court had occasion to consider Section 62 of the Indian Contract Act United bank of India vs. Ramdas Mahadeo Prashad & Ors. [2003 (11) TMI 333 - SUPREME COURT], which judgment has been relied by learned Counsel for the SBI. In the above case, a MoU was signed by the parties of the original contract and it was contended that in view of the MoU, the earlier contract stood novated - Ultimately, the Hon’ble Supreme Court held in paragraph 9 that non-compliance with the terms and conditions of the MoU by the respondents and a party in breach can hardly seek to enforce contract.
Whether there is existence of debt and default to meet the criteria of Section 7 Application? - HELD THAT:- In the present case, conditions of MRA itself are not fulfilled and furthermore in the MRA, the JCCL was not even the party. The above judgment of the Hon’ble Supreme Court does not in any manner comes to the aid of the Appellant. The Adjudicating Authority after considering all the relevant facts and circumstances, has come to the conclusion that debt and default on the part of the CD – JCCL is proved. When the debt and default is proved, the admission of Section 7 Application against JCCl, cannot be faulted. There are no error in the order of the Adjudicating Authority admitting Section 7 Application.
Conclusion - Section 7 Application filed by SBI against JCCL was maintainable and rightly admitted by the Adjudicating Authority. The debt and default on the part of JCCL were established, the restructuring plan and MRA failed due to non-implementation of essential conditions, including creation of security interest, and the claim of novation was rejected.
Appeal dismissed.
1. Whether the payments made by the suspended management of the Corporate Debtor after commencement of Corporate Insolvency Resolution Process (CIRP) and declaration of moratorium constituted a breach of the moratorium provisions under Section 14 of the IBC.
2. Whether the impugned transactions made by the Appellant and others with certain vendors/service providers amounting to Rs. 11.01 crore were unauthorized and liable to be reversed to the assets of the Corporate Debtor.
3. Whether the cheques issued prior to CIRP commencement but encashed post-moratorium could be treated as payments made before moratorium and thus permissible under the IBC.
4. Whether the Resolution Professional (RP) acted arbitrarily or selectively in seeking reversal of payments made to certain vendors while not doing so for others.
Issue-wise Detailed Analysis
Issue 1: Breach of Moratorium by Payments Made Post-CIRP Commencement
Relevant Legal Framework and Precedents: The IBC defines "insolvency commencement date" as the date of admission of the application for CIRP (Section 5(12)). Section 13 mandates the Adjudicating Authority to declare a moratorium immediately upon admission of the application (Section 13(1)(a)). Section 14(1)(b) prohibits the Corporate Debtor from transferring, encumbering, alienating, or disposing of any assets or legal rights from the insolvency commencement date until the completion of CIRP. This moratorium is intended to preserve the Corporate Debtor's assets intact during the resolution process.
Court's Interpretation and Reasoning: The Tribunal emphasized the plain language of Sections 13 and 14 of the IBC, holding that moratorium becomes effective from the date of admission of the CIRP application, which in this case was 10.09.2018 as per the Adjudicating Authority's order. The Tribunal rejected the Appellant's contention that payments made to maintain the Corporate Debtor as a going concern were permissible. It held that the statutory embargo on any transfer of assets during moratorium is absolute and cannot be overridden by equitable considerations or business exigencies.
Key Evidence and Findings: The impugned payments were made in two phases: the first phase (10.09.2018 to 14.09.2018) and the second phase (27.09.2018 to 10.10.2018). The total impugned transactions amounted to Rs. 11.01 crore, primarily made via RTGS and cheques. The Adjudicating Authority had declared moratorium effective from 10.09.2018. The payments were made from the Corporate Debtor's bank accounts without prior approval of the Interim Resolution Professional (IRP).
Application of Law to Facts: Since the payments were made after moratorium took effect, they contravened Section 14(1)(b). The Tribunal found that the Appellant and Respondent No.6 (Chief Financial Officer) acted without authorization from the IRP, who had exclusive control over the Corporate Debtor's assets post moratorium. The Tribunal held that the payments were unauthorized and liable to be reversed to protect the Corporate Debtor's assets.
Treatment of Competing Arguments: The Appellant argued that payments were routine, necessary to maintain the Corporate Debtor as a going concern, and made under prior management approval before the IRP took charge. The Tribunal rejected these contentions, stating that the moratorium provisions are mandatory and absolute, and no exception exists for payments made in the ordinary course of business post moratorium. The argument that the IRP failed to stop encashment of cheques was also rejected as it did not absolve the suspended management from compliance with the moratorium.
Conclusions: The Tribunal upheld the Adjudicating Authority's finding that the payments made post moratorium were unauthorized and in breach of Section 14(1)(b) of the IBC.
Issue 2: Legality of the Cheque Payments Issued Before CIRP but Encashed After Moratorium
Relevant Legal Framework and Precedents: The Tribunal relied on the IBC moratorium provisions and precedent decisions, including the Tribunal's own ruling in SREI Equipment Finance Ltd. vs Amit Gupta, which held that even if a cheque is dated prior to moratorium, its encashment after moratorium commencement violates the moratorium.
Court's Interpretation and Reasoning: The Tribunal noted that three cheques were dated 06.09.2018 and 08.09.2018, i.e., before the moratorium effective date of 10.09.2018. However, these cheques were encashed only after the moratorium commenced. The Adjudicating Authority found that the cheques were deliberately ante-dated to create an impression of pre-moratorium payment, a finding the Tribunal endorsed due to lack of evidence from the Appellant explaining the delayed encashment.
Key Evidence and Findings: The Respondents admitted receipt of payments post moratorium. The Appellant failed to provide evidence that the cheques were physically handed over before moratorium. The Tribunal found that encashment after moratorium is a breach regardless of cheque date.
Application of Law to Facts: The Tribunal applied the moratorium provisions strictly, holding that the date of encashment is determinative for compliance with moratorium, not the date of cheque issuance.
Treatment of Competing Arguments: The Appellant relied on a precedent that payment date corresponds to cheque handover date and argued the onus to explain delayed encashment was on recipients. The Tribunal distinguished the precedent on facts and held that the statutory moratorium prohibits any recovery post commencement, thus overriding such arguments.
Conclusions: The Tribunal upheld the Adjudicating Authority's direction to reverse cheque payments encashed after moratorium, holding them to be in breach of Section 14(1)(b).
Issue 3: Whether Payments Were Authorized by the Interim Resolution Professional
Relevant Legal Framework: Sections 17 and 18 of the IBC vest the IRP with management and control of the Corporate Debtor's operations and assets upon commencement of CIRP. The suspended management's powers are suspended, and no payments can be made without IRP's approval.
Court's Interpretation and Reasoning: The Tribunal observed that the IRP had confirmed that payments made by him were approved by the Committee of Creditors and disbursed through the designated bank account. The impugned payments, however, were made from a different bank account without IRP's authorization. The Appellant informed the IRP about these payments only after they were made, confirming lack of prior approval.
Key Evidence and Findings: The RP's email correspondence established that the impugned payments were unauthorized. The Appellant's own letter admitted the payments were made before IRP took charge and without IRP's consent.
Application of Law to Facts: The Tribunal held that payments made without IRP's authorization after moratorium declaration violate the IBC framework and are liable to be reversed.
Treatment of Competing Arguments: The Appellant contended that the officers acted under prior board directions and to maintain business continuity. The Tribunal rejected this, holding that the moratorium suspends the board's powers and vests exclusive control in the IRP, rendering such payments unauthorized.
Conclusions: Payments made without IRP's authorization post moratorium were illegal and subject to reversal.
Issue 4: Allegation of Arbitrary Selection of Vendors for Reversal of Payments
Court's Interpretation and Reasoning: The Appellant argued that the RP selectively sought reversal from certain vendors while not doing so for others. The Tribunal rejected this argument, holding that illegality cannot be condoned on grounds of parity or selective enforcement. The Tribunal emphasized that equality cannot be claimed in enforcing an illegal act.
Conclusions: The selective action by the RP did not invalidate the legality of the reversal of impugned payments.
Significant Holdings
"From a bare reading of Section 14(1)(b), the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be no transfer, encumbrance, alienation or disposal of the assets or any legal right or beneficial interests by the Corporate Debtor during the moratorium."
"Merely by advocating the criticality of clearing payments in the ordinary course of business to make the Corporate Debtor continue running as a going concern cannot constitute sufficient mitigating circumstances for not giving effect to the statutory provisions of moratorium as contained in Section 14."
"Howsoever, noble, genuine or well-meaning may have been the motive for the Appellant in releasing payments ... the statutory provision of moratorium as it stands, puts a clear and unambiguous embargo on releasing such payments."
"No action violating moratorium can be countenanced. Even for argument's sake, if we agree that in the present case, the date depicted on the three cheques co-relates with the date of cheque handing over, nonetheless, in view of the specific statutory provision of moratorium which precludes any such recovery, the cheques cannot be encashed after moratorium starts."
"We cannot allow equality to be claimed in wrong or illegal actions and encourage the claim of parity or equality for enforcing a wrong or illegal order."
The Tribunal affirmed the Adjudicating Authority's order directing the Appellant and Respondent Nos. 2 to 6 to be jointly and severally liable to refund Rs. 11.01 crore to the Corporate Debtor's assets. It also upheld the referral of the matter to the Insolvency and Bankruptcy Board of India for initiation of proceedings under Section 74(1) of the IBC for breach of moratorium.
Breach of moratorium - payments made by the Appellant after commencement of CIRP - whether there was any infirmity in the impugned order directing the reversal of the impugned transactions by the Appellant and Respondent No. 2 to 6 to the assets of the Corporate Debtor? - HELD THAT:- The moratorium becomes enforceable from the date the CIRP application is admitted or as indicated in the said order. The provisions of moratorium inter-alia provides for a stand-still period during which Financial or Operational creditors cannot resort to individual debt enforcement action in respect of debts which had accrued during the period prior to commencement of CIRP proceedings. Once moratorium has been declared upon the admission of Sections 7, 9 or 10 application, it is not open for any Financial or Operational creditor to recover any amount from the account of the Corporate Debtor except by filing claims through the resolution framework. A logical corollary that follows is that the suspended management of the Corporate Debtor is also strictly prohibited from directly or indirectly deploying the funds of the Corporate Debtor unilaterally, without the authorisation of IRP, to clear any dues of any Financial Creditor or Operational Creditor.
The Appellant has not denied having made these RTGS and cheque payments to Respondent Nos. 2 to 5. There is no averment contained therein that these payments had either been authorised by the IRP. The ostensible reason attributed for making these payments was that these payments were made in the ordinary course of business to run the day to day affairs of the Corporate Debtor as a going concern and had been made before IRP could take charge. The other ground cited was that even if the powers of the Board of Directors stood suspended, it did not suspend the actions of the officers of the Corporate Debtor.
It is a well-settled principle of interpretation of statutes that the meaning of the language employed by the legislature in a statutory provision has to be given effect to in terms of the plain wordings of the statute. This precludes any scope for altering the meaning of the language contained in the statute. On a plain reading of the language employed in Sections 13(1) and 14 of IBC, it is unequivocally clear that it is statutorily mandated that on the admission of a Corporate Debtor into CIRP by the Adjudicating Authority alongwith orders for appointment of IRP, the Adjudicating Authority shall by an order declare a moratorium - Once moratorium is declared, the suspended management of the Corporate Debtor has to willy-nilly and mandatorily abide by this clear and express provision contained in the IBC statute and cannot raise grounds of exception to the applicability of Section 14(1)(b) of IBC. Merely by advocating the criticality of clearing payments in the ordinary course of business to make the Corporate Debtor continue running as a going concern cannot constitute sufficient mitigating circumstances for not giving effect to the statutory provisions of moratorium as contained in Section 14.
Conclusion - It is abundantly clearly that an amount of Rs 11.01 Cr. was unauthorisedly transferred from the account of the Corporate Debtor to Respondent Nos. 2 to 5 after commencement of CIRP proceedings of the Corporate Debtor by way of nine RTGS payments and three cheque payments in clear breach of moratorium by the Appellant and Respondent No.6.
There are no error in the impugned order holding the Appellant and Respondent Nos. 2 to 6 to be jointly and severally liable to refund the said amount to the account of the Corporate Debtor - appeal dismissed.
Breach of moratorium - payments made by the Appellant after commencement of CIRP - whether there was any infirmity in the impugned order directing the reversal of the impugned transactions by the Appellant and Respondent No. 2 to 6 to the assets of the Corporate Debtor? - HELD THAT:- The moratorium becomes enforceable from the date the CIRP application is admitted or as indicated in the said order. The provisions of moratorium inter-alia provides for a stand-still period during which Financial or Operational creditors cannot resort to individual debt enforcement action in respect of debts which had accrued during the period prior to commencement of CIRP proceedings. Once moratorium has been declared upon the admission of Sections 7, 9 or 10 application, it is not open for any Financial or Operational creditor to recover any amount from the account of the Corporate Debtor except by filing claims through the resolution framework. A logical corollary that follows is that the suspended management of the Corporate Debtor is also strictly prohibited from directly or indirectly deploying the funds of the Corporate Debtor unilaterally, without the authorisation of IRP, to clear any dues of any Financial Creditor or Operational Creditor.
The Appellant has not denied having made these RTGS and cheque payments to Respondent Nos. 2 to 5. There is no averment contained therein that these payments had either been authorised by the IRP. The ostensible reason attributed for making these payments was that these payments were made in the ordinary course of business to run the day to day affairs of the Corporate Debtor as a going concern and had been made before IRP could take charge. The other ground cited was that even if the powers of the Board of Directors stood suspended, it did not suspend the actions of the officers of the Corporate Debtor.
It is a well-settled principle of interpretation of statutes that the meaning of the language employed by the legislature in a statutory provision has to be given effect to in terms of the plain wordings of the statute. This precludes any scope for altering the meaning of the language contained in the statute. On a plain reading of the language employed in Sections 13(1) and 14 of IBC, it is unequivocally clear that it is statutorily mandated that on the admission of a Corporate Debtor into CIRP by the Adjudicating Authority alongwith orders for appointment of IRP, the Adjudicating Authority shall by an order declare a moratorium - Once moratorium is declared, the suspended management of the Corporate Debtor has to willy-nilly and mandatorily abide by this clear and express provision contained in the IBC statute and cannot raise grounds of exception to the applicability of Section 14(1)(b) of IBC. Merely by advocating the criticality of clearing payments in the ordinary course of business to make the Corporate Debtor continue running as a going concern cannot constitute sufficient mitigating circumstances for not giving effect to the statutory provisions of moratorium as contained in Section 14.
Conclusion - It is abundantly clearly that an amount of Rs 11.01 Cr. was unauthorisedly transferred from the account of the Corporate Debtor to Respondent Nos. 2 to 5 after commencement of CIRP proceedings of the Corporate Debtor by way of nine RTGS payments and three cheque payments in clear breach of moratorium by the Appellant and Respondent No.6.
There are no error in the impugned order holding the Appellant and Respondent Nos. 2 to 6 to be jointly and severally liable to refund the said amount to the account of the Corporate Debtor - appeal dismissed.
- Whether the adjudicating authority (NCLT) erred in directing the Successful Resolution Applicant (SRA) to implement the revised resolution plan within two months, effectively modifying the resolution plan beyond its jurisdiction.
- Whether the SRA was justified in delaying implementation of the resolution plan due to pending regulatory approvals, specifically from the Reserve Bank of India (RBI), which were a condition precedent under the resolution plan.
- Whether the statutory timeline of one year under Section 31(4) of the Insolvency and Bankruptcy Code (IBC) for obtaining necessary approvals had been complied with by the SRA.
- Whether the invocation of the Performance Bank Guarantee (PBG) and initiation of liquidation proceedings against the corporate debtor were justified due to the SRA's failure to implement the resolution plan.
- Whether the appellant's contention that the resolution plan's closing date only commences after all regulatory approvals are obtained is consistent with the legal framework and the terms of the resolution plan.
- The scope and effect of the relevant provisions of the IBC and the Request for Resolution Plan (RFRP) regarding regulatory approvals and timelines.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Jurisdiction of the Adjudicating Authority to Direct Implementation Timeline
Relevant Legal Framework and Precedents:
The IBC empowers the adjudicating authority to approve resolution plans and supervise their implementation. Section 31(4) of the IBC mandates that the resolution applicant obtain necessary statutory and regulatory approvals within one year from the date of approval of the resolution plan by the adjudicating authority. Clause 3.1 of the RFRP similarly requires the SRA to obtain all requisite approvals within one year, clarifying that the Resolution Professional and Committee of Creditors (CoC) bear no responsibility for this.
Court's Interpretation and Reasoning:
The Court held that the direction to implement the resolution plan within two months was not a modification of the resolution plan but rather an extension of time granted by the adjudicating authority beyond the statutory one-year period. The adjudicating authority's order was a legitimate exercise of its supervisory jurisdiction to ensure timely implementation and not an impermissible alteration of the plan's terms.
Application of Law to Facts:
The resolution plan was approved on 03.02.2022. The application by SBI seeking directions to implement the plan was filed on 28.04.2023, well after the expiry of the one-year statutory period. The adjudicating authority's order dated 08.12.2023 directing implementation within two months was thus an extension, not a modification.
Treatment of Competing Arguments:
The appellant argued that the direction altered the resolution plan and was beyond the tribunal's jurisdiction. The Court rejected this, emphasizing the statutory timeline and supervisory role of the adjudicating authority.
Conclusion:
The adjudicating authority acted within its jurisdiction in directing the SRA to implement the resolution plan within two months.
Issue 2: Delay Due to Pending Regulatory Approvals from RBI
Relevant Legal Framework and Precedents:
Section 31(4) of the IBC requires the SRA to obtain necessary approvals within one year. Clause 3.1 of the RFRP places the onus on the SRA to obtain all statutory and regulatory approvals post-approval of the resolution plan. The Supreme Court's decision in Independent Sugar Corporation Ltd. clarified that mandatory statutory approvals must be obtained within prescribed timelines, and failure to do so can invalidate the plan.
Court's Interpretation and Reasoning:
The Court noted that the delay in obtaining RBI approvals was due to alleged contraventions of FEMA regulations by the corporate debtor, as pointed out by RBI in its communication dated 10.08.2023. The authorised dealer bank (PNB) had taken all necessary steps, including filing applications and responding to RBI queries. However, the approvals remained pending beyond the statutory period.
Key Evidence and Findings:
The affidavit filed by PNB detailed the transactions requiring RBI approval, including assignment of debt involving foreign financial creditors and conversion of debt into preference shares issued to foreign creditors. RBI's email indicated contraventions requiring compounding applications before approval could be granted.
Application of Law to Facts:
Despite regulatory hurdles, the Court emphasized that the obligation to secure approvals lay solely with the SRA, and the statutory timeline of one year had expired without approvals being obtained. The appellant's inability to secure RBI approval within the statutory period meant the resolution plan was not implemented as required.
Treatment of Competing Arguments:
The appellant contended that the closing date under the resolution plan only commenced after all approvals were obtained, thus excusing delay. The Court rejected this, holding that the statutory timeline under Section 31(4) is mandatory and cannot be circumvented by such conditions.
Conclusion:
The delay due to pending RBI approvals did not justify non-implementation beyond the statutory timeline, and the SRA failed to comply with the mandatory requirements.
Issue 3: Invocation of Performance Bank Guarantee and Initiation of Liquidation Proceedings
Relevant Legal Framework and Precedents:
Under the IBC, failure to implement a resolution plan within prescribed timelines and conditions can lead to invocation of guarantees and initiation of liquidation proceedings. The RFRP and resolution plan terms provide for invocation of bid bonds and performance guarantees in case of default.
Court's Interpretation and Reasoning:
The Court observed that the Joint Lenders Meeting (JLM) unanimously decided to invoke the PBG and file an application for liquidation due to the SRA's failure to implement the plan despite extensions and opportunities. The corporate debtor had been in CIRP since 2018, and only one resolution plan had been received but remained unimplemented for over three years.
Application of Law to Facts:
The PBG was invoked on 09.02.2024, and liquidation proceedings were initiated. The Court noted that the SRA's repeated requests for extensions and failure to deposit the resolution amount, despite offers to do so, indicated inability or unwillingness to implement the plan.
Treatment of Competing Arguments:
The appellant argued it was ready to deposit funds and implement the plan but was hindered by SBI's requirements and procedural delays. The Court found that these reasons were insufficient to justify prolonged non-implementation, especially given the limited amount subject to RBI approval relative to the total payout.
Conclusion:
Invocation of the PBG and initiation of liquidation proceedings were justified due to the SRA's breach of the resolution plan and failure to implement it within statutory and extended timelines.
Issue 4: Interpretation of the Resolution Plan's Closing Date and Conditions Precedent
Relevant Legal Framework and Precedents:
The resolution plan's Schedule I Clause 14 and Clause 3.1 of the RFRP set conditions precedent, including obtaining regulatory approvals. Section 31(4) of the IBC provides a one-year timeframe for obtaining necessary approvals.
Court's Interpretation and Reasoning:
The Court held that while the resolution plan contemplates conditions precedent, these cannot override the statutory timeline under the IBC. The closing date does not indefinitely await regulatory approvals, especially when the SRA is responsible for securing such approvals within one year.
Application of Law to Facts:
The appellant's contention that the closing date only starts after all approvals were obtained was rejected as inconsistent with the statutory mandate and the terms of the RFRP and resolution plan.
Treatment of Competing Arguments:
The appellant's reliance on regulatory delays as excusing non-implementation was not accepted.
Conclusion:
The closing date and timelines under the resolution plan must be read in conjunction with the mandatory statutory timelines under the IBC, precluding indefinite delays.
Issue 5: Applicability of Supreme Court Precedent on Withdrawal and Contractual Nature of Resolution Plan
Relevant Legal Framework and Precedents:
The appellant relied on the Supreme Court's judgment in Ebix Singapore Private Ltd. v. Committee of Creditors of Educomp Solutions Ltd., which held that the resolution plan embodies a commercial bargain with binding legal effect and that withdrawal of a resolution plan after approval is subject to judicial scrutiny.
Court's Interpretation and Reasoning:
The Court distinguished the present case, noting that the issue here was not withdrawal of the plan but failure to implement it within statutory timelines. The Ebix judgment did not support the appellant's contention that delay due to regulatory approvals justified non-implementation beyond the prescribed period.
Conclusion:
The precedent did not alter the obligation of the SRA to implement the plan within the statutory timeframe.
3. SIGNIFICANT HOLDINGS
"The resolution plan was approved by the adjudicating authority on 03.02.2022. The period of one year prescribed under Section 31(4) of the IBC for obtaining necessary approvals has long elapsed. The appellant having failed to obtain the necessary regulatory approvals within the statutory timeline, the resolution plan has not been implemented."
"The direction of the adjudicating authority to implement the resolution plan within two months from the date of the order dated 08.12.2023 is not a modification of the resolution plan but a supervisory direction to ensure timely implementation."
"The obligation to obtain all requisite statutory and regulatory approvals rests solely with the resolution applicant and cannot be delegated or excused on the ground of regulatory delays."
"Invocation of the Performance Bank Guarantee and initiation of liquidation proceedings are justified where the resolution applicant fails to implement the resolution plan within the prescribed timelines despite opportunities and extensions."
"The closing date and timelines under the resolution plan must be read in conjunction with the mandatory statutory timelines under the IBC, and conditions precedent cannot be used to indefinitely delay implementation."
"The appellant's contention that the resolution plan's implementation is pending solely due to regulatory approvals is not tenable in view of the statutory mandate and the facts on record."
"The appeal is dismissed, and the adjudicating authority is directed to decide the pending liquidation application preferably within three months from the date of production of this order."
Prayer for direction to the SRA to implement the revised resolution plan within 2 months - statutory timeline of one year under Section 31(4) of the Insolvency and Bankruptcy Code (IBC) for obtaining necessary approvals had been complied with by the SRA or not - HELD THAT:- The present is a case where there was no requirement obtaining any prior approval prior to approval of the resolution plan, however, under Section 31(4) all regulatory approval are to be obtained within a period of 1 year. When the approvals have not been obtained by SRA, who is under obligation to obtain the approval, it is not open to the SRA to contend that he could not obtain approval due to reason A or reason B. The fact remains that regulatory approval has not been obtained within a period of 1 year from passing the order approving the resolution plan. The fact remains that regulatory approval have not been obtained within a period of 1 year from the passing of the order, and even within a period extended by the NCLT by impugned order dated 08.12.2023, i.e.by 08.02.2023. There was sufficient ground to hold the plan has not implemented the application for liquidation, which is pending consideration before the adjudicating authority need to be proceeded.
Hon’ble Supreme Court in the judgement in Ebix Singapore Private Ltd. Vs. Committee of Creditors of Educomp Solutions Limited & Anr. [2021 (9) TMI 672 - SUPREME COURT] has held that terms of the resolution plan contain commercial bargain between the CoC and the resolution applicant and there is also intention to create legal relations with binding effect. It was also held that structure of the IBC confers legal force on the CoC approved resolution plan. The issue in the above case which came for consideration before the Hon’ble Supreme Court was as to whether after approval of the resolution plan by the CoC, whether the resolution plan can be allowed to be withdrawn by the resolution applicant by filing an application in the NCLT. In the above case, NCLT has allowed the application filed by the resolution applicant for withdrawal of the resolution plan, which gave rise to the appeal before this Tribunal, as well as before the Hon’ble Supreme Court.
Conclusion - The resolution plan was approved by the adjudicating authority on 03.02.2022. The period of one year prescribed under Section 31(4) of the IBC for obtaining necessary approvals has long elapsed. The appellant having failed to obtain the necessary regulatory approvals within the statutory timeline, the resolution plan has not been implemented.
Thus, no grounds have been made out to interfere with the impugned order dated 08.12.2023. The appeal is dismissed.
Prayer for direction to the SRA to implement the revised resolution plan within 2 months - statutory timeline of one year under Section 31(4) of the Insolvency and Bankruptcy Code (IBC) for obtaining necessary approvals had been complied with by the SRA or not - HELD THAT:- The present is a case where there was no requirement obtaining any prior approval prior to approval of the resolution plan, however, under Section 31(4) all regulatory approval are to be obtained within a period of 1 year. When the approvals have not been obtained by SRA, who is under obligation to obtain the approval, it is not open to the SRA to contend that he could not obtain approval due to reason A or reason B. The fact remains that regulatory approval has not been obtained within a period of 1 year from passing the order approving the resolution plan. The fact remains that regulatory approval have not been obtained within a period of 1 year from the passing of the order, and even within a period extended by the NCLT by impugned order dated 08.12.2023, i.e.by 08.02.2023. There was sufficient ground to hold the plan has not implemented the application for liquidation, which is pending consideration before the adjudicating authority need to be proceeded.
Hon’ble Supreme Court in the judgement in Ebix Singapore Private Ltd. Vs. Committee of Creditors of Educomp Solutions Limited & Anr. [2021 (9) TMI 672 - SUPREME COURT] has held that terms of the resolution plan contain commercial bargain between the CoC and the resolution applicant and there is also intention to create legal relations with binding effect. It was also held that structure of the IBC confers legal force on the CoC approved resolution plan. The issue in the above case which came for consideration before the Hon’ble Supreme Court was as to whether after approval of the resolution plan by the CoC, whether the resolution plan can be allowed to be withdrawn by the resolution applicant by filing an application in the NCLT. In the above case, NCLT has allowed the application filed by the resolution applicant for withdrawal of the resolution plan, which gave rise to the appeal before this Tribunal, as well as before the Hon’ble Supreme Court.
Conclusion - The resolution plan was approved by the adjudicating authority on 03.02.2022. The period of one year prescribed under Section 31(4) of the IBC for obtaining necessary approvals has long elapsed. The appellant having failed to obtain the necessary regulatory approvals within the statutory timeline, the resolution plan has not been implemented.
Thus, no grounds have been made out to interfere with the impugned order dated 08.12.2023. The appeal is dismissed.
The core legal questions considered by the Tribunal in these appeals are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Legality of dismissal of Section 9 application based solely on prior dismissals against different Corporate Debtors
Relevant legal framework and precedents: Section 9 of the IBC, 2016 allows an Operational Creditor to initiate insolvency resolution proceedings against a Corporate Debtor upon default in payment. The adjudicating authority is required to examine whether there is a valid debt and default and whether any pre-existing dispute exists. Precedents emphasize that each Section 9 application must be decided on its own facts and merits, and prior decisions involving different parties cannot be mechanically applied.
Court's interpretation and reasoning: The Tribunal observed that the impugned order dismissed the Section 9 application only on the ground that two earlier applications filed by the same Operational Creditor against different Corporate Debtors were dismissed by different Benches of the same Tribunal. The Court found this approach legally incorrect, as the Tribunal failed to consider the facts and evidence specific to the present case and instead relied on unrelated prior decisions.
Key evidence and findings: The Operational Creditor's claim arose from a High Sea Sale Agreement under which telecommunication devices in Semi Knocked Down (SKD) state and batteries were delivered. The claim involved a principal amount and interest calculated at 18% p.a. The prior cases cited by the Tribunal involved different Corporate Debtors and facts, including communications evidencing pre-existing disputes and allegations of fraud and forgery.
Application of law to facts: The Court held that the Tribunal was obliged to examine the facts and evidence in the present case independently. The existence of pre-existing disputes or other defenses must be assessed on the record of the specific application. The mere fact that earlier applications by the same Operational Creditor against different Corporate Debtors were dismissed could not justify dismissal without a detailed inquiry.
Treatment of competing arguments: The Operational Creditor argued that the impugned order was non-speaking and failed to address the merits. The Corporate Debtor relied on prior dismissals to contend that the present claim was similarly untenable. The Court rejected the latter approach as legally impermissible.
Conclusion: The dismissal of the Section 9 application solely on the basis of prior unrelated dismissals was improper. The matter requires fresh adjudication on the merits with a speaking order.
Issue 2: Dismissal of application for punitive proceedings under Section 65 and Section 76 of the IBC
Relevant legal framework and precedents: Sections 65 and 76 of the IBC provide for punitive action against parties who initiate proceedings fraudulently or maliciously or suppress material facts. Rule 11 of the NCLT Rules, 2016 governs the procedure for such applications. The adjudicating authority must consider the evidence and pass a reasoned order.
Court's interpretation and reasoning: The application filed by the Corporate Debtor seeking punitive proceedings against the Operational Creditor was dismissed by the Tribunal merely on the ground that the main Section 9 application was dismissed. The Court found this to be an erroneous approach, as the punitive application required independent consideration and a speaking order.
Key evidence and findings: The Corporate Debtor alleged fraudulent and malicious initiation of the Section 9 proceedings and deliberate non-disclosure of pre-existing disputes. The Tribunal did not examine these allegations or the evidence presented.
Application of law to facts: The Court held that dismissal of the punitive application on the basis of dismissal of the main application without any deliberation on the merits was legally untenable. The application must be decided on its own facts and evidence.
Treatment of competing arguments: The Corporate Debtor contended that the Operational Creditor acted fraudulently, while the Operational Creditor relied on dismissal of the main application to argue that the punitive application was not maintainable. The Court emphasized the need for separate adjudication.
Conclusion: The dismissal of the punitive application without a speaking order and independent consideration was improper and requires fresh adjudication.
Issue 3: Non-speaking nature of the impugned orders and failure to consider facts and evidence
Relevant legal framework and precedents: Principles of natural justice and judicial discipline require that orders passed by adjudicating authorities be speaking orders, addressing the material facts, evidence, and legal contentions. Non-speaking orders are liable to be set aside.
Court's interpretation and reasoning: The Court observed that the impugned order dismissed the Section 9 application and the punitive application without examining the facts and evidence of the present case and without passing a reasoned order. The Tribunal relied on prior decisions without detailing the factual matrix of the present case or explaining the applicability of those decisions.
Key evidence and findings: The prior orders relied upon involved different Corporate Debtors and facts, including communications evidencing pre-existing disputes and allegations of fraud. The present case involved a distinct High Sea Sale Agreement and a substantial claim for principal and interest.
Application of law to facts: The Court emphasized that the Tribunal was duty-bound to analyze the facts and evidence before it and pass a reasoned, speaking order. The failure to do so rendered the impugned order non-speaking and legally unsustainable.
Treatment of competing arguments: The Operational Creditor challenged the impugned order as non-speaking and arbitrary. The Corporate Debtor relied on prior dismissals to justify the impugned order. The Court rejected the latter approach as contrary to law.
Conclusion: The impugned orders are non-speaking and require to be set aside for fresh adjudication on merits.
3. SIGNIFICANT HOLDINGS
The Court held: "The Tribunal has not deliberated upon the facts given in IB-998(ND)/2020 and the evidence and has simply relied upon earlier decisions dated 15.11.2021 and 14.09.2023 which are against different CD's which has no nexus with the facts of the present case."
It was further observed: "For the purposes of holding that there is a similarity in the case setup by the appellant in the first appeal with the two cases decided on 15.11.2021 and 14.09.2023, it was incumbent upon the Tribunal to have referred to the facts of all the three cases in detail."
Core principles established include:
Final determinations:
Dismissal of application filed under Section 9 of the IBC, 2016 - dismissal of first appeal only on the ground that earlier two applications filed by the same operational creditor against different Corporate Debtors were dismissed by two different Benches of the same Tribunal - dismissal of second appeal only on the ground that the main petition bearing CP (IB) 998 (ND) 2020) filed by the Operational Creditor (appellant in the first appeal) has been dismissed.
HELD THAT:- The Tribunal has not deliberated upon the facts given in IB-998(ND)/2020 and the evidence and has simply relied upon earlier decisions dated 15.11.2021 and 14.09.2023 which are against different CD’s which has no nexus with the facts of the present case because in the case decided on 15.11.2021, the Tribunal has noticed that there was communications between the parties dated 23.04.2018, 04.10.2018 and 24.10.2018, relied upon by the Corporate Debtor, which were prior to the issuance of demand notice dated 11.12.2019 in which the Corporate Debtor had raised a dispute about quantum of debt due and payable by the Corporate Debtor, therefore, there was an issue of pre-existing dispute.
In the case decided on 14.09.2023, the court has noticed the contention of the corporate debtor that there are communications of fraud and forgery made by the Corporate Debtor but the Tribunal has held that it is not expected to ascertain the veracity of documents produced and dismissed the application.
For the purposes of holding that there is a similarity in the case setup by the appellant in the first appeal with the two cases decided on 15.11.2021 and 14.09.2023, it was incumbent upon the Tribunal to have referred to the facts of all the three cases in detail.
Secondly, the application filed under Section 9 has to be decided on its own facts because the court has to find out as to whether the defence taken by the corporate debtor is sufficient for the purpose of dismissal of the application or the same is only moonshine defence.
Conclusion - i) The impugned order dismissing the Section 9 application solely on the basis of prior dismissals is set aside. ii) The impugned order dismissing the punitive application without a speaking order is set aside.
The impugned order in both the appeals is set aside and the matter is remanded back to the Tribunal with a direction to decide the lis between the parties afresh by passing a speaking order. The parties shall appear before the Tribunal on 21.07.2025 - Petition allowed by way of remand.
Dismissal of application filed under Section 9 of the IBC, 2016 - dismissal of first appeal only on the ground that earlier two applications filed by the same operational creditor against different Corporate Debtors were dismissed by two different Benches of the same Tribunal - dismissal of second appeal only on the ground that the main petition bearing CP (IB) 998 (ND) 2020) filed by the Operational Creditor (appellant in the first appeal) has been dismissed.
HELD THAT:- The Tribunal has not deliberated upon the facts given in IB-998(ND)/2020 and the evidence and has simply relied upon earlier decisions dated 15.11.2021 and 14.09.2023 which are against different CD’s which has no nexus with the facts of the present case because in the case decided on 15.11.2021, the Tribunal has noticed that there was communications between the parties dated 23.04.2018, 04.10.2018 and 24.10.2018, relied upon by the Corporate Debtor, which were prior to the issuance of demand notice dated 11.12.2019 in which the Corporate Debtor had raised a dispute about quantum of debt due and payable by the Corporate Debtor, therefore, there was an issue of pre-existing dispute.
In the case decided on 14.09.2023, the court has noticed the contention of the corporate debtor that there are communications of fraud and forgery made by the Corporate Debtor but the Tribunal has held that it is not expected to ascertain the veracity of documents produced and dismissed the application.
For the purposes of holding that there is a similarity in the case setup by the appellant in the first appeal with the two cases decided on 15.11.2021 and 14.09.2023, it was incumbent upon the Tribunal to have referred to the facts of all the three cases in detail.
Secondly, the application filed under Section 9 has to be decided on its own facts because the court has to find out as to whether the defence taken by the corporate debtor is sufficient for the purpose of dismissal of the application or the same is only moonshine defence.
Conclusion - i) The impugned order dismissing the Section 9 application solely on the basis of prior dismissals is set aside. ii) The impugned order dismissing the punitive application without a speaking order is set aside.
The impugned order in both the appeals is set aside and the matter is remanded back to the Tribunal with a direction to decide the lis between the parties afresh by passing a speaking order. The parties shall appear before the Tribunal on 21.07.2025 - Petition allowed by way of remand.
1. Whether the Corporate Debtor is a solvent and financially viable company, thereby precluding initiation of CIRP under Section 7 of the Code.
2. The applicability and interpretation of the Supreme Court's ruling in Vidarbha Industries Power Ltd. regarding temporary defaults and solvency in the context of CIRP initiation.
3. The validity and sufficiency of the financial creditor's claim of default and overdue payments, considering the Corporate Debtor's repayments and financial commitments.
4. The relevance and viability of alleged settlement offers and third-party financial support proposed to resolve outstanding dues.
5. The impact of the initiation of CIRP on stakeholders, particularly homebuyers, and the consideration of their interests in the insolvency proceedings.
6. Whether the Adjudicating Authority properly exercised its discretion under the Code and considered all relevant facts and legal principles before admitting the Section 7 petition.
Issue-wise Detailed Analysis:
1. Viability and Solvency of the Corporate Debtor and CIRP Initiation
The legal framework governing this issue is Section 7 of the Code, which allows a financial creditor to initiate CIRP upon default by the Corporate Debtor. The Supreme Court's decision in Vidarbha Industries Power Ltd. (2022) provides a critical precedent, holding that CIRP should not be initiated against solvent companies facing temporary financial distress.
The Appellant argued that the Corporate Debtor was solvent and financially viable, having repaid a substantial portion of the loan (Rs. 33 Crores out of Rs. 64.5 Crores), having receivables from sales, and ongoing efforts to settle dues, including a proposed Rs. 35 Crores settlement offer. The Appellant contended that the Adjudicating Authority erred in admitting the Section 7 petition without adequately considering these facts and the Vidarbha precedent.
The Respondent Financial Creditor disputed these claims, highlighting that the account had been classified as a Non-Performing Asset since December 2020 with no significant repayments thereafter, and the default was prolonged beyond two years. The Financial Creditor emphasized that despite selling 301 of 330 units, the Corporate Debtor failed to clear dues, undermining its claim of solvency.
The Court analyzed the facts and noted that the Adjudicating Authority had rightly observed that project completion alone is not determinative of financial health. The Adjudicating Authority's reasoning underscored that the Corporate Debtor's failure to repay dues despite substantial sales and the speculative nature of the third-party comfort letter (Rs. 20 Crores) did not constitute exceptional circumstances to withhold CIRP initiation.
The Court distinguished the present case from Vidarbha Industries Power Ltd., noting that in Vidarbha, the debtor had a realistic prospect of repayment backed by pending adjudications and substantial funds exceeding dues. In contrast, here, no material evidence demonstrated the Corporate Debtor's ability to repay outstanding debts or complete the project.
Thus, the Court concluded that the Corporate Debtor was not a viable company entitled to protection under the Vidarbha ratio, and the initiation of CIRP was justified.
2. Evaluation of Settlement Offers and Third-Party Support
The Appellant relied on a Memorandum of Understanding with the Lotus 300 Buyers Association, promoter infusions of funds, and a settlement proposal by Ace Infracity Developers Pvt. Ltd. to pay Rs. 35 Crores over 18 months. Additionally, a Rs. 20 Crores comfort letter from Three C Residency Pvt. Ltd. was cited as evidence of financial support.
The Financial Creditor refuted these claims, stating no concrete settlement offer existed, and the Rs. 20 Crores comfort letter was speculative and not relied upon. The Court noted that the Adjudicating Authority had considered these submissions and found no credible evidence that these proposals were viable or would materialize to clear dues.
The Court observed that the absence of materialization of these offers and the Financial Creditor's rejection of settlement proposals negated the Appellant's argument for withholding CIRP.
3. Impact on Homebuyers and Stakeholders' Interests
The Lotus 300 Apartment Owners' Association intervened, opposing the Appellant's contentions and highlighting alleged misappropriation of funds by promoters, unauthorized sale of project land, and substantial investments made by homebuyers to complete the project. They argued that the project was nearly complete, and CIRP initiation threatened homebuyers' interests and delayed project completion.
The Association contended that the project was fully funded by homebuyers and the external loan was collusive, aimed at siphoning funds. They sought protective measures, including restraining the Resolution Professional and directing recovery of misappropriated funds.
The Court acknowledged these submissions but clarified that the present appeal's scope was limited to the question of admitting the Section 7 petition and initiating CIRP, and not to adjudicate on alleged fraud or misappropriation claims.
The Court noted that the Adjudicating Authority had not erred in admitting CIRP despite homebuyers' interests and that the Code's objective is to resolve the Corporate Debtor's financial distress, which ultimately serves the interests of all creditors including homebuyers.
4. Exercise of Discretion by the Adjudicating Authority
The Appellant challenged the Impugned Order as mechanically passed without due consideration of financial viability and ongoing efforts to resolve dues.
The Court reviewed the Adjudicating Authority's reasoning, which explicitly addressed the Appellant's submissions, including the project's near completion, the speculative nature of third-party undertakings, and the failure to repay dues despite sales.
The Adjudicating Authority emphasized that CIRP initiation does not equate to liquidation and is aimed at resolution. It rejected the argument that project completion alone should prevent CIRP.
The Court found no error or misapplication of law in the Adjudicating Authority's exercise of discretion and upheld the Impugned Order.
5. Subsequent Developments and Compliance with Interim Orders
The Appellate Tribunal had earlier granted interim relief by staying constitution of the Committee of Creditors and allowing the project to continue with due oversight. However, the project remained incomplete after nearly three years, and the Appellant failed to demonstrate steps taken to complete the project or satisfy financial dues.
This failure further undermined the Appellant's claim of solvency and ability to resolve financial distress without CIRP.
Significant Holdings:
"Had the company been a financially sound entity, it would not have defaulted in payment of its dues to the Applicant Bank. Hence, in our view, the completion of a Project cannot be the sole parameter to judge the overall health and viability of a company."
"Any company which is admitted into the CIRP is attempted to be revived/ resolved first and mere admission of a company into CIRP does not directly result in its instant liquidation or dissolution under the Scheme of IBC."
"Despite the claim of selling the most of the units (301 out of the 330 units as pleaded by the Respondent in its Reply) in the Project, the Respondent has failed to repay its financial debt, therefore, there is no exceptional case made out whereby despite default, the CIRP shall not be initiated against the Respondent."
Core principles established include that CIRP initiation under Section 7 is justified where default is proved and the Corporate Debtor fails to demonstrate solvency or exceptional circumstances to withhold proceedings. Project completion status is not determinative of financial viability. Speculative or unmaterialized settlement proposals do not preclude CIRP. The Code's objective is resolution, not liquidation, and the Adjudicating Authority's discretion must be exercised considering all relevant facts.
Final determinations on the issues are that the Corporate Debtor was not financially viable or solvent to avoid CIRP initiation; the Adjudicating Authority rightly admitted the Section 7 petition; the Appellant's reliance on Vidarbha Industries Power Ltd. was misplaced; and the appeal was devoid of merit and rejected.
Admissibility of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 against a Corporate Debtor - case of appellant is that Corporate Debtor is a viable company and should not have been initiated into CIRP - whether the Corporate Debtor is a viable company which entitles the Corporate Debtor to be covered under the ratio of Vidarbha Industries Power Ltd. - HELD THAT:- After going through all the facts of the case, especially the financial status of the Appellant as Promoters of the Corporate debtor and the reason the Appellant sought invoking protection of Vidarbha Industries Power Ltd. case, it is not convinced with the same.
There are no adequate resources available with the Appellant, which could have been utilised by the Appellant as Promoters of the Corporate Debtor to settle the Financial Creditors including the Respondent No. 1 & 3.
It is also worthwhile to note that the project was to be completed in the year 2014 and even in the current year of 2025, the towers are yet to be completed along with other facilities and dues of NOIDA Authority are still to be paid. The contesting Respondent i.e., IndusInd Bank Limited/ Respondent No. 1 herein as well as Intervenor Homebuyers who constitute the CoC have also refuted the claims of the Appellant.
Conclusion - The Corporate Debtor is not financially viable or solvent to avoid CIRP initiation; The Adjudicating Authority rightly admitted the Section 7 petition; The Appellant's reliance on Vidarbha Industries Power Ltd. is misplaced.
There are no error in the Impugned Order - appeal dismissed.
Admissibility of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 against a Corporate Debtor - case of appellant is that Corporate Debtor is a viable company and should not have been initiated into CIRP - whether the Corporate Debtor is a viable company which entitles the Corporate Debtor to be covered under the ratio of Vidarbha Industries Power Ltd. - HELD THAT:- After going through all the facts of the case, especially the financial status of the Appellant as Promoters of the Corporate debtor and the reason the Appellant sought invoking protection of Vidarbha Industries Power Ltd. case, it is not convinced with the same.
There are no adequate resources available with the Appellant, which could have been utilised by the Appellant as Promoters of the Corporate Debtor to settle the Financial Creditors including the Respondent No. 1 & 3.
It is also worthwhile to note that the project was to be completed in the year 2014 and even in the current year of 2025, the towers are yet to be completed along with other facilities and dues of NOIDA Authority are still to be paid. The contesting Respondent i.e., IndusInd Bank Limited/ Respondent No. 1 herein as well as Intervenor Homebuyers who constitute the CoC have also refuted the claims of the Appellant.
Conclusion - The Corporate Debtor is not financially viable or solvent to avoid CIRP initiation; The Adjudicating Authority rightly admitted the Section 7 petition; The Appellant's reliance on Vidarbha Industries Power Ltd. is misplaced.
There are no error in the Impugned Order - appeal dismissed.
1. Whether the termination of the Corporate Insolvency Resolution Process ("CIRP") of the Corporate Debtor by the Adjudicating Authority was justified, particularly when sufficient funds were available to repay the Operational Creditors.
2. Whether the Committee of Creditors ("CoC") acted with malafide intent in refusing to accept a settlement proposal that would have cleared the admitted operational debts and thereby prematurely or unnecessarily prolonged the CIRP.
3. Whether the Resolution Professional ("RP") acted diligently and in accordance with statutory duties, or whether the RP colluded with the CoC to prolong the CIRP and charge excessive fees and costs.
4. The appropriateness of the reduction of the RP's fees and the validity of the Adjudicating Authority's observations regarding the RP's conduct.
Issue 1: Justification for Termination of CIRP and Refusal of Settlement by CoC
The legal framework governing CIRP under the IBC aims to facilitate insolvency resolution "in a time-bound manner" for maximization of asset value and revival of the Corporate Debtor, balancing interests of all stakeholders. The Supreme Court's precedent in E.S. Krishnamurthy v. Bharath Hi-Tech Builders (2022) 3 SCC 161 was relied upon, emphasizing that settlements should be encouraged to enable rehabilitation rather than liquidation.
The Tribunal noted that the Corporate Debtor had a cash balance of approximately Rs 7 crore during the CIRP, which was more than sufficient to repay the admitted operational debt of Rs 26.76 lakhs owed to the three Operational Creditors constituting the CoC. The ITNL, a related party, had claimed Rs 181 crore, which was disputed and subject to litigation regarding their status and inclusion in the CoC.
The Adjudicating Authority had directed the RP to convene CoC meetings to explore settlement possibilities, including a proposal by ITNL to pay off the Operational Creditors in full and withdraw their claims. However, the Operational Creditor with 89.54% voting share (RCPL) refused to accept the settlement, raising objections based on procedural and substantive grounds, including questioning ITNL's locus and alleging fraudulent transactions.
The Tribunal found that the refusal of the Operational Creditors to accept full repayment lacked cogent reasons and appeared motivated by "hidden motives" or "ulterior and dubious motives" unrelated to insolvency resolution. The Adjudicating Authority's reliance on Rule 11 of the NCLT Rules, 2016, which confers inherent powers to prevent abuse of process, was upheld. The Tribunal also referenced Vallal RCK v. Siva Industries & Holdings Ltd. (2022) 9 SCC 803, which clarified that courts should not interfere with the commercial wisdom of the CoC unless their decisions are arbitrary or irrational.
Applying these principles, the Tribunal concluded that the Adjudicating Authority rightly terminated the CIRP as continuation was unwarranted given the Corporate Debtor's liquidity and the CoC's refusal to accept repayment. The prolongation was deemed an abuse of the IBC process.
Issue 2: Alleged Malafide Conduct of CoC and RP in Prolonging CIRP
The Adjudicating Authority had observed that the CIRP had dragged on for over four and a half years despite the Corporate Debtor's ability to repay the operational debts early on. The RP's fees and CIRP costs had ballooned to Rs 73.31 lakhs, nearly three times the admitted debt of the CoC, suggesting misuse of the process for private gain.
The RP and CoC contended that the delay was caused primarily due to ITNL's persistent litigation to secure a seat in the CoC, including the filing of IA No. 100 of 2020 challenging their "related-party" classification. The Adjudicating Authority's interim stay of CIRP from August 2020 to March 2021 further prolonged the process.
The Tribunal accepted that the protracted litigation by ITNL was a significant cause of delay and that the RP could not be held responsible for the extended CIRP period. It was noted that the RP had no mandate to propose settlements and that ITNL's settlement offer was complicated by ongoing allegations of fraudulent transactions under Sections 66 and 67 of the IBC.
However, the Tribunal concurred with the Adjudicating Authority's finding that the RP had charged fees during the CIRP stay period, which was impermissible. The RP's claim for Rs 7,09,090/- for the stay period was held to be unlawful, as supported by precedent from this Tribunal in Indus Ind Bank Ltd. v. Rajendra K Bhuta. Further, the increase in RP's fees from Rs 1,00,000/- to Rs 2,00,000/- per month was questioned since the CIRP began before the applicability of Schedule-II of CIRP Regulations prescribing minimum fees.
Overall, while the RP was not responsible for the litigation-induced delay, the Tribunal found merit in the reduction of remuneration due to excessive fees and costs relative to the admitted debt, and the charging of fees during the stay period was improper.
Issue 3: RP's Compliance with Statutory Duties and Conduct During CIRP
ITNL alleged multiple failures by the RP, including non-filing of annual returns and financial statements, failure to hold AGMs, and non-compliance with income tax and GST filings. The RP countered that all statutory duties were diligently performed, including contesting tax assessments, recovering amounts from fraudulent transactions, and protecting assets despite non-cooperation from the Corporate Debtor.
The Tribunal refrained from detailed adjudication of these compliance issues, focusing instead on the broader question of whether the RP acted as a prudent business person preserving stakeholder interests. The disproportionate CIRP costs relative to the admitted debt and continuation of CIRP despite sufficient funds suggested imprudence. Nonetheless, the Tribunal recognized that the RP undertook various efforts to preserve value and manage the Corporate Debtor, albeit with some lapses.
Issue 4: Reduction of RP's Fees and Expunging Remarks
The Adjudicating Authority reduced the RP's fees to Rs 50,000/- per month for the CIRP duration and directed refund of excess remuneration, citing lack of necessity for prolonged CIRP and improper fee claims during the stay period. The RP challenged this reduction and sought expunction of adverse remarks regarding conduct and performance.
The Tribunal upheld the reduction of fees, emphasizing the need to align remuneration with the scale of admitted claims and the duration of CIRP. The charging of fees during the stay period was specifically disallowed. However, the Tribunal did not expressly order expunction of remarks but acknowledged that some observations were punitive and unsubstantiated.
Significant Holdings and Core Principles Established
"The ultimate purpose of IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation."
"Settlements have to be encouraged because the ultimate purpose of IBC is to facilitate the continuance and rehabilitation of a corporate debtor."
"The Adjudicating Authority or the Appellate Authority cannot sit in appeal over the commercial wisdom of CoC unless the decision is wholly capricious, arbitrary, irrational and dehors the provisions of the statute or the Rules."
"It is a clear case of some hidden motives and misuse of IBC and apparently gives rise to the suspicion of understanding among certain parties to continue the CIRP for some oblique purpose and till the amount lying in the account of the Corporate Debtor is exhausted."
"The fee of the Resolution Professional cannot be charged for the duration of a stay on CIRP."
"The Adjudicating Authority has inherent powers under Rule 11 of NCLT Rules, 2016 to prevent abuse of the process of the Tribunal."
Final determinations included:
Termination of the Corporate Insolvency Resolution Process ("CIRP") of the Corporate Debtor by the Adjudicating Authority - sufficient funds were available to repay the Operational Creditors - Correctness of decision of the CoC to decline the proposal for acceptance - dragging on with the CIRP proceedings and in the process incurring an exorbitant expenditure towards CIRP cost was arbitrary and unsustainable or not - HELD THAT:- From the deliberations of the seventh CoC meeting, it becomes clear that RCPL has only raised doubts and questions on ITNL’s locus and standing with respect to the settlement proposal but cleverly skirted to address the more relevant and pertinent question as to why the Operational Creditors were unwilling to claim their dues when it was being fully repaid. When sufficient fund was already available with the Corporate Debtor to liquidate the debt of the Corporate Debtor, there are no cogent reasons offered by the Operational Creditors in declining to accept their entire admitted claim and closing the CIRP.
The Adjudicating Authority has relied on the judgment of Hon’ble Supreme Court in the matter of E.S. Krishnamurthy Vs Bharath Hi-Tech Builders (P) Ltd. [2021 (12) TMI 683 - SUPREME COURT] wherein it has been clearly held that ultimate purpose of IBC is to facilitate insolvency resolution so as to put the Corporate Debtor back on its feet so as to ensure revival and continuance of the Corporate Debtor.
At a time when there was Rs 7 Cr. in the bank account of the Corporate Debtor while the total claim of the Operational Creditors was merely Rs. 26 lakhs, there was no reason for continuing on with the CIRP proceeding. When 100% of the admitted debt of the CoC was being satisfied and yet not being accepted by CoC members, the Adjudicating Authority had not committed any mistake in inferring that there was some other hidden motive on the part of the Operational Creditors to continue with the CIRP.
It is well settled that IBC is a beneficial legislation intending to bring back the Corporate Debtor on its feet without letting the value of the assets of the Corporate Debtor suffer a beating. Hence CIRP proceedings against the Corporate Debtor, when pursued coercively or mindlessly, it becomes violative of the quintessential spirit of the insolvency resolution framework. In the present facts of the case, when the Corporate Debtor had sufficient finances in its kitty and was indubitably in a position to wipe off and repay the operational debt qua the three Operational Creditors who are the only members of the CoC and full liability was proposed to be discharged, there seems to have been no rational basis for the Operational Creditors to decline from accepting their outstanding dues. What comes to notice is stubborn reluctance on the part of CoC members to accept the repayment of the operational debt, making it clear that the three Operational Creditors who constituted the CoC were trying to scuttle the resolution of the Corporate Debtor and more interested in pushing the Corporate Debtor into insolvency rather than salvaging the Corporate Debtor from the perils of corporate death - The RCPL with majority stake in the CoC has been trying to take undue advantage of the situation and was being actuated by some other ulterior and dubious motives which had nothing to do with insolvency resolution. This amounts to misuse and abuse of the provisions of IBC. Based on the totality of circumstances, it is convinced that the intent behind continuing of the CIRP proceedings by the Operational Creditor was clearly for reasons other than insolvency resolution.
Whether the RP was working in collusion with RCPL and CoC in dragging on with the CIRP proceedings and in the process charging hefty fees and ballooning the CIRP costs? - HELD THAT:- What needs to be seen is whether the RP who is supposed to run the Corporate Debtor as a prudent business person by preserving the all-round interests of all stakeholders lived up to that role appropriately without any arbitrary personal gain. It is an undisputed fact that for an admitted debt of Rs 26 lakhs, the CIRP was allowed to drag on for a four and half years. In contrast to a paltry sum of Rs 26 lakhs of admitted debt, the CIRP cost had inflated to Rs 73 lakhs which was three times the admitted debt of the CoC which on the face of it shows that the Corporate Debtor was burdened with unnecessary and exorbitant expenditure. The CIRP cost had clearly mounted on account of the fees of the RP which was increased from Rs 1,00,000/- to Rs 2,00,000/- per month in the fourth CoC meeting held on 20.03.2020. We also find that the RP had continued to charge fees even when the CIRP had remained stayed from 05.08.2020 to 16.03.2021. The Adjudicating Authority had also relied on the judgment of this Tribunal in Indus Ind Bank Ltd. Vs Rajendra K Bhuta [2022 (4) TMI 1657 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI] wherein it was held that the fee of RP cannot be charged for the duration of a stay on CIRP.
The impugned order had not committed any infirmity in directing that RP was to receive only remuneration of Rs 50,000/- per month totalling Rs 21.45 lakhs besides directing the refund of the excess amount of remuneration paid to the RP.
As the admitted dues of the Operational Creditors when squared off against the liability of proportionate CIRP costs to be borne by the CoC, a balance amount had become recoverable from the CoC and no dues in respect of the admitted claim of the CoC members survived, the Adjudicating Authority has rightly terminated the CIRP of the Corporate Debtor.
Conclusion - i) The termination of CIRP was justified due to the availability of sufficient funds to repay Operational Creditors and the refusal of CoC members to accept repayment, indicating misuse of the insolvency process. ii) The RP's charging of fees during the CIRP stay period was unlawful, and the overall remuneration was disproportionate to the admitted debt, warranting reduction. iii) The Adjudicating Authority's directions for CoC members to proportionately bear CIRP costs were appropriate given the misuse of Corporate Debtor's funds.
Appeal dismissed.
Termination of the Corporate Insolvency Resolution Process ("CIRP") of the Corporate Debtor by the Adjudicating Authority - sufficient funds were available to repay the Operational Creditors - Correctness of decision of the CoC to decline the proposal for acceptance - dragging on with the CIRP proceedings and in the process incurring an exorbitant expenditure towards CIRP cost was arbitrary and unsustainable or not - HELD THAT:- From the deliberations of the seventh CoC meeting, it becomes clear that RCPL has only raised doubts and questions on ITNL’s locus and standing with respect to the settlement proposal but cleverly skirted to address the more relevant and pertinent question as to why the Operational Creditors were unwilling to claim their dues when it was being fully repaid. When sufficient fund was already available with the Corporate Debtor to liquidate the debt of the Corporate Debtor, there are no cogent reasons offered by the Operational Creditors in declining to accept their entire admitted claim and closing the CIRP.
The Adjudicating Authority has relied on the judgment of Hon’ble Supreme Court in the matter of E.S. Krishnamurthy Vs Bharath Hi-Tech Builders (P) Ltd. [2021 (12) TMI 683 - SUPREME COURT] wherein it has been clearly held that ultimate purpose of IBC is to facilitate insolvency resolution so as to put the Corporate Debtor back on its feet so as to ensure revival and continuance of the Corporate Debtor.
At a time when there was Rs 7 Cr. in the bank account of the Corporate Debtor while the total claim of the Operational Creditors was merely Rs. 26 lakhs, there was no reason for continuing on with the CIRP proceeding. When 100% of the admitted debt of the CoC was being satisfied and yet not being accepted by CoC members, the Adjudicating Authority had not committed any mistake in inferring that there was some other hidden motive on the part of the Operational Creditors to continue with the CIRP.
It is well settled that IBC is a beneficial legislation intending to bring back the Corporate Debtor on its feet without letting the value of the assets of the Corporate Debtor suffer a beating. Hence CIRP proceedings against the Corporate Debtor, when pursued coercively or mindlessly, it becomes violative of the quintessential spirit of the insolvency resolution framework. In the present facts of the case, when the Corporate Debtor had sufficient finances in its kitty and was indubitably in a position to wipe off and repay the operational debt qua the three Operational Creditors who are the only members of the CoC and full liability was proposed to be discharged, there seems to have been no rational basis for the Operational Creditors to decline from accepting their outstanding dues. What comes to notice is stubborn reluctance on the part of CoC members to accept the repayment of the operational debt, making it clear that the three Operational Creditors who constituted the CoC were trying to scuttle the resolution of the Corporate Debtor and more interested in pushing the Corporate Debtor into insolvency rather than salvaging the Corporate Debtor from the perils of corporate death - The RCPL with majority stake in the CoC has been trying to take undue advantage of the situation and was being actuated by some other ulterior and dubious motives which had nothing to do with insolvency resolution. This amounts to misuse and abuse of the provisions of IBC. Based on the totality of circumstances, it is convinced that the intent behind continuing of the CIRP proceedings by the Operational Creditor was clearly for reasons other than insolvency resolution.
Whether the RP was working in collusion with RCPL and CoC in dragging on with the CIRP proceedings and in the process charging hefty fees and ballooning the CIRP costs? - HELD THAT:- What needs to be seen is whether the RP who is supposed to run the Corporate Debtor as a prudent business person by preserving the all-round interests of all stakeholders lived up to that role appropriately without any arbitrary personal gain. It is an undisputed fact that for an admitted debt of Rs 26 lakhs, the CIRP was allowed to drag on for a four and half years. In contrast to a paltry sum of Rs 26 lakhs of admitted debt, the CIRP cost had inflated to Rs 73 lakhs which was three times the admitted debt of the CoC which on the face of it shows that the Corporate Debtor was burdened with unnecessary and exorbitant expenditure. The CIRP cost had clearly mounted on account of the fees of the RP which was increased from Rs 1,00,000/- to Rs 2,00,000/- per month in the fourth CoC meeting held on 20.03.2020. We also find that the RP had continued to charge fees even when the CIRP had remained stayed from 05.08.2020 to 16.03.2021. The Adjudicating Authority had also relied on the judgment of this Tribunal in Indus Ind Bank Ltd. Vs Rajendra K Bhuta [2022 (4) TMI 1657 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI] wherein it was held that the fee of RP cannot be charged for the duration of a stay on CIRP.
The impugned order had not committed any infirmity in directing that RP was to receive only remuneration of Rs 50,000/- per month totalling Rs 21.45 lakhs besides directing the refund of the excess amount of remuneration paid to the RP.
As the admitted dues of the Operational Creditors when squared off against the liability of proportionate CIRP costs to be borne by the CoC, a balance amount had become recoverable from the CoC and no dues in respect of the admitted claim of the CoC members survived, the Adjudicating Authority has rightly terminated the CIRP of the Corporate Debtor.
Conclusion - i) The termination of CIRP was justified due to the availability of sufficient funds to repay Operational Creditors and the refusal of CoC members to accept repayment, indicating misuse of the insolvency process. ii) The RP's charging of fees during the CIRP stay period was unlawful, and the overall remuneration was disproportionate to the admitted debt, warranting reduction. iii) The Adjudicating Authority's directions for CoC members to proportionately bear CIRP costs were appropriate given the misuse of Corporate Debtor's funds.
Appeal dismissed.
The core legal questions considered by the Tribunal in these appeals are:
(I) (A) Whether the Interim Resolution Professional (IRP) appointed by the Adjudicating Authority was lawfully appointed as the Resolution Professional (RP) by the Committee of Creditors (CoC) in accordance with the Insolvency and Bankruptcy Code, 2016 (the Code) and applicable regulations.
(I) (B) Whether the CoC dissented or approved the appointment of the IRP as RP during the first CoC meeting.
(I) (C) Whether the conduct of the IRP/RP was fair, reasonable, and in accordance with the Code and CIRP Regulations or whether it was arbitrary, prejudicial, and violative of the Code.
(I) (D) What was the stand of the CoC on the CIRP process and the appointment or replacement of the RP.
(II) (A) Whether the Memorandum of Understanding (MoU) executed by the IRP/RP with a third party (SIPL) was in accordance with the Code and CIRP Regulations, or whether it constituted a violation.
(II) (B) Whether the contractor SIPL was a related party of the Corporate Debtor and whether the IRP/RP misled the CoC regarding this fact.
(III) Whether material irregularities committed by the IRP/RP during the CIRP process affect the validity of the approved Resolution Plan.
Additionally, the Tribunal considered the issues raised in a Contempt Petition related to the conduct of the IRP/RP and the implementation of the Resolution Plan during pendency of appeals.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (I)(A), (I)(B), and (I)(C): Appointment and Conduct of the Interim Resolution Professional / Resolution Professional
Legal Framework and Precedents: The appointment of the IRP by the Adjudicating Authority under Section 9 and confirmation as RP by the CoC under Section 22 of the Code and the CIRP Regulations governs the process. The CoC's commercial wisdom is generally respected, but procedural compliance is mandatory. Prior judgments emphasize the need for proper appointment and adherence to statutory procedures.
Court's Interpretation and Reasoning: The Tribunal examined the minutes of the first CoC meeting held on 10.11.2021 and the voting results communicated by the online voting platform, which showed dissent against the confirmation of the IRP as RP. The CoC subsequently proposed replacement of the IRP with a new RP, approved by 100% voting. The CoC's additional affidavit dated 28.03.2022 detailed multiple violations and misconduct by the IRP, including misrepresentation, failure to conduct meetings timely, and unauthorized actions.
The Tribunal noted that the IRP was never formally confirmed or appointed as RP by the CoC. The IRP's conduct was found prima facie violative of several CIRP regulations and the Code. The Insolvency and Bankruptcy Board of India (IBBI) conducted an investigation on the Appellant's complaint and suspended the IRP for six months for misconduct, including misrepresentation and concealment of material facts.
The IRP filed a writ petition challenging the IBBI order, but the High Court of Bombay's interim relief was limited to a technical issue regarding the authority of the IBBI official passing the order and did not address merits. The Supreme Court dismissed the IRP's appeal against this Tribunal's earlier judgment confirming non-appointment as RP.
Key Evidence and Findings: The e-voting results, CoC affidavits, IBBI disciplinary orders, and prior judicial findings established that the IRP was not lawfully appointed as RP and engaged in misconduct.
Application of Law to Facts: The Tribunal held that the IRP's appointment as RP was never confirmed by the CoC, and the IRP acted in violation of the Code and CIRP Regulations. The misconduct was material and affected the integrity of the CIRP.
Treatment of Competing Arguments: The IRP contended that the Appellant lacked locus standi and misused the CIRP process. The CoC later withdrew the application for replacement of the IRP, stating the IRP acted in best interests. The Tribunal found the CoC's later affidavit inconsistent with its earlier detailed allegations and rejected the justification offered.
Conclusion: The IRP was never lawfully appointed as RP by the CoC, and his conduct was found to be fraudulent, arbitrary, and violative of the Code and CIRP Regulations. The IBBI's suspension order was upheld as justified.
Issue (II)(A) and (II)(B): Validity of the MoU with SIPL and Related Party Status
Legal Framework: Section 28 of the Code requires prior approval of the CoC for certain actions by the IRP/RP, including transfer of rights or financial debts under material contracts not in the ordinary course of business. CIRP Regulations mandate transparency and prior consent for such actions. Related party transactions require scrutiny to prevent collusion or fraud.
Court's Interpretation and Reasoning: The Tribunal observed that the IRP executed a MoU on 10.11.2021 with SIPL for contract manufacturing, with retrospective effect from the date of CIRP initiation (05.10.2021). This MoU was presented as a draft to CoC only on 30.12.2021, indicating misrepresentation. The IRP represented himself as RP in the MoU, which was factually incorrect.
Evidence showed that SIPL was a related party of the Corporate Debtor, sharing the same principal place of business and GST registration address, indicating collusion with the Suspended Board of Directors (SBOD). The CoC had earlier alleged the MoU was executed without authority and with wrongful intentions.
The IBBI found the IRP guilty of violating Section 28(1)(k) and other provisions by executing the MoU without CoC approval, suppressing facts from the CoC, and acting beyond his authority.
Application of Law to Facts: The execution of the MoU without CoC approval violated the Code and CIRP Regulations. The related party status of SIPL and misrepresentation to the CoC further vitiated the transaction.
Treatment of Competing Arguments: The IRP and CoC later justified the MoU as beneficial and approved by CoC, but the Tribunal found this inconsistent with earlier affidavits and evidence.
Conclusion: The MoU was executed in violation of statutory provisions and CIRP regulations, and SIPL was a related party. The IRP misled the CoC and acted beyond his powers.
Issue (III): Effect of Material Irregularities on the Approved Resolution Plan
Legal Framework: Section 61(3)(ii) of the Code allows appeals against approval of Resolution Plans on grounds of material irregularities by the RP during CIRP. Material irregularity is a significant deviation from established rules or procedures affecting the fairness or legality of the process. The Supreme Court has emphasized the primacy of CoC's commercial wisdom but also mandated procedural compliance and transparency.
Court's Interpretation and Reasoning: The Tribunal defined material irregularity as a substantial procedural or substantive defect affecting the merits or fairness of the CIRP. The IRP's misconduct, including misrepresentation, concealment, unauthorized asset transfer, and violation of CIRP Regulations, constituted material irregularities.
The Tribunal noted that the Resolution Plan was approved by the CoC and the Adjudicating Authority but was based on a process tainted by these irregularities. The Tribunal referred to a recent Supreme Court judgment emphasizing that procedural safeguards are substantive protections, and failure to adhere to them vitiates the process and may nullify actions taken pursuant to the Resolution Plan.
Application of Law to Facts: Given the established material irregularities by the IRP, the approval of the Resolution Plan was affected. The Tribunal held that such irregularities could not be overlooked merely because the CoC approved the plan, as the integrity of the CIRP process is paramount.
Treatment of Competing Arguments: The Respondent and CoC argued that the Resolution Plan was approved by 100% CoC voting, implemented, and payments made, rendering appeals infructuous. The Tribunal acknowledged this but held that procedural irregularities affecting the process's fairness warranted setting aside the approval.
Conclusion: Material irregularities committed by the IRP during CIRP materially affected the validity of the approved Resolution Plan. The Tribunal set aside the approval order and allowed the appeals.
Additional Issue: Contempt Petition Regarding Implementation of Resolution Plan
The Appellant filed a Contempt Petition alleging that the Respondent implemented the Resolution Plan despite pending appeals and notices, violating the stay and orders of the Appellate Tribunal. The Adjudicating Authority dismissed the petition without fully considering the evidence.
The Tribunal declined to further examine the Contempt Petition in view of allowing the main appeals and disposed of it accordingly.
3. SIGNIFICANT HOLDINGS
"Thus, we hold that there was no formal and proper appointment of Mr. Kairav Anil Trivedi as Resolution Professional of the Corporate Debtor by the CoC. We also find that CoC did not approve the Respondent No. 1/ Mr. Kairav Anil Trivedi as the Resolution Professional in 1st CoC meeting."
"The Respondent No. 1 signed the said MoU with SIPL in violation of the provisions of the Code and the CIRP Regulations."
"The SIPL was related party of the Corporate Debtor and Respondent No. 1 gave misleading facts to the CoC in 2nd CoC meeting."
"Material irregularities in the CIRP process, including fraudulent conduct, misrepresentation, and violation of statutory provisions by the Resolution Professional, affect the fate of the approved Resolution Plan."
"The Hon'ble Supreme Court of India has emphasized that procedural safeguards are substantive protections designed to ensure fairness and transparency and cannot be circumvented for expediency. Any action taken pursuant to a Resolution Plan affected by such irregularities shall stand nullified."
"We find merit in both the appeals... The Impugned Order dated 15.05.2023 is set aside."
Core principles established include the necessity of strict adherence to procedural requirements in CIRP, the non-appointment of an IRP as RP without CoC approval invalidates such appointment, unauthorized asset transfers without CoC consent are impermissible, and material irregularities by the Resolution Professional can vitiate the entire resolution process including the approval of the Resolution Plan.
The Tribunal's final determination was to allow the appeals, set aside the approval of the Resolution Plan, and direct parties to appear before the Adjudicating Authority for further proceedings. The Contempt Petition was disposed of as infructuous.
Approval of Resolution Plan - No locus standi to raise objections in the ongoing CIRP - Whether, Mr. Kairav Anil Trivedi appointed as Interim Resolution Professional by the Adjudicating Authority vide CIRP order dated 05.10.2021 was lawfully appointed as Resolution Professional by the CoC in accordance with the Regulations or not? - Whether the CoC dissented the appointment of Mr. Kairav Anil Trivedi working as Interim Resolution Professional of the Corporate Debtor being appointed as Resolution Professional of the Corporate Debtor or approved his appointment as Resolution Professional in the First CoC Meeting? - Whether conduct of Mr. Kairav Anil Trivedi the Interim Resolution Professional of Corporate Debtor has been fair, reasonable and in accordance with the provisions of the Code and Regulations or acted in arbitrary and pre-judicial manner as alleged by the Appellant? - HELD THAT:- The IBBI who is the regulator for Resolution Professionals as per the Code, has categorically held Respondent No. 1 as guilty in the present case and debarred the Respondent No. 1 for six months. It is also a fact that the Respondent No. 1 filed a Writ Petition and obtained ad-interim relief from the Hon’ble High Court of Bombay. However, it is consciously noted that the Hon’ble High Court of Bombay gave interim relief to the Respondent No. 1 only on one limited technical ground that whether Mr. Ravi Mittal who signed final disciplinary order acted as whole time member (WTM) or chairman of IBBI. In fact, the Hon’ble High Court of Bombay did not comment on any aspect of merit based on IBBI finding, holding Respondent No. 1 to be involved in misconduct in the present case.
It is found that one of ground in the present appeal is violation of CIRP Regulations No. 28 i.e., transferring assets of the Corporate Debtor during CIRP without consent of CoC by signing MoU with SIPL, again alleged to be a related party of Corporate Debtor. In the quoted case of Parental Drug which is an independent case in relation to the present appeal, the Respondent No. 1 has been found guilty of violation of Regulation as well as Section 28(1)(h) (for obtaining prior approval of CoC in certain cases) and IBBI, the regulator has debarred the Respondent No. 1/ Mr. Kairav Anil Trivedi for a period of two years.
Thus, based on wholistic reading of several cases instituted against the Respondent No. 1/ Mr. Kairav Anil Trivedi, there are merit in the arguments of the Appellant and find Respondent No. 1 involved in misconduct which has also been investigated and confirmed by IBBI.
What has been stand of CoC on CIRP Process? - HELD THAT:- The CoC is trying to justify that the Right2Vote document was erroneously created which caused confusion. It is found that the additional affidavit dated 28.03.2022 filed by Canara Bank in support of IA 247 of 2022 before the Adjudicating Authority, where the CoC made several allegations against the Respondent No.1 are quite contrary to new affidavit dated 29.07.2024 - The CoC has now tried to justify their action in their affidavit dated 29.07.2024 merely on the ground that the right to vote document was erroneously created and is the cause of all fall outs.
It is found that the new affidavit dated 29.07.2024 filed by the CoC before us as convincing and we rather find it in complete contrast with the factual position presented before the Adjudicating Authority, in additional affidavit dated 28.03.2022 in IA No. 247 of 2022, hence it is unable to accept the reasoning given by the CoC in the present affidavit dated 29.07.2024. The bank management may like to review whole process involved to safeguard public money of hundreds of crores of rupees.
Whether the MoU signed with the SIPL was in accordance with provision of the Code and the Regulations or otherwise. Whether Mr. Kairav Anil Trivedi violated any of the laid down provisions in approving and signing the said MoU? - HELD THAT:- The CoC is vested with the authority to oversee the work of Interim Resolution Professional / Resolution Professional and need to specifically approve actions that could impact the Corporate Debtor's financial health requiring the CoC's prior approval like the transfer of rights or financial or operational debts under material contracts, except when carried out in the ordinary course of business. This provision ensures that the Interim Resolution Professional /Resolution Professional cannot make significant changes to the Corporate Debtor's financial or contractual arrangements without the informed decision and approval of CoC - the Respondent No. 1 signed the said MoU with SIPL in violation of the provisions of the Code and the CIRP Regulations.
Whether the contractor of Haridwar plant of the Corporate Debtor i.e., SIPL was related party of the Corporate Debtor? - Whether Mr. Kairav Anil Trivedi brought out misleading facts before CoC? - HELD THAT:- The Respondent No. 1 signed MoU with SIPL violating provision of the Code and Regulations - the SIPL was related party of the Corporate Debtor and Respondent No. 1 gave misleading facts to the CoC in 2nd CoC meeting.
Whether, material irregularities, if any, by Interim Resolution Professional /Resolution Professional while taking approval from the Adjudicating Authority will affect the fate of approved Resolution Plan? - HELD THAT:- If a material irregularity is established, the Adjudicating Authority is empowered under the Code to take corrective measures. Such measures may include setting aside decisions taken during the CIRP, directing an investigation into the conduct of the resolution professional, or imposing sanctions on the parties involved. We are conscious that the Adjudicating Authority has limited scope for rejecting a Resolution Plan under Section 31 of the Code and cannot unnecessarily interfere with the “commercial wisdom of CoC”. However, it may not mean that the Adjudicating Authority cannot look into any relevant aspect before approving the Resolution Plan proposed by the CoC. The Adjudicating Authority can reject a plan, if it does not meet the requirement of the Code or Regulations or it violate the Code or Regulations. The Resolution Plan has to be in compliance with Section 30 of the Code.
The Hon’ble Supreme Court of India, time and again has stipulated that the commercial wisdom of the CoC is supreme and cannot be interfered as held in catena of judgements including, K. Shashidhar Vs. Indian Overseas Bank & Ors. and Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta [2019 (11) TMI 731 - SUPREME COURT]. While the Adjudicating Authority cannot interfere with the CoC’s commercial decisions, it needs to ensure that the procedure followed by the CoC and/or Resolution Professional is in accordance with the Code and Regulations. Any significant procedural lapses may be a ground for rejection.
The Hon’ble Supreme Court of India has emphasised regarding indispensability of procedural safeguards as an integral component of a just, legal ordered must be given its due weight, especially as procedural requirements are not mere formalities to be circumvented for expediency but substantive protections designed to ensure fairness and transparency.
Conclusion - i) There was no formal and proper appointment of Mr. Kairav Anil Trivedi as Resolution Professional of the Corporate Debtor by the CoC. ii) The CoC did not approve the Respondent No. 1/ Mr. Kairav Anil Trivedi as the Resolution Professional in 1st CoC meeting.
Appeal disposed off.
Approval of Resolution Plan - No locus standi to raise objections in the ongoing CIRP - Whether, Mr. Kairav Anil Trivedi appointed as Interim Resolution Professional by the Adjudicating Authority vide CIRP order dated 05.10.2021 was lawfully appointed as Resolution Professional by the CoC in accordance with the Regulations or not? - Whether the CoC dissented the appointment of Mr. Kairav Anil Trivedi working as Interim Resolution Professional of the Corporate Debtor being appointed as Resolution Professional of the Corporate Debtor or approved his appointment as Resolution Professional in the First CoC Meeting? - Whether conduct of Mr. Kairav Anil Trivedi the Interim Resolution Professional of Corporate Debtor has been fair, reasonable and in accordance with the provisions of the Code and Regulations or acted in arbitrary and pre-judicial manner as alleged by the Appellant? - HELD THAT:- The IBBI who is the regulator for Resolution Professionals as per the Code, has categorically held Respondent No. 1 as guilty in the present case and debarred the Respondent No. 1 for six months. It is also a fact that the Respondent No. 1 filed a Writ Petition and obtained ad-interim relief from the Hon’ble High Court of Bombay. However, it is consciously noted that the Hon’ble High Court of Bombay gave interim relief to the Respondent No. 1 only on one limited technical ground that whether Mr. Ravi Mittal who signed final disciplinary order acted as whole time member (WTM) or chairman of IBBI. In fact, the Hon’ble High Court of Bombay did not comment on any aspect of merit based on IBBI finding, holding Respondent No. 1 to be involved in misconduct in the present case.
It is found that one of ground in the present appeal is violation of CIRP Regulations No. 28 i.e., transferring assets of the Corporate Debtor during CIRP without consent of CoC by signing MoU with SIPL, again alleged to be a related party of Corporate Debtor. In the quoted case of Parental Drug which is an independent case in relation to the present appeal, the Respondent No. 1 has been found guilty of violation of Regulation as well as Section 28(1)(h) (for obtaining prior approval of CoC in certain cases) and IBBI, the regulator has debarred the Respondent No. 1/ Mr. Kairav Anil Trivedi for a period of two years.
Thus, based on wholistic reading of several cases instituted against the Respondent No. 1/ Mr. Kairav Anil Trivedi, there are merit in the arguments of the Appellant and find Respondent No. 1 involved in misconduct which has also been investigated and confirmed by IBBI.
What has been stand of CoC on CIRP Process? - HELD THAT:- The CoC is trying to justify that the Right2Vote document was erroneously created which caused confusion. It is found that the additional affidavit dated 28.03.2022 filed by Canara Bank in support of IA 247 of 2022 before the Adjudicating Authority, where the CoC made several allegations against the Respondent No.1 are quite contrary to new affidavit dated 29.07.2024 - The CoC has now tried to justify their action in their affidavit dated 29.07.2024 merely on the ground that the right to vote document was erroneously created and is the cause of all fall outs.
It is found that the new affidavit dated 29.07.2024 filed by the CoC before us as convincing and we rather find it in complete contrast with the factual position presented before the Adjudicating Authority, in additional affidavit dated 28.03.2022 in IA No. 247 of 2022, hence it is unable to accept the reasoning given by the CoC in the present affidavit dated 29.07.2024. The bank management may like to review whole process involved to safeguard public money of hundreds of crores of rupees.
Whether the MoU signed with the SIPL was in accordance with provision of the Code and the Regulations or otherwise. Whether Mr. Kairav Anil Trivedi violated any of the laid down provisions in approving and signing the said MoU? - HELD THAT:- The CoC is vested with the authority to oversee the work of Interim Resolution Professional / Resolution Professional and need to specifically approve actions that could impact the Corporate Debtor's financial health requiring the CoC's prior approval like the transfer of rights or financial or operational debts under material contracts, except when carried out in the ordinary course of business. This provision ensures that the Interim Resolution Professional /Resolution Professional cannot make significant changes to the Corporate Debtor's financial or contractual arrangements without the informed decision and approval of CoC - the Respondent No. 1 signed the said MoU with SIPL in violation of the provisions of the Code and the CIRP Regulations.
Whether the contractor of Haridwar plant of the Corporate Debtor i.e., SIPL was related party of the Corporate Debtor? - Whether Mr. Kairav Anil Trivedi brought out misleading facts before CoC? - HELD THAT:- The Respondent No. 1 signed MoU with SIPL violating provision of the Code and Regulations - the SIPL was related party of the Corporate Debtor and Respondent No. 1 gave misleading facts to the CoC in 2nd CoC meeting.
Whether, material irregularities, if any, by Interim Resolution Professional /Resolution Professional while taking approval from the Adjudicating Authority will affect the fate of approved Resolution Plan? - HELD THAT:- If a material irregularity is established, the Adjudicating Authority is empowered under the Code to take corrective measures. Such measures may include setting aside decisions taken during the CIRP, directing an investigation into the conduct of the resolution professional, or imposing sanctions on the parties involved. We are conscious that the Adjudicating Authority has limited scope for rejecting a Resolution Plan under Section 31 of the Code and cannot unnecessarily interfere with the “commercial wisdom of CoC”. However, it may not mean that the Adjudicating Authority cannot look into any relevant aspect before approving the Resolution Plan proposed by the CoC. The Adjudicating Authority can reject a plan, if it does not meet the requirement of the Code or Regulations or it violate the Code or Regulations. The Resolution Plan has to be in compliance with Section 30 of the Code.
The Hon’ble Supreme Court of India, time and again has stipulated that the commercial wisdom of the CoC is supreme and cannot be interfered as held in catena of judgements including, K. Shashidhar Vs. Indian Overseas Bank & Ors. and Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta [2019 (11) TMI 731 - SUPREME COURT]. While the Adjudicating Authority cannot interfere with the CoC’s commercial decisions, it needs to ensure that the procedure followed by the CoC and/or Resolution Professional is in accordance with the Code and Regulations. Any significant procedural lapses may be a ground for rejection.
The Hon’ble Supreme Court of India has emphasised regarding indispensability of procedural safeguards as an integral component of a just, legal ordered must be given its due weight, especially as procedural requirements are not mere formalities to be circumvented for expediency but substantive protections designed to ensure fairness and transparency.
Conclusion - i) There was no formal and proper appointment of Mr. Kairav Anil Trivedi as Resolution Professional of the Corporate Debtor by the CoC. ii) The CoC did not approve the Respondent No. 1/ Mr. Kairav Anil Trivedi as the Resolution Professional in 1st CoC meeting.
Appeal disposed off.
The core legal questions considered by the Court in this matter are:
(a) Whether the bail condition requiring the applicant, a foreign national, to furnish a surety bond along with a personal bond can be modified or waived, given the applicant's inability to find a surety in India due to lack of family or social ties.
(b) Whether the condition requiring the applicant to surrender his passport before the learned Trial Court can be waived or modified, considering that the applicant's existing passport has expired and he must retain it for renewal purposes.
(c) The extent to which bail conditions imposed on a foreign national accused must balance the interests of ensuring the accused's presence for trial and the accused's fundamental rights under Article 21 of the Constitution.
(d) The applicability and interpretation of statutory provisions, particularly Section 441 of the Criminal Procedure Code (Cr.P.C.), and relevant judicial precedents concerning bail conditions, surety bonds, and passport surrender.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Modification or Waiver of Surety Bond Requirement for a Foreign National
Legal Framework and Precedents: The Court examined Section 441 of Cr.P.C., which mandates furnishing of a surety bond as a condition for bail. The judgment extensively relied on the Coordinate Bench decision in OBI Ogochukwa Stephen v. State (NCT of Delhi), which addressed the permissibility of dispensing with or substituting the surety bond requirement, especially for foreign nationals lacking local ties. The Coordinate Bench formulated a three-fold test for bail conditions: they must be necessary to ensure the accused's presence for trial, preserve judicial integrity, and be feasible for the accused to fulfill.
The Court also referenced the Supreme Court's judgment in Frank Vitus v. Narcotics Control Bureau, which held that bail conditions must not be "fanciful, arbitrary or freakish" but should facilitate the trial's efficient resolution without imposing impossible burdens on the accused.
Court's Interpretation and Reasoning: The Court recognized that while furnishing a surety bond is the norm and serves the critical function of ensuring the accused's presence during trial, exceptions may be made where the accused demonstrates a genuine, verifiable inability to furnish surety. The Court emphasized that waiver or substitution of surety must be cautiously granted, especially for foreign nationals who pose a heightened flight risk.
Key Evidence and Findings: The applicant is a British national who was extradited to India and has no family or friends in India to stand surety. He has been incarcerated in India for over six years, exceeding most of the maximum sentence prescribed for the alleged offence. The Directorate of Enforcement (DoE) confirmed the applicant's lack of roots in India and highlighted the risk of absconding if surety is waived.
Application of Law to Facts: Balancing the applicant's prolonged incarceration, lack of local ties, and inability to furnish surety against the State's interest in securing trial attendance, the Court found that strict enforcement of the surety condition would be unjust and punitive. However, the Court sought to mitigate flight risk by increasing the cash surety amount and imposing stringent conditions such as regular attendance before the investigating officer, address verification, and passport deposit.
Treatment of Competing Arguments: The DoE opposed waiver, citing Section 441 Cr.P.C. and the risk of absconding. The Court acknowledged these concerns but held that the applicant's unique circumstances justified modification rather than outright waiver. The Court rejected the notion that cash deposits alone suffice as surety without accompanying safeguards.
Conclusion: The Court modified the bail condition to require the applicant to furnish a personal bond of Rs. 5,00,000 and a cash surety of Rs. 10,00,000, dispensing with the need for a third-party surety. This modification balances the applicant's rights and the State's interest in trial integrity.
Issue (b): Modification of Passport Surrender Condition
Legal Framework and Precedents: The surrender of passport is a common bail condition aimed at preventing flight risk. The Court considered the practical difficulties faced by the applicant due to his expired passport and the procedural requirements of the British High Commission/HMPO for renewal, which can take 4-8 weeks.
Court's Interpretation and Reasoning: The Court noted prior orders permitting the applicant to apply for a fresh passport online from jail, with assistance from counsel and jail authorities. The Court recognized that immediate surrender of the expired passport was impractical as it was required for renewal.
Key Evidence and Findings: The applicant had not been able to comply with the passport deposit condition as his passport was expired and needed for the renewal process. The Trial Court had already authorized steps to facilitate the passport application process.
Application of Law to Facts: The Court modified the bail condition to allow the applicant's release without immediate deposit of the passport. However, it directed that the FRRO ensure the applicant does not leave India and that the British High Commission or issuing authority deposit the renewed passport directly with the Trial Court upon issuance, preventing misuse.
Treatment of Competing Arguments: The DoE argued that the applicant should deposit his expired passport and that renewal could be managed without retaining the passport. The Court accepted the practical difficulties and the procedural safeguards in place, thereby modifying the condition.
Conclusion: The passport surrender condition was modified to accommodate the renewal process without compromising the State's interest in preventing absconding.
Issue (c): Balancing Bail Conditions with Fundamental Rights
Legal Framework and Precedents: Article 21 of the Constitution guarantees the right to life and personal liberty. The Court considered the principle that bail conditions must not be excessive or punitive, especially where the accused has already undergone substantial pre-trial incarceration.
Court's Interpretation and Reasoning: The Court observed that the applicant had spent over six years in custody, nearly the maximum sentence prescribed for the offence, without trial commencement. Imposing onerous bail conditions that the applicant cannot fulfill would amount to unjust deprivation of liberty.
Key Evidence and Findings: The applicant's prolonged incarceration and the delay in trial proceedings were undisputed. The Court noted that bail conditions must be proportionate, fair, and not defeat the purpose of bail.
Application of Law to Facts: The Court applied the principle that bail conditions should facilitate liberty without compromising judicial process integrity, leading to the modification of conditions to suit the applicant's circumstances.
Treatment of Competing Arguments: While the DoE emphasized the necessity of strict conditions to prevent flight risk, the Court balanced this against the applicant's fundamental rights and the realities of his situation.
Conclusion: Bail conditions were tailored to balance the applicant's right to liberty with the State's interest in ensuring trial attendance.
3. SIGNIFICANT HOLDINGS
The Court held that:
"It is permissible for a court to completely dispense with the requirement that an undertrial/convict must furnish a surety bond executed by a third person to avail bail or suspension of sentence."
However, such waiver or substitution must be "guarded, to ensure that at least the fundamental requirement that an undertrial/convict must remain available to face trial or to undergo the punishment awarded, is not jeopardised."
"The conditions imposed for grant of bail or suspension of sentence must pass muster on the anvil of the following criteria: First, the conditions must be necessary to ensure that the accused remains available for trial. Second, the conditions must be necessary to ensure that the integrity of the judicial process is preserved. Third, the conditions must not be impossible for the accused to fulfill."
Regarding passport surrender, the Court emphasized practical considerations and procedural safeguards, stating:
"The bail condition imposed by this Court, in order dated 04.03.2025, stands modified, to the extent that applicant may be released on regular bail, without him depositing his passport immediately; however, the FRRO shall ensure that the applicant does not leave the country, and the British High Commission (or the concerned authority issuing the applicant's passport) shall ensure that the applicant's fresh passport, whenever the same is ready, is not handed over to the applicant, but directly deposited with the learned Trial Court under intimation to this Court."
On balancing fundamental rights and State interests, the Court noted:
"The principle that bail conditions must not be excessive or punitive in nature applies with greater force in cases where the undertrial has already spent a period in custody nearly equivalent to the potential maximum sentence."
Final determinations include:
(i) Modification of bail condition to dispense with third-party surety bond and substitute it with a cash surety of Rs. 10,00,000 along with a personal bond of Rs. 5,00,000.
(ii) Modification of passport surrender condition to allow release without immediate deposit of expired passport, with the condition that the renewed passport be deposited directly with the Trial Court and the FRRO monitor the applicant's movement.
(iii) Affirmation that the applicant must comply with all other bail conditions imposed by the Trial Court, including attendance, address verification, prohibition on tampering with evidence, and restrictions on leaving India without permission.
Money Laundering - seeking modification of order dated passed by this Court in the captioned bail - condition requiring the surrender of passport - condition of furnishing a surety bond.
Condition requiring the surrender of passport - grievance of the applicant herein is essentially that since bail has been granted to him, subject to him depositing his passport with the learned Trial Court, he cannot be released as he is not in a position to deposit his passport - HELD THAT:- Having considered the orders passed by the learned Trial Court, and the fact that it would take some time for a fresh passport being issued to the applicant by the HMPO/British High Commission, the bail condition imposed by this Court, in order dated 04.03.2025, stands modified, to the extent that applicant may be released on regular bail, without him depositing his passport immediately; however, the FRRO shall ensure that the applicant does not leave the country, and the British High Commission (or the concerned authority issuing the applicant’s passport) shall ensure that the applicant’s fresh passport, whenever the same is ready, is not handed over to the applicant, but directly deposited with the learned Trial Court under intimation to this Court.
Condition of furnishing a surety bond - whether this Court can dispense with the requirement that the applicant, who is an accused in the present ECIR – must furnish a surety bond – alongwith his personal bond? - HELD THAT:- It shall be apposite to take note of the decision of the Coordinate Bench of this Court in OBI Ogochukwa Stephen v. State (NCT of Delhi) [2024 (10) TMI 1663 - DELHI HIGH COURT], wherein a similar issue was decided. The Coordinate Bench was adjudicating two applications seeking modification of bail conditions – pertaining to furnishing of surety bond – filed by the petitioners therein, who were foreign nationals (nationals of Nigeria) and had been granted regular bail in a case registered under the NDPS Act, 1985.
The Coordinate Bench has held that while the requirement of furnishing a surety bond by a third person is the norm, the same may be waived or substituted with a cash deposit in exceptional cases, particularly where the accused or convict is able to demonstrate a genuine and verifiable inability to furnish surety. However, such waiver or substitution must not be granted mechanically or for mere convenience, but only after careful scrutiny of the facts and circumstances of each case, including verification where necessary. Importantly, the Court emphasized that the substitution of surety with a cash deposit does not, by itself, satisfy the underlying purpose of ensuring the accused’s continued presence during trial, unless accompanied by additional conditions that effectively mitigate the flight risk and uphold the integrity of the judicial process.
In the present case, the applicant has remained in custody in India for a period of about 6 years and 5 months. As already noted by this Court while granting bail, even if the applicant was to be convicted for the alleged offence, the maximum punishment prescribed is seven years of imprisonment. Thus, the applicant has already undergone a substantial portion of the maximum sentence that could be imposed, without the trial having even commenced - The principle that bail conditions must not be excessive or punitive in nature applies with greater force in cases where the undertrial has already spent a period in custody nearly equivalent to the potential maximum sentence. In these circumstances, the imposition of rigid conditions, without due regard to the applicant’s peculiar situation, would amount to an unjust deprivation of liberty.
In the present case, the applicant is a British national. It is his case that he has no friends or relatives in India who can stand as a surety for him. To appreciate this submission, it is necessary to take note of some crucial facts. It is not in dispute that the applicant was apprehended in Dubai, UAE, where he remained in custody for approximately 130 days. Thereafter, he was extradited to India on 04.12.2018 and, following 14 days of custodial interrogation, was arrested by the DoE in the present case on 22.12.2018. Since then, the applicant has remained continuously incarcerated and has not stepped out of prison even for a single day. It is the DoE’s own case that the applicant had not visited India at all after February 2013 and that he has no roots in the country. In such circumstances, the applicant’s assertion that he has no friend or relative in India who could stand as a surety appears to be logical and acceptable.
Considering the overall facts and circumstances of the case, including the applicant’s prolonged incarceration, his status as a foreign national with no roots in India, and his inability to arrange for a surety locally, this Court is inclined to modify the bail condition imposed earlier. Instead of the requirement to furnish a personal bond and surety bond of Rs. 5,00,000/- each – the applicant shall now furnish a personal bond of Rs. 5,00,000/- along with a cash surety in the enhanced sum of Rs. 10,00,000/-.
Conclusion - i) Modification of bail condition to dispense with third-party surety bond and substitute it with a cash surety of Rs. 10,00,000 along with a personal bond of Rs. 5,00,000. ii) Modification of passport surrender condition to allow release without immediate deposit of expired passport, with the condition that the renewed passport be deposited directly with the Trial Court and the FRRO monitor the applicant's movement. iii) Affirmation that the applicant must comply with all other bail conditions imposed by the Trial Court, including attendance, address verification, prohibition on tampering with evidence, and restrictions on leaving India without permission.
Application disposed off.
Money Laundering - seeking modification of order dated passed by this Court in the captioned bail - condition requiring the surrender of passport - condition of furnishing a surety bond.
Condition requiring the surrender of passport - grievance of the applicant herein is essentially that since bail has been granted to him, subject to him depositing his passport with the learned Trial Court, he cannot be released as he is not in a position to deposit his passport - HELD THAT:- Having considered the orders passed by the learned Trial Court, and the fact that it would take some time for a fresh passport being issued to the applicant by the HMPO/British High Commission, the bail condition imposed by this Court, in order dated 04.03.2025, stands modified, to the extent that applicant may be released on regular bail, without him depositing his passport immediately; however, the FRRO shall ensure that the applicant does not leave the country, and the British High Commission (or the concerned authority issuing the applicant’s passport) shall ensure that the applicant’s fresh passport, whenever the same is ready, is not handed over to the applicant, but directly deposited with the learned Trial Court under intimation to this Court.
Condition of furnishing a surety bond - whether this Court can dispense with the requirement that the applicant, who is an accused in the present ECIR – must furnish a surety bond – alongwith his personal bond? - HELD THAT:- It shall be apposite to take note of the decision of the Coordinate Bench of this Court in OBI Ogochukwa Stephen v. State (NCT of Delhi) [2024 (10) TMI 1663 - DELHI HIGH COURT], wherein a similar issue was decided. The Coordinate Bench was adjudicating two applications seeking modification of bail conditions – pertaining to furnishing of surety bond – filed by the petitioners therein, who were foreign nationals (nationals of Nigeria) and had been granted regular bail in a case registered under the NDPS Act, 1985.
The Coordinate Bench has held that while the requirement of furnishing a surety bond by a third person is the norm, the same may be waived or substituted with a cash deposit in exceptional cases, particularly where the accused or convict is able to demonstrate a genuine and verifiable inability to furnish surety. However, such waiver or substitution must not be granted mechanically or for mere convenience, but only after careful scrutiny of the facts and circumstances of each case, including verification where necessary. Importantly, the Court emphasized that the substitution of surety with a cash deposit does not, by itself, satisfy the underlying purpose of ensuring the accused’s continued presence during trial, unless accompanied by additional conditions that effectively mitigate the flight risk and uphold the integrity of the judicial process.
In the present case, the applicant has remained in custody in India for a period of about 6 years and 5 months. As already noted by this Court while granting bail, even if the applicant was to be convicted for the alleged offence, the maximum punishment prescribed is seven years of imprisonment. Thus, the applicant has already undergone a substantial portion of the maximum sentence that could be imposed, without the trial having even commenced - The principle that bail conditions must not be excessive or punitive in nature applies with greater force in cases where the undertrial has already spent a period in custody nearly equivalent to the potential maximum sentence. In these circumstances, the imposition of rigid conditions, without due regard to the applicant’s peculiar situation, would amount to an unjust deprivation of liberty.
In the present case, the applicant is a British national. It is his case that he has no friends or relatives in India who can stand as a surety for him. To appreciate this submission, it is necessary to take note of some crucial facts. It is not in dispute that the applicant was apprehended in Dubai, UAE, where he remained in custody for approximately 130 days. Thereafter, he was extradited to India on 04.12.2018 and, following 14 days of custodial interrogation, was arrested by the DoE in the present case on 22.12.2018. Since then, the applicant has remained continuously incarcerated and has not stepped out of prison even for a single day. It is the DoE’s own case that the applicant had not visited India at all after February 2013 and that he has no roots in the country. In such circumstances, the applicant’s assertion that he has no friend or relative in India who could stand as a surety appears to be logical and acceptable.
Considering the overall facts and circumstances of the case, including the applicant’s prolonged incarceration, his status as a foreign national with no roots in India, and his inability to arrange for a surety locally, this Court is inclined to modify the bail condition imposed earlier. Instead of the requirement to furnish a personal bond and surety bond of Rs. 5,00,000/- each – the applicant shall now furnish a personal bond of Rs. 5,00,000/- along with a cash surety in the enhanced sum of Rs. 10,00,000/-.
Conclusion - i) Modification of bail condition to dispense with third-party surety bond and substitute it with a cash surety of Rs. 10,00,000 along with a personal bond of Rs. 5,00,000. ii) Modification of passport surrender condition to allow release without immediate deposit of expired passport, with the condition that the renewed passport be deposited directly with the Trial Court and the FRRO monitor the applicant's movement. iii) Affirmation that the applicant must comply with all other bail conditions imposed by the Trial Court, including attendance, address verification, prohibition on tampering with evidence, and restrictions on leaving India without permission.
Application disposed off.
1. Whether the applicant is entitled to regular bail under Section 483 of the Bhartiya Nagrik Suraksha Sanhita (BNSS) 2023 read with Section 45 of the Prevention of Money Laundering Act (PMLA) 2002 and Section 346(2) BNSS, given the quashing of the earlier cognizance order and the status of prosecution.
2. The legal effect of the quashing of the cognizance order dated 5.10.2024 on the detention and custody of the applicant, including the applicability of Sections 167(2) and 309(2) of the Criminal Procedure Code (Cr.P.C.).
3. The interpretation and application of the "twin conditions" under Section 45 of the PMLA for grant of bail in money laundering cases.
4. The impact of prolonged pre-trial detention on the applicant's fundamental rights under Article 21 of the Constitution and the balancing of such rights against the interests of investigation and prosecution in money laundering offences.
5. The validity and effect of prosecution sanction under Section 197 Cr.P.C. in continuing the prosecution and the scope of judicial review of such sanction at the bail stage.
6. The relevance and application of precedents relating to bail in money laundering and related offences, including the cases of Arun Pati Tripathi, V. Senthil Balaji, Anil Tuteja, and others.
Issue-wise Detailed Analysis:
1. Entitlement to Bail Following Quashing of Cognizance Order
The applicant's counsel argued that the quashing of the cognizance order dated 5.10.2024 by this Court on 29.01.2025 effectively meant that no inquiry, trial, or prosecution was pending against the applicant from that date. Consequently, detention post that date was unauthorized under Sections 167(2) and 309(2) Cr.P.C., which regulate custody after cognizance and trial commencement. The counsel relied on the Apex Court's decision in Arun Pati Tripathi, where bail was granted after the High Court set aside the cognizance order, emphasizing that custody cannot be continued without valid cognizance.
The Court noted that the quashing of cognizance order created a legal vacuum regarding custody between the date of quashing and the date of re-cognizance (22.03.2025). Detention during this period was not authorized under Section 309(2) Cr.P.C. The Court held that continued detention without valid cognizance was impermissible, reinforcing that procedural safeguards must be strictly followed. However, the Court also observed that the prosecution complaint remained active and that re-cognizance had been taken subsequently, restoring the prosecution's legal footing.
2. Application of Section 45 of the PMLA and Twin Conditions for Bail
Section 45 of the PMLA imposes twin conditions for bail: the Court must have reasonable grounds to believe that the accused is not guilty of the offence and is not likely to commit any offence while on bail. The Enforcement Directorate (ED) contended that the applicant failed these conditions due to his active role in money laundering and the risk of influencing witnesses.
The Court acknowledged the restrictive nature of Section 45 but emphasized that it does not create an absolute bar on bail. The discretion to grant bail remains with the Court, which must also consider constitutional protections under Article 21. The Court highlighted that bail is the rule and jail is the exception, underscoring the primacy of liberty and the right to a speedy trial.
3. Prolonged Pre-trial Detention and Article 21 Rights
The applicant had been in custody since 30.04.2024, approximately one year, while the maximum punishment prescribed was seven years. Trial had not commenced, and charges had not been framed. The Court referred to precedents emphasizing that indefinite pre-trial detention infringes the fundamental right to liberty under Article 21 and effectively amounts to punishment without trial.
Drawing on the Apex Court's judgment in V. Senthil Balaji and other cases, the Court held that where trial delays are not attributable to the accused and no imminent trial date exists, prolonged detention under Section 45 PMLA cannot be sustained as a tool for incarceration. The Court stressed that the constitutional mandate must prevail over statutory restrictions in such circumstances.
4. Validity and Judicial Review of Prosecution Sanction
The prosecution sanction under Section 197 Cr.P.C. is a prerequisite for proceeding against certain public officials. The ED submitted that sanction was granted on 05.02.2025, validating the continuation of prosecution and cognizance. The Court relied on authoritative precedents holding that the validity of prosecution sanction is to be examined during trial and not at the bail stage, and that irregularities or delays in sanction do not vitiate prosecution unless they cause failure of justice.
The Court rejected the applicant's contention that absence or quashing of sanction invalidated prosecution, emphasizing that challenges to sanction can be raised but should not be used to stall proceedings. The Court cited judgments underscoring that quashing is impermissible solely on the ground of alleged invalidity of sanction without trial adjudication.
5. Role of the Applicant and Risk of Interference with Investigation
The ED argued that the applicant had a significant role in extortion and money laundering activities, assisting a co-accused in collecting illicit amounts. The ED expressed concern that bail could enable the applicant to influence witnesses and hamper investigation. The Court noted the seriousness of allegations but balanced these against the prolonged pre-trial detention and lack of trial progress.
The Court observed that stringent bail conditions, including surrender of passport and undertaking to cooperate with trial, can mitigate risks of interference. The Court also noted that the applicant was neither absconding nor a flight risk.
6. Comparative Precedents and Application of Parity Principle
The applicant relied on the Arun Pati Tripathi case where bail was granted following quashing of cognizance. The ED countered that the factual matrix differed since in the present case re-cognizance had been taken and prosecution sanction granted. The Court acknowledged that parity is not an absolute principle and requires focus on the accused's role and case facts.
The Court referred to other relevant judgments, including Anil Tuteja and V. Senthil Balaji, which emphasized that prolonged detention without trial is impermissible and bail should be granted where trial delay is not attributable to the accused. These precedents supported the Court's ultimate decision to grant bail subject to conditions.
Conclusions on Issues:
1. The quashing of the earlier cognizance order rendered detention between the quashing date and re-cognizance unauthorized under Section 309(2) Cr.P.C., invalidating custody for that period.
2. Although Section 45 of the PMLA imposes restrictive conditions for bail, it does not create an absolute bar. The Court must exercise discretion balancing statutory provisions with constitutional rights.
3. Prolonged pre-trial detention without trial commencement, especially when delay is not attributable to the accused, violates the right to liberty under Article 21 and justifies bail.
4. The prosecution sanction granted post-quashing validates continuation of prosecution. Challenges to sanction are to be addressed during trial and do not automatically invalidate bail applications.
5. The risk of witness tampering and interference can be addressed by imposing stringent bail conditions rather than denying bail outright.
6. Precedents support bail where trial delays are unreasonable and custody is prolonged, even in serious offences like money laundering, provided conditions to safeguard investigation are imposed.
Significant Holdings:
"The twin conditions though restrict the right of accused to be released on bail but do not impose absolute restraint and the discretion vests in the Court."
"Bail is the rule and jail is the exception. This principle is nothing but a crystallization of the constitutional mandate enshrined in Article 21, which says that no person shall be deprived of his life or personal liberty except according to the procedure established by law."
"Where there are multiple accused persons and the trial is not expected to end anytime in the near future and the delay is not attributable to the accused, keeping the accused in custody by using Section 45 PMLA as a tool for incarceration or as a shackle is not permissible."
"The validity of the prosecution sanction is to be decided by the trial court during trial and a mere delay or irregularity in sanction does not vitiate the prosecution."
"Detention from the date of earlier cognizance to the date of taking re-cognizance by the Special Court which is not as per provisions contained under Section 309(2) Cr.P.C. is not authorized."
The Court ultimately granted regular bail to the applicant subject to stringent conditions including surrender of passport, undertaking to cooperate and attend trial punctually, and provision for cancellation of bail if conditions are breached or cooperation is lacking.
Money Lauhndering - seeking grant of bail - case of applicant is that the applicant is in custody since 30.04.2024 i.e. about one year, therefore, he should be released on bail on account of long incarceration period - applicability of Section 45 of the PMLA - HELD THAT:- Since the offence pertains to money laundering, apart from the usual considerations, it would have to be seen whether the twin conditions stipulated in Section 45 of the PMLA are met. A plain reading of Section 45 of the PMLA shows that the respondent/ED must be given an opportunity to oppose the application and the Court should have reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail. The twin conditions though restricts the right of accused to be released on bail but do not impose absolute restraint and the discretion vests in the Court.
Section 45 of the PMLA while imposing additional conditions to be met for granting bail, does not create an absolute prohibition on the grant of bail. When there is no possibility of trial being concluded in a reasonable time and the accused is incarcerated for a long time, depending on the nature of allegations, the conditions under Section 45 of the PMLA would have to give way to the constitutional mandate of Article 21. What is a reasonable period for completion of trial would have to be seen in light of the minimum and maximum sentences provided for the offence, whether there are any stringent conditions which have been provided, etc. It would also have to be seen whether the delay in trial is attributable to the accused.
In the present case, it is pertinent to mention here that in Cr.R. No. 1326 of 2024 vide order dated 29.01.2025, this Court has set aside the order of taking cognizance therefore, detention from the date of earlier cognizance ie. on 5.10.2024 to the date of taking re-cognizance by the Special Court vide order dated 22.03.2025 is not as per provisions contained under Section 309(2) Cr.P.C. The applicant is in custody since 30.04.2024 i.e. about one year and the maximum punishment prescribed is 7 years as of today and the position is that though the complaint has been filed on 21.08.2023, the trial has not yet commenced and even hearing on charges has not taken place.
The Apex Court in the matter of Arun Pati Tripathi Vs. Directorate of Enforcement [2025 (2) TMI 852 - SC ORDER], has observed that the custody of the appellant cannot be continued.
After considering the entire facts and circumstances of the case, particularly the long incarceration of the applicant in custody ie. about one year, charge sheet has already been filed, the maximum punishment prescribed is 7 years as of today and further that this Court vide order dated 29.01.2025 in Cr.Rev. No. 1326 of 2024 has set aside the order taking cognizance ie. 5.10.2024 to the date of taking re- cogniance by the Special Court vide order dated 22.03.2025 which is not as per provisions contained under Section 309(2) Cr.P.C. and applying the principle laid down by the Apex Court in the matter of V. Senthil Balaji [2024 (9) TMI 1497 - SUPREME COURT] as also Arun Pati Tripathi [2025 (2) TMI 852 - SC ORDER], this court is of the view that the applicant deserves to be granted regular bail. The concerned trial court shall enlarge the applicant on bail subject to stringent terms and conditions as may be fixed after hearing the ED/respondent.
The bail application is allowed.
Money Lauhndering - seeking grant of bail - case of applicant is that the applicant is in custody since 30.04.2024 i.e. about one year, therefore, he should be released on bail on account of long incarceration period - applicability of Section 45 of the PMLA - HELD THAT:- Since the offence pertains to money laundering, apart from the usual considerations, it would have to be seen whether the twin conditions stipulated in Section 45 of the PMLA are met. A plain reading of Section 45 of the PMLA shows that the respondent/ED must be given an opportunity to oppose the application and the Court should have reasonable grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence while on bail. The twin conditions though restricts the right of accused to be released on bail but do not impose absolute restraint and the discretion vests in the Court.
Section 45 of the PMLA while imposing additional conditions to be met for granting bail, does not create an absolute prohibition on the grant of bail. When there is no possibility of trial being concluded in a reasonable time and the accused is incarcerated for a long time, depending on the nature of allegations, the conditions under Section 45 of the PMLA would have to give way to the constitutional mandate of Article 21. What is a reasonable period for completion of trial would have to be seen in light of the minimum and maximum sentences provided for the offence, whether there are any stringent conditions which have been provided, etc. It would also have to be seen whether the delay in trial is attributable to the accused.
In the present case, it is pertinent to mention here that in Cr.R. No. 1326 of 2024 vide order dated 29.01.2025, this Court has set aside the order of taking cognizance therefore, detention from the date of earlier cognizance ie. on 5.10.2024 to the date of taking re-cognizance by the Special Court vide order dated 22.03.2025 is not as per provisions contained under Section 309(2) Cr.P.C. The applicant is in custody since 30.04.2024 i.e. about one year and the maximum punishment prescribed is 7 years as of today and the position is that though the complaint has been filed on 21.08.2023, the trial has not yet commenced and even hearing on charges has not taken place.
The Apex Court in the matter of Arun Pati Tripathi Vs. Directorate of Enforcement [2025 (2) TMI 852 - SC ORDER], has observed that the custody of the appellant cannot be continued.
After considering the entire facts and circumstances of the case, particularly the long incarceration of the applicant in custody ie. about one year, charge sheet has already been filed, the maximum punishment prescribed is 7 years as of today and further that this Court vide order dated 29.01.2025 in Cr.Rev. No. 1326 of 2024 has set aside the order taking cognizance ie. 5.10.2024 to the date of taking re- cogniance by the Special Court vide order dated 22.03.2025 which is not as per provisions contained under Section 309(2) Cr.P.C. and applying the principle laid down by the Apex Court in the matter of V. Senthil Balaji [2024 (9) TMI 1497 - SUPREME COURT] as also Arun Pati Tripathi [2025 (2) TMI 852 - SC ORDER], this court is of the view that the applicant deserves to be granted regular bail. The concerned trial court shall enlarge the applicant on bail subject to stringent terms and conditions as may be fixed after hearing the ED/respondent.
The bail application is allowed.
The core legal questions considered by the Court are:
(a) Whether the offence of money laundering under Section 3 of the Prevention of Money Laundering Act (PMLA), 2002 is made out against the applicant, who is alleged only to have assisted in the generation of proceeds of crime, without being involved in any process or activity connected with proceeds of crime after its generation or acquisition;
(b) Whether mere assistance in generation of proceeds of crime amounts to an offence under Section 3 of PMLA or whether involvement in any process or activity connected with proceeds of crime, as defined under Section 3, is necessary;
(c) Whether the allegations against the applicant, who is also facing trial for the scheduled offence, justify continuation of proceedings under PMLA, or whether such proceedings amount to persecution;
(d) The interpretation and scope of Section 3 of PMLA, including the meaning of "process or activity connected with proceeds of crime" and whether the offence under Section 3 is a stand-alone offence;
(e) The applicability and relevance of the Supreme Court judgments in Vijay Madan Lal Chaudhari and Y. Balaji in the context of the present case;
(f) Whether the Directorate of Enforcement (ED) had sufficient foundational or jurisdictional facts to initiate and continue proceedings against the applicant under PMLA.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Whether mere assistance in generation of proceeds of crime constitutes offence under Section 3 PMLA
The legal framework is Section 3 of PMLA, which defines the offence of money laundering as involving any person who directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with proceeds of crime including concealment, possession, acquisition, use, projecting or claiming it as untainted property. The Explanation clarifies that involvement in any one or more of these activities suffices for offence.
The Court extensively analyzed the Supreme Court judgment in Vijay Madan Lal Chaudhari, which interpreted Section 3 in detail. The Court emphasized that the offence of money laundering is committed when a person is involved in any process or activity connected with proceeds of crime that have been derived or obtained as a result of a scheduled offence. The judgment clarified that the offence is independent and stand-alone, focusing on the process or activity connected with proceeds of crime, which can include concealment, possession, acquisition, use, projecting or claiming as untainted property. The Court noted that the word "and" in the statute should be read as "or" to avoid frustrating the legislative intent.
The Court further noted that the stages of money laundering-placement, layering, and integration-imply that involvement occurs after the proceeds of crime have been generated or acquired. Mere assistance in generation of proceeds of crime, without involvement in any subsequent process or activity connected with such proceeds, does not constitute money laundering under Section 3.
In contrast, the judgment in Y. Balaji, relied upon by the ED, held that acquisition or use of proceeds of crime (e.g., bribe money) amounts to money laundering. However, the Court distinguished Y. Balaji on facts, as that case involved direct acquisition of proceeds of crime by the accused, whereas in the present case, the applicant is only alleged to have assisted in generation of proceeds but not to have acquired or dealt with proceeds of crime.
The Court also highlighted that the judgment in Y. Balaji did not deal with the comprehensive interpretation of Section 3 as in Vijay Madan Lal Chaudhari, and that precedents must be read in their factual context.
Thus, the Court concluded that the applicant's alleged conduct-assisting in generation of proceeds of crime without involvement in any process or activity connected with proceeds of crime-does not prima facie make out the offence under Section 3 PMLA.
Issue (c): Whether continuation of PMLA proceedings against the applicant amounts to persecution
The Court noted that the applicant has been facing trial for the scheduled offence since 2010, with charges framed but no prosecution witnesses examined, indicating lack of substantial progress. The ED's complaint under PMLA was filed in 2017, with charges framed only in 2025, and the trial is still pending.
Given the absence of allegations that the applicant was involved in possession or use of proceeds of crime, and the prolonged pendency without progress, the Court held that continuation of PMLA proceedings against the applicant would amount to persecution rather than legitimate prosecution.
Issue (d): Interpretation and scope of Section 3 PMLA and whether offence is stand-alone
The Court relied on the detailed interpretation in Vijay Madan Lal Chaudhari, which held that Section 3 defines an independent offence of money laundering relating to any process or activity connected with proceeds of crime derived from scheduled offences. The offence is not dependent on the date of commission of the scheduled offence but on the date of involvement in the process or activity connected with proceeds of crime.
The Court emphasized that the offence under Section 3 is a stand-alone offence concerning the process or activity connected with proceeds of crime, which must be tangible and supported by credible evidence. Mere generation of proceeds of crime does not suffice; involvement in a defined process or activity (concealment, possession, acquisition, use, projecting or claiming as untainted property) is essential.
Issue (e): Applicability of Supreme Court precedents Vijay Madan Lal Chaudhari and Y. Balaji
The Court distinguished the two judgments based on facts and scope. Vijay Madan Lal Chaudhari provides a comprehensive interpretation of Section 3 PMLA, laying down core principles about the offence's nature, stages, and required involvement. Y. Balaji, decided by a two-judge bench, dealt with facts involving direct acquisition of proceeds of crime (bribe money) and held that acquisition or use amounts to money laundering.
The Court found that Y. Balaji did not address the full scope of Section 3 as elaborated in Vijay Madan Lal Chaudhari and that the present case facts do not fall within the ambit of Y. Balaji since the applicant is not alleged to have acquired or used proceeds of crime.
Issue (f): Whether ED had sufficient foundational facts to initiate and continue proceedings against applicant under PMLA
The Court noted that prosecution under PMLA requires the ED to have reason to believe, supported by tangible and credible evidence, that the accused is in possession of proceeds of crime and involved in any process or activity connected therewith. In the present case, the applicant is not alleged to have been in possession of proceeds of crime or involved in any post-generation process or activity.
Accordingly, the Court found that the foundational facts or jurisdictional facts necessary to sustain the PMLA proceedings against the applicant are absent.
3. SIGNIFICANT HOLDINGS
The Court held:
"The facts of the present case where the only allegation against the applicant is of providing assistance in generation of the proceeds of crime and he is not alleged to have been involved in any process or activity after generation of the proceeds of crime or to have at any point of time been in possession of any proceeds of crime, do not even prima facie make out the offence of money laundering defined under Section 3 of the Prevention of Money Laundering Act."
"The offence of money laundering is an independent offence regarding the process or activity connected with the proceeds of crime which had been derived or obtained as a result of criminal activity relating to or in relation to a scheduled offence. The process or activity can be in any form - be it one of concealment, possession, acquisition, use of proceeds of crime as much as projecting it as untainted property or claiming it to be so. Thus, involvement in any one of such process or activity connected with the proceeds of crime would constitute offence of money laundering."
"A person can be prosecuted under PMLA only if the ED has reason to believe that the person is in possession of proceeds of crime, which belief is supported by tangible and credible evidence indicative of involvement of the person concerned in any process or activity connected with the proceeds of crime."
"The offence under Section 3 is a stand-alone offence and is not dependent on or linked to the date on which the scheduled offence or predicate offence has been committed. The relevant date is the date on which the person indulges in the process or activity connected with such proceeds of crime."
"The argument that the mere generation of proceeds of crime is not sufficient to constitute the offence of money-laundering, is actually preposterous. As we could see from Section 3, there are six processes or activities identified therein. They are, (i) concealment; (ii) possession; (iii) acquisition; (iv) use; (v) projecting as untainted property; and (vi) claiming as untainted property."
"In the present case, the applicant is not alleged to have been involved in any of the aforesaid activities after generation of proceeds of crime. The only allegation is that he assisted in generation of proceeds of crime, which does not fall within the ambit of Section 3."
"Continuation of the proceedings under PMLA against the applicant would only amount to his persecution."
Accordingly, the Court quashed the complaint dated 16.09.2017 filed by the Directorate of Enforcement against the applicant, the cognizance and summoning order dated 02.04.2018, and the entire proceedings of Sessions Case No. 123 of 2023 under Sections 3 and 4 of PMLA in the Court of Special Judge (C.B.I.), Lucknow, qua the applicant.
Money Laundering - generation of proceeds of crime - illegal gratification - violation of provisions of Section 3 of PMLA by knowingly assisting the other accused persons in generation of proceeds of crime - HELD THAT:- It is settled law that a precedent is to be read keeping in view the background in which the case was decided. In Y. Balaji [2023 (6) TMI 594 - SUPREME COURT] the accusation against the accused persons was of having taken the bribe and thus generated proceeds of crime by this. The Hon’ble Supreme Court held that taking bribe amounts to acquisition of proceeds of crime.
In the present case, there is no allegation against the applicant that he had generated or acquired any proceeds of crime. The only allegation against the applicant is that he has assisted in generation of crime and thereby violated the provision of Section 3 of Prevention of Money Laundering Act. The allegation against the applicant in the case relating to the scheduled offence is that in the monthly returns he did not report accesses made by A. K. Dutta in granting undue facilities to Vijay Kumar Jaiswal and thus he did not follow the guidelines of the bank.
As per the law laid down in Vijay Madan Lal Chaudhary [2022 (7) TMI 1316 - SUPREME COURT (LB)], the process or activity of money laundering can be indulged in only after the property is derived or obtained as a result of a scheduled offence. The fundamental stages of ‘money laundering’ are ‘ (1) Placement: which is to move the funds from direct association of the crime, (2) Layering: which is disguising the trail to foil pursuit and (3) Integration: which is making the money available to the criminal from what seems to be legitimate sources. There is no allegation in the complained filed by ED that the applicant was involved in any of the aforesaid activities. It is only when money is generated as a result of such acts that PMLA steps in as soon as proceeds of crime are involved in any process or activity but in the present case, the applicant is not alleged to have been involved in any process or activity after generation of the proceeds of crime.
The applicant is already facing trial for the scheduled offence since the year 2010 and the learned counsel for the parties have informed that in that case also merely charges have been framed till date and no prosecution witness has been examined. The case lodged by the Directorate of Enforcement was initiated by lodging the ECIR in the year 2010, the complaint was filed in the year 2017, charges have been framed in the year 2025 and further proceedings are yet to take place. It appears that neither the case relating to the scheduled offence instituted by the CBI nor the case relating to PMLA instituted by the ED could make any substantial progress during the past 1 ½ decade.
Conclusion - The facts of the present case where the only allegation against the applicant is of providing assistance in generation of the proceeds of crime and he is not alleged to have been involved in any process or activity after generation of the proceeds of crime or to have at any point of time been in possession of any proceeds of crime, do not even prima facie make out the offence of money laundering defined under Section 3 of the Prevention of Money Laundering Act. In these circumstances, continuance of the proceedings under PMLA against the application would only amount to his persecution.
The complaint dated 16.09.2017 filed by the Directorate of Enforcement against the applicant, the cognizance and summoning order dated 02.04.2018 and the entire proceedings of Sessions Case No. 123 of 2023, under Section 3 & 4 of the Prevention of Money Laundering Act, 2002 in the Court of Special Judge (C.B.I.), Court No. III, Lucknow, against the applicant only, are quashed - the application filed under Section 482 Cr.P.C. is allowed.
Money Laundering - generation of proceeds of crime - illegal gratification - violation of provisions of Section 3 of PMLA by knowingly assisting the other accused persons in generation of proceeds of crime - HELD THAT:- It is settled law that a precedent is to be read keeping in view the background in which the case was decided. In Y. Balaji [2023 (6) TMI 594 - SUPREME COURT] the accusation against the accused persons was of having taken the bribe and thus generated proceeds of crime by this. The Hon’ble Supreme Court held that taking bribe amounts to acquisition of proceeds of crime.
In the present case, there is no allegation against the applicant that he had generated or acquired any proceeds of crime. The only allegation against the applicant is that he has assisted in generation of crime and thereby violated the provision of Section 3 of Prevention of Money Laundering Act. The allegation against the applicant in the case relating to the scheduled offence is that in the monthly returns he did not report accesses made by A. K. Dutta in granting undue facilities to Vijay Kumar Jaiswal and thus he did not follow the guidelines of the bank.
As per the law laid down in Vijay Madan Lal Chaudhary [2022 (7) TMI 1316 - SUPREME COURT (LB)], the process or activity of money laundering can be indulged in only after the property is derived or obtained as a result of a scheduled offence. The fundamental stages of ‘money laundering’ are ‘ (1) Placement: which is to move the funds from direct association of the crime, (2) Layering: which is disguising the trail to foil pursuit and (3) Integration: which is making the money available to the criminal from what seems to be legitimate sources. There is no allegation in the complained filed by ED that the applicant was involved in any of the aforesaid activities. It is only when money is generated as a result of such acts that PMLA steps in as soon as proceeds of crime are involved in any process or activity but in the present case, the applicant is not alleged to have been involved in any process or activity after generation of the proceeds of crime.
The applicant is already facing trial for the scheduled offence since the year 2010 and the learned counsel for the parties have informed that in that case also merely charges have been framed till date and no prosecution witness has been examined. The case lodged by the Directorate of Enforcement was initiated by lodging the ECIR in the year 2010, the complaint was filed in the year 2017, charges have been framed in the year 2025 and further proceedings are yet to take place. It appears that neither the case relating to the scheduled offence instituted by the CBI nor the case relating to PMLA instituted by the ED could make any substantial progress during the past 1 ½ decade.
Conclusion - The facts of the present case where the only allegation against the applicant is of providing assistance in generation of the proceeds of crime and he is not alleged to have been involved in any process or activity after generation of the proceeds of crime or to have at any point of time been in possession of any proceeds of crime, do not even prima facie make out the offence of money laundering defined under Section 3 of the Prevention of Money Laundering Act. In these circumstances, continuance of the proceedings under PMLA against the application would only amount to his persecution.
The complaint dated 16.09.2017 filed by the Directorate of Enforcement against the applicant, the cognizance and summoning order dated 02.04.2018 and the entire proceedings of Sessions Case No. 123 of 2023, under Section 3 & 4 of the Prevention of Money Laundering Act, 2002 in the Court of Special Judge (C.B.I.), Court No. III, Lucknow, against the applicant only, are quashed - the application filed under Section 482 Cr.P.C. is allowed.
1. Whether properties inherited or acquired prior to the commission of the scheduled offence can be attached as proceeds of crime or their equivalent value under the PMLA.
2. The applicability and interpretation of the definition of "proceeds of crime" under Section 2(1)(u) of the PMLA, particularly the second limb relating to the value of any such property or property equivalent in value.
3. The legitimacy of attaching properties in the name of the accused's family members, including those allegedly purchased from the proceeds of crime.
4. The relevance and sufficiency of investigation and evidence linking the attached properties to the alleged money laundering offence.
5. Whether the delay of over ten years since the FIR affects the validity of the attachment orders.
Issue-wise Detailed Analysis:
1. Attachment of Properties Inherited or Acquired Prior to the Scheduled Offence
The legal framework revolves around the definition of "proceeds of crime" under Section 2(1)(u) of the PMLA, which includes:
"any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property."
The Court referenced the Delhi High Court's judgment in Prakash Industries Ltd. v. Directorate of Enforcement, which clarified that properties acquired prior to the enforcement of the Act are not completely immune from attachment. The Court explained that the Act contemplates attachment not only of tainted property but also untainted property to the extent of the value of proceeds of crime, particularly when the actual tainted property cannot be traced.
The Tribunal also relied on its own precedent in Sadananda Nayak v. Deputy Director, ED, which upheld the principle that properties acquired before the offence may be attached as value equivalent to proceeds of crime, subject to safeguards protecting bona fide third parties.
Further, the Supreme Court's ruling in Vijay Madanlal Chaudhary v. Union of India was pivotal, especially paragraph 68, which emphasized the wide scope of the definition of "proceeds of crime," allowing attachment of properties equivalent in value within the country even if the tainted property is held abroad or is untraceable.
Applying this legal framework, the Court held that the appellant's inherited properties and those acquired prior to the offence could be attached as value equivalent to proceeds of crime, especially since the actual proceeds were not available or had been siphoned off.
2. Attachment of Properties in the Name of Family Members Purchased from Proceeds of Crime
The appellant contended that properties in the name of his wife were purchased from her own earnings and savings, and thus should not be attached. The ED countered by stating that the properties were acquired in 2006-07, contemporaneous with the commission of the offence, and no evidence was produced to prove the wife's independent source of income or savings.
The Court, relying on the Supreme Court's Vijay Madanlal Chaudhary judgment, held that properties purchased from the proceeds of crime, even if in the name of family members, are liable for attachment. The appellant failed to establish the independent source of funds for these properties, thus justifying their attachment.
3. Sufficiency of Investigation and Evidence Linking Properties to Money Laundering
The appellant argued that the ED's attachment was based solely on the FIR and allegations without independent investigation, and that no documentary proof was provided regarding the payment of Rs. 2.49 crores in cash. The appellant also challenged the complainant's financial capacity to make such payments.
The Court observed that the ED's investigation included seizure of incriminating documents from the appellant's residence, statements of witnesses and co-conspirators, and tracing of properties and bank accounts linked to the offence. The investigation established that the appellant received Rs. 2.49 crores in cash from the complainant and that other amounts were deposited in a forged account.
Regarding the complainant's financial capacity, the Court noted that such issues are to be tested during the criminal trial and cross-examination, not at the stage of attachment under PMLA. The Court found no infirmity in the ED's reliance on the investigation and evidence to attach the properties.
4. Delay in Attachment Proceedings
The appellant contended that attachment after more than ten years from the FIR was unjustified. The ED argued that money laundering is a continuing offence and delay does not vitiate the attachment.
The Court agreed with the ED, holding that the PMLA contemplates attachment at any stage during the continuing offence and investigation. Delay alone is not a ground for releasing attached properties.
5. Interpretation of "Proceeds of Crime" under Section 2(1)(u) PMLA
The Court undertook a detailed interpretation of the definition, emphasizing three limbs:
The Court highlighted that when actual tainted property cannot be located, the Act permits attachment of untainted property or property equivalent in value to ensure recovery of proceeds of crime. The Court distinguished the recent Supreme Court judgment in Pavana Dibbur v. ED, noting that it did not consider paragraph 68 of Vijay Madanlal Chaudhary, which supports the broader interpretation adopted here.
Significant Holdings:
"The property which is inherited or acquired prior to the commission of the scheduled offence can also be attached by ED as value thereof, as value thereof under the second limb of the definition of 'proceeds of crime' under Section 2(1)(u) of the Prevention of Money-Laundering Act, 2002."
"The definition of 'proceeds of crime' is wide enough to not only refer to the property derived or obtained as a result of criminal activity relating to a scheduled offence, but also of the value of any such property. If the property is taken or held outside the country, even in such a case, the property equivalent in value held within the country or abroad can be proceeded with."
"In the light of the aforesaid, second limb of the definition of 'proceeds of crime' has been applied to attach the property of equivalent value."
"Attachment of properties after the 10 years of FIR is no ground to release the properties as the offence of money laundering is a continuing offence."
"The issue regarding the financial condition of the complainant to pay sale consideration to the appellant cannot be doubted at this stage, as the present appellant is at liberty to cross examine the complainant on this aspect in the criminal trial."
The Court concluded that the appellant failed to establish any infirmity in the attachment orders. The properties, including inherited and family members' properties, were rightly attached as proceeds of crime or their equivalent value. The appeal was dismissed, with a caveat that no coercive action be taken by the ED until the criminal prosecution attains finality, except under exceptional circumstances.
Money Laundering - attachment of property - relevance and sufficiency of investigation and evidence linking the attached properties to the alleged money laundering offence - delay of over ten years since the FIR affects the validity of the attachment orders - HELD THAT:- The property which is inherited or acquired prior to the commission of the scheduled offence can also be attached by ED as value thereof, as value thereof under the second limb of the definition of “proceeds of crime” under Section 2(1)(u) of the Prevention of Money-Laundering Act, 2002.
The judgment of the Apex Court in the case of Smt. Pavana Dibbur vs The Directorate of Enforcement [2023 (12) TMI 49 - SUPREME COURT] has also been considered, which is silent about para 68 of Vijay Madanlal Choudhary Vs. Union of India. It seems that this particular para 68 was not pointed out during the arguments in case of Pavana Dibbur case. Even otherwise, findings given by three judges Bench of the Apex Court in the Vijay Madanlal Choudhary Vs. Union of India has been relied to give interpretation to the definition.
In the light of the above, there are no force in the argument when the proceeds out of crime was not available with the appellant rather vanished and siphoned off, the property of equivalent value has been attached. In the light of the aforesaid, second limb of the definition of “proceeds of crime” has been applied to attach the property of equivalent value. Thus, the ground raised by the appellant cannot be accepted.
Appeal dismissed.
Money Laundering - attachment of property - relevance and sufficiency of investigation and evidence linking the attached properties to the alleged money laundering offence - delay of over ten years since the FIR affects the validity of the attachment orders - HELD THAT:- The property which is inherited or acquired prior to the commission of the scheduled offence can also be attached by ED as value thereof, as value thereof under the second limb of the definition of “proceeds of crime” under Section 2(1)(u) of the Prevention of Money-Laundering Act, 2002.
The judgment of the Apex Court in the case of Smt. Pavana Dibbur vs The Directorate of Enforcement [2023 (12) TMI 49 - SUPREME COURT] has also been considered, which is silent about para 68 of Vijay Madanlal Choudhary Vs. Union of India. It seems that this particular para 68 was not pointed out during the arguments in case of Pavana Dibbur case. Even otherwise, findings given by three judges Bench of the Apex Court in the Vijay Madanlal Choudhary Vs. Union of India has been relied to give interpretation to the definition.
In the light of the above, there are no force in the argument when the proceeds out of crime was not available with the appellant rather vanished and siphoned off, the property of equivalent value has been attached. In the light of the aforesaid, second limb of the definition of “proceeds of crime” has been applied to attach the property of equivalent value. Thus, the ground raised by the appellant cannot be accepted.
Appeal dismissed.
(1) Whether no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA as the value of the consignment was not specified as exceeding Rs. 30 lakhs;
(2) Whether the two attached properties, acquired prior to the alleged offence, fall within the definition of "proceeds of crime" under PMLA;
(3) Whether properties of the appellant can be attached in the absence of any charge of predicate offence against the appellant;
(4) Whether there was any reason to believe recorded by the Enforcement Directorate (ED) or the Adjudicating Authority that non-attachment of the properties would frustrate proceedings under PMLA, as required under section 5(1)(b) and section 8(1) of the Act.
Issue 1: Applicability of Scheduled Offence under Section 2(1)(y)(ii) of PMLA
The appellant contended that no scheduled offence was committed as the value of the consignment was not specified as exceeding Rs. 30 lakhs, which is the threshold for offences under Part B of the Schedule to PMLA. The Tribunal analyzed the relevant provisions and held that the appellant's contention was misplaced. The offences under the Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) fall under Part A of the Schedule, which does not require any minimum value threshold for applicability under PMLA. Hence, Section 2(1)(y)(ii) was not attracted, but Section 2(1)(y)(i) was squarely applicable.
The Tribunal further noted that the quantum of fraud involved in the case exceeded Rs. 30 lakhs, reinforcing the applicability of PMLA provisions. This finding was based on the detailed financial investigation revealing large sums involved in the narcotics-related transactions.
Issue 2: Whether Properties Acquired Prior to the Incident Constitute 'Proceeds of Crime'
The appellant argued that the two properties attached were purchased in 2004 and 2007, well before the alleged offence in 2011, and thus could not be proceeds of crime. The Tribunal rejected this contention after a detailed examination of the evidence and legal principles.
The investigation revealed that the company controlled by the appellant's husband received substantial payments from suppliers of narcotic drugs and psychotropic substances between April and October 2011. These payments, amounting to nearly Rs. 40 lakhs, were reflected in the company's books as sales but were proceeds of crime. The properties in question were mortgaged to banks to avail credit facilities, and the proceeds of crime were used to reduce the overdraft liabilities on these properties. Thus, the properties were "infused with the proceeds of crime" and constituted proceeds of crime themselves, even if originally acquired earlier.
The Tribunal relied on the definition of "proceeds of crime" under Section 2(1)(u) of PMLA, which includes any property derived directly or indirectly from criminal activity relating to a scheduled offence, or the value of such property. The Tribunal emphasized that the second limb of the definition allows attachment of properties equivalent in value to the proceeds of crime when the actual tainted property cannot be located.
Judicial precedents were cited, including a recent decision of the Delhi High Court, which clarified that properties acquired prior to the commission of the offence are not immune if they are infused with proceeds of crime or represent the value thereof. The Tribunal also referred to the Supreme Court's ruling affirming that attachment of properties equivalent in value to proceeds of crime is permissible even if the proceeds are located outside the country.
Issue 3: Attachment of Properties in Absence of Predicate Offence Charge Against Appellant
The appellant contended that since she was not charged with the predicate offence under the NDPS Act, her properties could not be attached. The Tribunal rejected this argument, holding that under PMLA, attachment can be made if the property is proceeds of crime or value thereof, irrespective of whether the owner is accused in the predicate offence.
The Tribunal observed that the appellant's properties were infused with proceeds of crime, as demonstrated by the financial transactions and the role of the appellant's company in the laundering process. The law does not require the property owner to be an accused in the predicate offence to attach proceeds of crime. Even an innocent receiver of such property can have the property attached under PMLA.
Issue 4: Whether Reasons to Believe Were Recorded for Attachment and Confirmation
The appellant argued that no reason to believe was recorded by the ED or the Adjudicating Authority that non-attachment of the properties would frustrate proceedings under PMLA, as required under Section 5(1)(b) and for issuing show cause notice under Section 8(1).
The Tribunal found that the ED had registered an Enforcement Case Information Report (ECIR) based on a criminal complaint filed by the Directorate of Revenue Intelligence (DRI) against nine accused persons for offences under the NDPS Act. The ED conducted an independent investigation into money laundering, recorded statements under Section 50 of PMLA, and collected documentary evidence.
On the basis of this incriminating material, the ED passed the Provisional Attachment Order (PAO) and filed a complaint before the Adjudicating Authority for confirmation. The Adjudicating Authority, after examining the PAO, complaint, documents, and statements, recorded its reasons to believe that the properties were proceeds of crime and confirmed the attachment.
The Tribunal relied on the High Court's decision that the authority needs only to show that there was sufficiently probable cause to form the opinion that the property under attachment is proceeds of crime. The Tribunal concluded that the Adjudicating Authority had applied its mind and recorded valid reasons for attachment and confirmation.
Significant Holdings and Core Principles
The Tribunal held that the NDPS offences are scheduled offences under Part A of the Schedule to PMLA, and no minimum value threshold applies for invoking PMLA provisions in such cases.
It was established that properties acquired prior to the commission of scheduled offences can be attached if they are infused with or represent the value of proceeds of crime, especially when the actual tainted property is not available. The Tribunal quoted the definition of "proceeds of crime" under Section 2(1)(u) of PMLA and judicial precedents clarifying this principle:
"The expression proceeds of crime envisages both -tainted property as well as -untainted property with it being permissible to proceed against the latter provided it is being attached as equal to the 'value of any such property' or 'property equivalent in value held within the country or abroad'. However, both the italicised categories would be liable to be invoked in cases where the actual tainted property cannot be traced or found out."
The Tribunal affirmed that attachment of properties is permissible even if the owner is not charged with the predicate offence, provided the properties are proceeds of crime or their value.
It was also held that the ED and Adjudicating Authority must record reasons to believe for attachment and confirmation, which can be based on probable cause and material collected during investigation. The Tribunal found such reasons sufficiently recorded in the present case.
In conclusion, the Tribunal dismissed the appeal, holding that the properties were rightly attached as proceeds of crime or value thereof, the scheduled offence was established, and the procedural requirements for attachment were fulfilled. The ownership and possession of the properties were to be maintained until the criminal trial attains finality.
Money Laundering - proceeds of crime - no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA - value of the consignment was not specified as exceeding Rs. 30 lakhs - absence of any charge of predicate offence against the appellant - reason to believe.
Whether no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA as the value of the consignment is not specified as more than Rs. 30 lakhs? - HELD THAT:- It is not satisfied with the contention of the appellant that no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA, just because the value of the consignment is not specified as more than Rs. 30 lakhs. In this regard, clause 2(1)(y)(ii) is not attracted, but in fact clause 2(1)(y)(i) is attracted, as the NDPS offences are covered in Part A of the Schedule. Even otherwise, the quantum of fraud in the present case is more than Rs. 30 lakhs.
Whether the two attached properties are covered within the definition of 'Proceeds of Crime' in any manner since the said two properties were acquired on 19/03/2004 and 18/04/2007 that is much before the alleged incident i.e. 03.12.2011? - HELD THAT:- Since, these properties were kept afloat by the appellants by using different payments received from Narcotics and Psychotropic Substances suppliers as discussed aforesaid, thereby becoming infused with the proceeds of crime generated as a result of commission of offences in terms of Scheduled offences of PMLA, these properties themselves can be termed as proceeds of crime being acquired (loan repayment) from the amount of proceeds of crime.
Even otherwise, it is an established fact that properties of “value thereof” can be attached as per the second limb of the definition of the “proceeds of crime”, in case of non-availability of the proceeds of crime itself. In the present case, since the proceeds of crime is not available, the ED has rightful authority to attach the impugned properties, even if they were purchased before the incident took place.
There are no force in the second argument when the proceeds out of crime was not available with the appellant rather vanished and siphoned off, the property of equivalent value can be attached.
Whether the properties of the appellant can be attached in absence of any charge of predicate offence against the present appellant? - HELD THAT:- It is settled law that regardless of the fact as to whether the appellant is accused of the scheduled offence or not, the property can still be attached if the appellant was involved in the act of money laundering, even being innocent receiver of the properties derived out of proceeds of crime and in the present case, the impugned properties in possession of the appellant are proceeds of crime/value thereof, as is evident from the detailed discussion in para 6 above, where by these properties were kept afloat by the appellants by using different payments received from Narcotics and Psychotropic Substances suppliers, thus becoming infused with the proceeds of crime generated as a result of commission of offences in terms of Scheduled offences of PMLA. Hence, these properties themselves can be termed as proceeds of crime being acquired (loan repayment) from the amount of proceeds of crime and thus, can be rightly attached regardless of the appellant not being arraigned as an accused.
Whether there is nothing on record to show that officer has any reason to believe that the non-attachment of the properties will frustrate any proceedings under PMLA, as per section 5(1)(b) or the adjudicating authority has any reason to believe regarding the commission of offence under section 3 of PMLA for issuing show cause notice under section 8(1)? - HELD THAT:- In the present case, ED recorded ECIR No. 15/AZO/2012 dated 08.11.2012 on the basis of Criminal complaint filed by the DRI against the nine accused persons for commission of offences under the NDPS Act. Thereafter, ED initiated the investigation pertaining to the offence of money laundering and recorded the statements of the suspects and others under section 50 of PMLA and collected the documents from various sources. On the basis of incriminating material on record coupled with the allegations mentioned in the prosecution complaint, ED passed the PAO No. 7/2015 dated 31.03.2015. Thus, the 1st Proviso to sec. 5(1)(b) is duly complied for passing the PAO. Thereafter, it filed original complaint no. 492/2015 before the Adjudicating Authority for confirmation of the PAO. However, the Ld. Adjudicating Authority has made its careful observation and cited its reason to believe regarding the same, based on the perusal of PAO, complaint, documents relied, statements recorded u/s 50 of the PMLA and investigation conducted by the ED. Further, the Hon’ble High Court of Bombay in the case of Radha Mohan Lakhotia v Deputy Director, Enforcement Directorate, [2010 (8) TMI 947 - BOMBAY HIGH COURT] has held that: “All that the authority is required to show is that there was sufficiently probable cause to form the opinion that the property under attachment is proceeds of crime.” Thus, there remains no doubt that the Adjudicating Authority had applied its mind and cited reasons to believe. Hence, the impugned order was rightly passed by the Ld. AA for confirmation of PAO.
Conclusion - The properties are rightly attached as proceeds of crime or value thereof, the scheduled offence was established, and the procedural requirements for attachment were fulfilled. The ownership and possession of the properties were to be maintained until the criminal trial attains finality.
Appeal dismissed.
Money Laundering - proceeds of crime - no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA - value of the consignment was not specified as exceeding Rs. 30 lakhs - absence of any charge of predicate offence against the appellant - reason to believe.
Whether no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA as the value of the consignment is not specified as more than Rs. 30 lakhs? - HELD THAT:- It is not satisfied with the contention of the appellant that no scheduled offence was committed by any person under Section 2(1)(y)(ii) of PMLA, just because the value of the consignment is not specified as more than Rs. 30 lakhs. In this regard, clause 2(1)(y)(ii) is not attracted, but in fact clause 2(1)(y)(i) is attracted, as the NDPS offences are covered in Part A of the Schedule. Even otherwise, the quantum of fraud in the present case is more than Rs. 30 lakhs.
Whether the two attached properties are covered within the definition of 'Proceeds of Crime' in any manner since the said two properties were acquired on 19/03/2004 and 18/04/2007 that is much before the alleged incident i.e. 03.12.2011? - HELD THAT:- Since, these properties were kept afloat by the appellants by using different payments received from Narcotics and Psychotropic Substances suppliers as discussed aforesaid, thereby becoming infused with the proceeds of crime generated as a result of commission of offences in terms of Scheduled offences of PMLA, these properties themselves can be termed as proceeds of crime being acquired (loan repayment) from the amount of proceeds of crime.
Even otherwise, it is an established fact that properties of “value thereof” can be attached as per the second limb of the definition of the “proceeds of crime”, in case of non-availability of the proceeds of crime itself. In the present case, since the proceeds of crime is not available, the ED has rightful authority to attach the impugned properties, even if they were purchased before the incident took place.
There are no force in the second argument when the proceeds out of crime was not available with the appellant rather vanished and siphoned off, the property of equivalent value can be attached.
Whether the properties of the appellant can be attached in absence of any charge of predicate offence against the present appellant? - HELD THAT:- It is settled law that regardless of the fact as to whether the appellant is accused of the scheduled offence or not, the property can still be attached if the appellant was involved in the act of money laundering, even being innocent receiver of the properties derived out of proceeds of crime and in the present case, the impugned properties in possession of the appellant are proceeds of crime/value thereof, as is evident from the detailed discussion in para 6 above, where by these properties were kept afloat by the appellants by using different payments received from Narcotics and Psychotropic Substances suppliers, thus becoming infused with the proceeds of crime generated as a result of commission of offences in terms of Scheduled offences of PMLA. Hence, these properties themselves can be termed as proceeds of crime being acquired (loan repayment) from the amount of proceeds of crime and thus, can be rightly attached regardless of the appellant not being arraigned as an accused.
Whether there is nothing on record to show that officer has any reason to believe that the non-attachment of the properties will frustrate any proceedings under PMLA, as per section 5(1)(b) or the adjudicating authority has any reason to believe regarding the commission of offence under section 3 of PMLA for issuing show cause notice under section 8(1)? - HELD THAT:- In the present case, ED recorded ECIR No. 15/AZO/2012 dated 08.11.2012 on the basis of Criminal complaint filed by the DRI against the nine accused persons for commission of offences under the NDPS Act. Thereafter, ED initiated the investigation pertaining to the offence of money laundering and recorded the statements of the suspects and others under section 50 of PMLA and collected the documents from various sources. On the basis of incriminating material on record coupled with the allegations mentioned in the prosecution complaint, ED passed the PAO No. 7/2015 dated 31.03.2015. Thus, the 1st Proviso to sec. 5(1)(b) is duly complied for passing the PAO. Thereafter, it filed original complaint no. 492/2015 before the Adjudicating Authority for confirmation of the PAO. However, the Ld. Adjudicating Authority has made its careful observation and cited its reason to believe regarding the same, based on the perusal of PAO, complaint, documents relied, statements recorded u/s 50 of the PMLA and investigation conducted by the ED. Further, the Hon’ble High Court of Bombay in the case of Radha Mohan Lakhotia v Deputy Director, Enforcement Directorate, [2010 (8) TMI 947 - BOMBAY HIGH COURT] has held that: “All that the authority is required to show is that there was sufficiently probable cause to form the opinion that the property under attachment is proceeds of crime.” Thus, there remains no doubt that the Adjudicating Authority had applied its mind and cited reasons to believe. Hence, the impugned order was rightly passed by the Ld. AA for confirmation of PAO.
Conclusion - The properties are rightly attached as proceeds of crime or value thereof, the scheduled offence was established, and the procedural requirements for attachment were fulfilled. The ownership and possession of the properties were to be maintained until the criminal trial attains finality.
Appeal dismissed.
1. Whether the issuance of the show cause notice and order-in-original without prior pre-consultation notice to the petitioners was legally valid and in compliance with the mandatory procedural requirements under the relevant Circulars and statutory provisions.
2. Whether the petitioners were liable to pay service tax on the activities of construction, renovation, or alteration of public roads, considering the exemption granted under Notification No. 25/2012-ST dated 20.6.2012.
3. Whether the extended period of limitation under section 73(1) of the Finance Act, 1994 could be invoked for recovery of service tax based on the difference in value reported in Income Tax returns and ST-3 returns.
4. Whether the show cause notice issued without a valid Document Identification Number (DIN) and without proper party details was valid.
5. Whether the appeal filed by the petitioners was barred by limitation and the consequences thereof.
6. The applicability and interpretation of the Circular dated 10.3.2017 and related Board instructions regarding mandatory pre-show cause notice consultation in cases involving demands exceeding Rs. 50 lakhs, and exceptions thereto.
Issue-wise Detailed Analysis:
1. Validity of Show Cause Notice without Pre-consultation Notice
Legal Framework and Precedents: The Court examined Circular No. 1053/02/2017-CX dated 10.3.2017 and subsequent clarifications including Circular No. 1079/03/2021-CX dated 11.11.2021 and Circular No. 1076/02/2020-CX dated 19.11.2020, which mandate pre-show cause notice consultation with the Principal Commissioner or Commissioner prior to issuance of show cause notices involving demands exceeding Rs. 50 lakhs, except in cases involving preventive or offence-related SCNs. The Court also considered the decision in L AND T Hydrocarbon Engineering Ltd. Vs. Union of India and Amadeus India Pvt Ltd Vs. Principal Commissioner, which emphasized the mandatory nature of pre-consultation and held non-compliance fatal to the proceedings.
Court's Interpretation and Reasoning: The Court held that the show cause notice issued in the present case was not preventive or offence-related in nature. The respondents' contention that the case involved suppression or wilful mis-statement to evade tax did not automatically render the SCN as offence-related for the purpose of exemption from pre-consultation. The Court emphasized that the possibility of penal consequences after adjudication does not exempt the department from following the pre-consultation procedure. The circulars make clear that the exclusion from pre-consultation is case-specific, not formation-specific, and the present case did not fall within the exceptions.
Key Evidence and Findings: The petitioners asserted that no pre-consultation notice was issued; the respondents contended otherwise but failed to establish that such consultation occurred. The Court relied on the absence of any pre-consultation record and the binding nature of the Board's circulars.
Application of Law to Facts: Since the demand exceeded Rs. 50 lakhs and the SCN was not offence/preventive related, the failure to conduct pre-consultation rendered the show cause notice invalid.
Treatment of Competing Arguments: The respondents argued that the case was exempt from pre-consultation due to the nature of the investigation and alleged suppression. The Court rejected this, noting that such a broad interpretation would nullify the mandatory pre-consultation requirement in most cases.
Conclusion: The absence of pre-consultation notice was fatal to the validity of the show cause notice and subsequent order.
2. Liability for Service Tax on Construction, Renovation or Alteration of Public Roads
Legal Framework and Precedents: Notification No. 25/2012-ST dated 20.6.2012 exempts services related to construction, renovation, or alteration of roads meant for use by the general public. The burden of proof to establish exemption lies on the claimant. The Court also referred to the definition of "general public" under the Notification and the requirement to verify whether the roads constructed were for public use.
Court's Interpretation and Reasoning: The Court noted that the petitioners failed to produce key documentary evidence such as agreements between the main contractor and the Government, work orders, and RA bills to establish that the roads constructed were for the general public and thus exempt. The adjudicating authority's reliance on this absence to deny exemption was upheld.
Key Evidence and Findings: Petitioners admitted the value of services provided but did not furnish documents to prove the exemption claim. Respondents relied on the absence of such proof and the best judgment assessment based on third-party data (Income Tax returns, Form 26AS).
Application of Law to Facts: Without documentary proof, the exemption could not be granted. The adjudicating authority correctly applied the principle that the claimant bears the burden of proof.
Treatment of Competing Arguments: Petitioners contended that the exemption was unconditional; respondents countered that the exemption applies only if the road is for general public use and proof is necessary.
Conclusion: The petitioners were liable for service tax as the exemption was not established.
3. Invocation of Extended Period of Limitation under Section 73(1) of the Finance Act, 1994
Legal Framework and Precedents: Section 73(1) allows recovery within five years if there is suppression of facts or wilful mis-statement. The Court referred to the statutory provisions and the principle of best judgment assessment under Section 72.
Court's Interpretation and Reasoning: The respondents invoked extended limitation based on the difference between income tax returns and ST-3 returns, alleging suppression. The Court accepted that the petitioner had not filed accurate ST-3 returns and that the department was entitled to invoke extended limitation.
Key Evidence and Findings: Third-party data from Income Tax returns and Form 26AS showed higher income than declared in ST-3 returns. Petitioners admitted the income but did not file correct returns.
Application of Law to Facts: The department's invocation of extended limitation was justified due to suppression.
Treatment of Competing Arguments: Petitioners did not dispute the income figures but disputed the tax liability based on exemption claims.
Conclusion: Extended limitation was rightly invoked.
4. Validity of Show Cause Notice without Valid DIN and Proper Party Details
Legal Framework and Precedents: Circular No. 122/41/2019-GST and Circular No. 128/47/2019-GST mandate issuance of communications with valid Document Identification Number (DIN) for authenticity and traceability.
Court's Interpretation and Reasoning: Petitioners alleged absence of valid DIN and inability to retrieve party details on the portal. Respondents produced proof of valid DINs for both the show cause notice and order-in-original. The Court accepted the respondents' evidence.
Key Evidence and Findings: Respondents produced annexures showing generation of DINs with timestamps and category details.
Application of Law to Facts: The show cause notice and order-in-original were validly issued with proper DINs.
Treatment of Competing Arguments: Petitioners' claim of invalid DIN was rejected on evidence.
Conclusion: The SCN and OIO were validly issued with proper DINs.
5. Limitation Bar on Appeal
Legal Framework and Precedents: Appeals must be filed within prescribed limitation periods under the Finance Act, 1994. Delay without sufficient cause results in dismissal.
Court's Interpretation and Reasoning: Petitioners filed appeal belatedly due to internal disputes with consultants. The appellate authority rejected the appeal on limitation grounds. The Court found no merit in condoning delay.
Key Evidence and Findings: Appeal was filed after expiry of limitation period.
Application of Law to Facts: Delay was not excused; appeal was rightly rejected.
Treatment of Competing Arguments: Petitioners sought leniency; respondents relied on strict limitation rules.
Conclusion: Appeal was barred by limitation and rightly rejected.
Significant Holdings:
"The absence of pre-show cause notice consultation in cases involving demands exceeding Rs. 50 lakhs, unless the show cause notice is preventive or offence-related, is fatal to the validity of the proceedings."
"The exception to mandatory pre-consultation is case-specific and not formation-specific; mere suspicion or possibility of offence does not exempt the department from following the procedure."
"The burden of proof to establish exemption under Notification No. 25/2012-ST lies on the claimant, and failure to produce documentary evidence to prove that the road constructed was for use by the general public disentitles the claimant from exemption."
"Extended period of limitation under Section 73(1) of the Finance Act, 1994 can be invoked where there is suppression of facts or wilful mis-statement, as evidenced by discrepancies between income tax returns and ST-3 returns."
"Communications including show cause notices must be issued with valid Document Identification Numbers (DIN) for authenticity; absence of valid DIN renders the notice invalid."
"Appeals filed beyond the prescribed limitation period without sufficient cause are liable to be rejected."p>
Final determinations on each issue:
1. The show cause notice and order-in-original issued without pre-consultation notice were quashed and set aside.
2. The petitioners failed to establish exemption under Notification No. 25/2012-ST; hence, they were liable for service tax.
3. The invocation of extended limitation period was justified based on suppression of facts.
4. The show cause notice and order-in-original were validly issued with proper DINs.
5. The appeal was rightly rejected on limitation grounds.
6. The respondents are permitted to initiate fresh proceedings or revive the original show cause notice after complying with the mandatory pre-consultation requirement and within the period of limitation.
Liability to pay service tax on the activities of construction, renovation, or alteration of public roads - Validity of show cause notice - order-in-original passed without granting pre-consultation notice - exemption granted under Notification No. 25/2012-ST - compliance with the mandatory procedural requirements - deduction of TDS - HELD THAT:- It was submitted that in the impugned show cause notice issued by the respondent No. 2, there is no valid DIN and online search on the portal reveals that the same has been generated without indicating the Party Name, Party Address and also the document identifier and proper verification and therefore, it was not possible to find the party name and party address and also the petitioner could not retrive any document identifier so as to find the DIN for impugned show cause notice.
Having heard learned advocates for the respective parties, issue raised in the present petition is no more res integra in view of the order passed by this Court in the case of M/s Jay Mahakali Industrial Service [2023 (9) TMI 1672 - GUJARAT HIGH COURT]
In view of the aforesaid settled legal position, impugned show cause notice dated 23.10.2021 and the order-in-original dated 7.2.2022 as well as the appellate orders are hereby quashed and set aside. However, it is made clear that the respondent authorities may take appropriate proceedings if permitted as per the period of limitation in accordance with law after giving pre-consultation notice to the petitioners.
Rule is made absolute with no order as to costs.
Liability to pay service tax on the activities of construction, renovation, or alteration of public roads - Validity of show cause notice - order-in-original passed without granting pre-consultation notice - exemption granted under Notification No. 25/2012-ST - compliance with the mandatory procedural requirements - deduction of TDS - HELD THAT:- It was submitted that in the impugned show cause notice issued by the respondent No. 2, there is no valid DIN and online search on the portal reveals that the same has been generated without indicating the Party Name, Party Address and also the document identifier and proper verification and therefore, it was not possible to find the party name and party address and also the petitioner could not retrive any document identifier so as to find the DIN for impugned show cause notice.
Having heard learned advocates for the respective parties, issue raised in the present petition is no more res integra in view of the order passed by this Court in the case of M/s Jay Mahakali Industrial Service [2023 (9) TMI 1672 - GUJARAT HIGH COURT]
In view of the aforesaid settled legal position, impugned show cause notice dated 23.10.2021 and the order-in-original dated 7.2.2022 as well as the appellate orders are hereby quashed and set aside. However, it is made clear that the respondent authorities may take appropriate proceedings if permitted as per the period of limitation in accordance with law after giving pre-consultation notice to the petitioners.
Rule is made absolute with no order as to costs.
(i) Whether bank charges paid to foreign banks are subject to service tax under the reverse charge mechanism (RCM)Rs.
(ii) Whether commission paid to agents is liable to service tax under RCMRs.
(iii) Whether design charges paid to professionals are subject to service tax under RCMRs.
(iv) Whether the extended period of limitation was rightly invoked by the DepartmentRs.
Issue-wise Detailed Analysis:
(i) Bank Charges Paid to Foreign Banks
Relevant Legal Framework and Precedents: The Department invoked Section 66A of the Finance Act, 1994, which deals with the levy of service tax on services provided by banking companies or financial institutions, including foreign banks, under the category of "Banking and Other Financial Services" (BOFS). The definition of BOFS encompasses a variety of financial services such as financial leasing, merchant banking, foreign exchange broking, advisory services, and other auxiliary financial services. The taxable service under Section 65(105)(zm) is defined as any service provided by a banking company or financial institution to any person in relation to banking and other financial services.
Precedents relied upon included Greenply Industries Ltd. and several other Tribunal decisions which held that service tax cannot be levied where there is no direct contractual relationship between the foreign bank and the Indian appellant and the service is provided outside taxable territory.
Court's Interpretation and Reasoning: The Tribunal noted that the foreign buyers (clients of the appellant) availed services of foreign banks to facilitate payments in foreign currency. The appellant bore the bank charges based on an understanding with the buyers but did not have any privity of contract with the foreign banks. The Tribunal emphasized that the foreign bank provided services to its client (the foreign buyer), not to the appellant. The appellant had only borne the expenses as per the commercial arrangement with the buyer.
The Tribunal held that since both service provider (foreign bank) and service recipient (foreign buyer) were located outside India, the service was rendered outside the taxable territory and thus outside the purview of Section 66B (charging section) of the Finance Act. The appellant's Indian bank provided banking services to the appellant, and service tax liability, if any, was on that Indian bank.
Key Evidence and Findings: The appellant's balance sheet reflected foreign bank charges paid in foreign currency. There was no documentary evidence of any direct transaction or contract between the appellant and the foreign bank. The foreign bank charges were deducted by the foreign bank from the buyer's account before remitting the net amount to the appellant's Indian bank.
Application of Law to Facts: The Tribunal applied the legal principle that service tax under RCM can only be levied if the appellant is the recipient of the service from the foreign service provider. Since the foreign bank did not provide any service to the appellant, no service tax liability arose.
Treatment of Competing Arguments: The Department argued that the appellant was liable under Section 66A for foreign bank charges. The appellant contended absence of contractual relationship and that the Indian bank had already discharged service tax liability. The Tribunal sided with the appellant, finding no taxable service provided to the appellant by the foreign bank.
Conclusion: The demand of service tax on foreign bank charges under RCM was unsustainable and set aside.
(ii) Commission Paid to Agents
Relevant Legal Framework and Precedents: Commission payments to agents fall under the category of "Business Auxiliary Services" (BAS), which is taxable under RCM when services are provided by foreign service providers to Indian recipients. The Department relied on Section 66A and the Service Tax Rules, 1994.
Precedents included several Tribunal decisions such as Suryanarayan Synthetics P Ltd. and Laxmi Exports, which held that commission payments are taxable only if there is a direct service provider-recipient relationship and a contract between the parties.
Court's Interpretation and Reasoning: The Tribunal examined the factual matrix and found that the foreign buyers had appointed agents to identify suppliers, and the appellant merely bore the commission charges as per the terms of sale. There was no agreement or contract between the appellant and the foreign agents. The commission was deducted from the invoice value and reflected as a discount or rebate to the foreign buyer rather than a payment for services received by the appellant.
Key Evidence and Findings: The Tribunal scrutinized export documents including purchase orders, invoices, shipping bills, and bank realization certificates. These documents showed commission as deductions from the sale price payable by the foreign buyer, not as payments made by the appellant to any third-party service provider. No evidence was produced to show direct payment or contract between appellant and foreign agents.
Application of Law to Facts: The Tribunal applied the principle that for service tax under RCM to be leviable, the appellant must be the recipient of the service. Here, the appellant was not the recipient of any commission agent services; rather, the commission was a trade discount extended to the buyer. The absence of a third-party service provider negated the applicability of BAS under RCM.
Treatment of Competing Arguments: The Department contended that the appellant was promoting the business of foreign buyers by paying commission and was thus liable for service tax. The appellant argued absence of service provider-recipient relationship and that the commission was a discount to the buyer. The Tribunal accepted the appellant's submissions based on documentary evidence and legal precedents.
Conclusion: The service tax demand on commission payments was rejected.
(iii) Design Charges Paid to Professionals
Relevant Legal Framework and Precedents: Design and artwork charges are taxable under RCM if the appellant receives design services from foreign professionals. The Department relied on Section 66A and the definition of taxable services.
Court's Interpretation and Reasoning: The Tribunal noted that the appellant bore design and artwork charges as per the terms of sale with the foreign buyers, who had engaged the designers. There was no privity of contract or direct receipt of services by the appellant from the foreign designers. The appellant merely reimbursed these charges as per contractual terms with the buyers.
Key Evidence and Findings: Sample purchase orders showed that the appellant agreed to bear artwork and design charges invoiced by the foreign buyers. No evidence was found that the appellant directly received or contracted for design services from foreign professionals.
Application of Law to Facts: The Tribunal held that since the appellant was not the recipient of design services, no service tax liability under RCM arose. Even if service tax was payable, the appellant would be entitled to CENVAT credit, rendering the transaction revenue neutral.
Treatment of Competing Arguments: The Department argued that design services were directly linked to the appellant's products and thus taxable. The appellant countered that the services were received by foreign buyers and only reimbursed by the appellant. The Tribunal accepted the latter view.
Conclusion: No service tax was payable on design and artwork charges under RCM.
(iv) Invocation of Extended Period of Limitation
Relevant Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994, provides for extended period of limitation in cases of willful suppression or evasion of tax. However, case law including Jet Airways (both Tribunal and Supreme Court decisions), The Indure Pvt. Ltd., and Parker Markwel Industries established that extended period is not invocable in cases involving interpretational issues or where the situation is revenue neutral due to availability of CENVAT credit.
Court's Interpretation and Reasoning: The appellant was unregistered during the disputed period, and the relevant date for limitation computation was the due date for payment of tax under Section 73(6). The Tribunal found that the issues in dispute were purely of interpretation and that the appellant's payment of service tax under RCM (if any) would be eligible for CENVAT credit, making the situation revenue neutral. There was no evidence of willful evasion or suppression.
Key Evidence and Findings: The appellant's records showed no concealment or suppression of facts. The appellant had bona fide belief that no service tax was payable or that any tax paid would be creditable. The Department failed to prove malafide intention or evasion.
Application of Law to Facts: The Tribunal applied the principle that extended limitation period is not applicable in revenue neutral situations or cases involving genuine disputes on interpretation. The appellant's unregistered status further limited the Department's ability to invoke extended period.
Treatment of Competing Arguments: The Department contended that extended period was justified due to willful contravention. The appellant argued absence of evasion and revenue neutrality. The Tribunal sided with the appellant based on legal precedents and facts.
Conclusion: The invocation of extended period of limitation was held to be unsustainable.
Significant Holdings:
On the issue of foreign bank charges, the Tribunal held:
"The Foreign Bank of the customer located outside India has not provided any service to the appellant located in India. In the instant case, the buyer is the client for the Foreign Bank, and not the appellant...when the provider of service i.e. 'the Foreign Bank' and recipient of service i.e. 'the Buyer' are both located outside India, there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B the charging section for levy of service tax."
Regarding commission payments, the Tribunal stated:
"There is no contract of commission agent service with any of the commission agent, there is no person to whom payment of commission was made therefore, it is clear that no service provider i.e. foreign commission agent exists in the present case and no service was provided by any person to the appellant. In the absence of any provision of service, no service tax can be demanded. The trade discount even though in the name of commission agent was given by the appellant to the foreign buyer, by any stretch of imagination cannot be considered as commission paid towards commission agent service, hence cannot be taxable."
On design charges, the Tribunal concluded:
"It is clear from these terms that the Artwork charges was received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence, we hold that no service tax is liable to be paid by the appellant on such artwork charges and design and development charges."
On extended limitation, the Tribunal relied on the Jet Airways decision and held:
"Since in this case, intention to evade the tax is absent, the penalty under Section 78 of Finance Act, 1994 would not be attracted...the entire service tax paid would be immediately available to them as Cenvat Credit and collection of service tax from the Appellant would be a revenue neutral exercise."
The Tribunal ultimately set aside the impugned order and allowed the appeal, holding that no service tax liability arose on foreign bank charges, commission payments, or design charges under RCM and that the extended period of limitation was wrongly invoked.
Levy of service tax - bank charges paid to foreign bank - reverse charge mechanism (RCM) - Imposition of the penalty under section 77 & section 78 of the Finance Act - 100% Export Oriented Unit - foreign currency from buyers - Commissioner payment to Agent - Payment for Artwork Charges - invocation of the extended period - HELD THAT:- We hold that no service has been provided by the foreign Bank within the taxable territory to the appellant. Further, it has to be appreciated that the Foreign Bank of the buyer had provided its services to its client i.e. the buyer who has the letter of credit facility with the Foreign bank. The said Bank retains its charges and commission, and thereafter remits the net amount to appellant's bank in India where the appellant enjoys the said facility of letter of credit. The appellant received services from the bank in India with whom all the documents were negotiated.
There is direct nexus of the buyer with the Foreign Bank, and it is held that when the provider of service i.e. 'the Foreign Bank' and recipient of service i.e. 'the Buyer' are both located outside India, there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B the charging section for levy of service tax. We draw support from the Tribunal’s decision in Greenply Industries Ltd. VS CCE-[2015 (12) TMI 80 - CESTAT NEW DELHI], wherein it was held that there is no document showing foreign banker charging any amount directly from assessee and the assessee cannot to be treated service recipient and Service Tax not to be charged under Section 66A of Finance Act, 1994 read with Rule 2(1)(2)(iv) of Service Tax we ort from: Rules, 1994.
We note that services provided by a commission agent are included in the category of taxable service termed as “business auxiliary service”. In cases where this ‘service’ is provided by a service provider who is based outside India to a service recipient who is based in India, Section 66A, inserted by the Finance Act, 2006 read with the Service Tax Rules, 1994 mandate that service tax liability is to be discharged by the service recipient. However, a perusal of sample purchase order of the client M/s TESCO, it is noted that the terms of the agreement is that the appellant will bear the artwork charges, Foreign Bank charges, Agent commission charges. It is clear from these terms that the services of the Commission agent was received by the buyer abroad and he charges the said commission amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the foreign commission agent.
We draw support from the Tribunal’s decision in the case of SURYANARAYAN SYNTHETICS P LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE & ST, [2024 (8) TMI 908 - CESTAT AHMEDABAD] wherein the coordinate bench of this Tribunal held that as per the documentary evidence such as invoice, it is clear that appellant has not made any payment directly to any commission agent whereas deduction was provided from the total value of the bill raised to foreign buyer of the goods.
In these facts, it is nothing but discount extended by the appellant to the buyer of the goods. Even though some service provider is involved, there is no relationship between the appellant and any foreign based service provider as there is no direct transaction made by the appellant with the commission agent. It is also a fact that there is no contract between the appellant and the foreign based service provider. The arrangement of payment was between the buyer of the goods and the commission agent in the foreign country. For this reason, the demand of service tax on the commission shown in the invoice raised to the buyer cannot be upheld.
It is clear from these terms that the Artwork charges was received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence, we hold that no service tax is liable to be paid by the appellant on such artwork charges and design and development charges.
We also observe that even if appellant is legally required to pay the amount of service tax under reverse charge mechanism, then the appellant would be entitled to avail CENVAT credit of the amount of service tax so paid and utilize it against payment of duties in respect of its clearances of final products. This would clearly render the situation to be revenue neutral and hence extended period cannot be upheld.
Therefore, the invocation of the extended period cannot be sustained.
In view of the above discussions with respect to three of the issues framed above, we set aside the impugned order. Consequently, the appeal is allowed.
Levy of service tax - bank charges paid to foreign bank - reverse charge mechanism (RCM) - Imposition of the penalty under section 77 & section 78 of the Finance Act - 100% Export Oriented Unit - foreign currency from buyers - Commissioner payment to Agent - Payment for Artwork Charges - invocation of the extended period - HELD THAT:- We hold that no service has been provided by the foreign Bank within the taxable territory to the appellant. Further, it has to be appreciated that the Foreign Bank of the buyer had provided its services to its client i.e. the buyer who has the letter of credit facility with the Foreign bank. The said Bank retains its charges and commission, and thereafter remits the net amount to appellant's bank in India where the appellant enjoys the said facility of letter of credit. The appellant received services from the bank in India with whom all the documents were negotiated.
There is direct nexus of the buyer with the Foreign Bank, and it is held that when the provider of service i.e. 'the Foreign Bank' and recipient of service i.e. 'the Buyer' are both located outside India, there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B the charging section for levy of service tax. We draw support from the Tribunal’s decision in Greenply Industries Ltd. VS CCE-[2015 (12) TMI 80 - CESTAT NEW DELHI], wherein it was held that there is no document showing foreign banker charging any amount directly from assessee and the assessee cannot to be treated service recipient and Service Tax not to be charged under Section 66A of Finance Act, 1994 read with Rule 2(1)(2)(iv) of Service Tax we ort from: Rules, 1994.
We note that services provided by a commission agent are included in the category of taxable service termed as “business auxiliary service”. In cases where this ‘service’ is provided by a service provider who is based outside India to a service recipient who is based in India, Section 66A, inserted by the Finance Act, 2006 read with the Service Tax Rules, 1994 mandate that service tax liability is to be discharged by the service recipient. However, a perusal of sample purchase order of the client M/s TESCO, it is noted that the terms of the agreement is that the appellant will bear the artwork charges, Foreign Bank charges, Agent commission charges. It is clear from these terms that the services of the Commission agent was received by the buyer abroad and he charges the said commission amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the foreign commission agent.
We draw support from the Tribunal’s decision in the case of SURYANARAYAN SYNTHETICS P LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE & ST, [2024 (8) TMI 908 - CESTAT AHMEDABAD] wherein the coordinate bench of this Tribunal held that as per the documentary evidence such as invoice, it is clear that appellant has not made any payment directly to any commission agent whereas deduction was provided from the total value of the bill raised to foreign buyer of the goods.
In these facts, it is nothing but discount extended by the appellant to the buyer of the goods. Even though some service provider is involved, there is no relationship between the appellant and any foreign based service provider as there is no direct transaction made by the appellant with the commission agent. It is also a fact that there is no contract between the appellant and the foreign based service provider. The arrangement of payment was between the buyer of the goods and the commission agent in the foreign country. For this reason, the demand of service tax on the commission shown in the invoice raised to the buyer cannot be upheld.
It is clear from these terms that the Artwork charges was received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence, we hold that no service tax is liable to be paid by the appellant on such artwork charges and design and development charges.
We also observe that even if appellant is legally required to pay the amount of service tax under reverse charge mechanism, then the appellant would be entitled to avail CENVAT credit of the amount of service tax so paid and utilize it against payment of duties in respect of its clearances of final products. This would clearly render the situation to be revenue neutral and hence extended period cannot be upheld.
Therefore, the invocation of the extended period cannot be sustained.
In view of the above discussions with respect to three of the issues framed above, we set aside the impugned order. Consequently, the appeal is allowed.
Regarding issue (A) on limitation, the Tribunal examined the provisions of Section 73(1) of the Finance Act, 1994, which governs recovery of service tax not levied or paid. The section prescribes a limitation period of thirty months from the relevant date for issuance of a show cause notice, with an extended period of five years applicable only where non-payment arises due to fraud, collusion, wilful misstatement, suppression of facts, or contravention of the provisions with intent to evade payment. The "relevant date" is defined in Section 73(6), primarily as the date of filing of the return showing particulars of service tax paid.
The Tribunal carefully analyzed judicial precedents, including a detailed review of the Supreme Court's interpretation of similar limitation provisions under the Customs Act and Central Excise Act, emphasizing that invocation of the extended limitation period requires proof of deliberate intention to evade tax, such as wilful misstatement or suppression of facts. Mere non-payment or omission does not suffice. The Tribunal further noted that the appellant had regularly filed service tax returns during the disputed period, consistently declaring the amounts received as export of services, and had responded to departmental inquiries in prior years, thereby negating any claim of suppression or wilful misstatement.
Moreover, the Tribunal underscored the statutory responsibility of departmental officers to scrutinize returns filed by assessees and to initiate timely inquiries if discrepancies are suspected. The failure of the department to scrutinize the appellant's returns or to raise queries within the prescribed period undermined the justification for invoking the extended limitation period. The Tribunal relied on several authoritative decisions holding that when the department neglects its duty to scrutinize returns, extended limitation cannot be invoked against an assessee who has made full disclosures.
Consequently, the Tribunal concluded that the show cause notice issued in June 2020, relating to the period October 2014 to June 2017, was beyond the normal limitation period of thirty months from the date of filing of the last return for that period (August 2017). Since the extended period was not invokable due to lack of evidence of wilful suppression or intent to evade tax, the entire demand was barred by limitation and unsustainable.
Turning to issue (B) on merits, the Tribunal noted that since the demand was barred by limitation, it was not necessary to adjudicate the substantive questions. However, the matter involved whether the appellant's services constituted intermediary services and whether they qualified as export of services under Rule 6A of the Service Tax Rules, 1994.
The appellant contended that it rendered accounting and payroll services on a principal-to-principal basis to its foreign associated enterprise, which was a separate legal entity and not merely an establishment of the same person. The appellant relied on the service agreements, which detailed the scope of services, and submitted that these services were independent and not mere facilitation or arrangement of services, thus not meeting the definition of intermediary services under Rule 2(f) of the Place of Provision of Services Rules, 2012. The appellant further argued that the services were provided outside the taxable territory and consideration was received in foreign convertible currency, fulfilling the conditions for export of services under Rule 6A.
The appellant supported its position by citing judicial precedents, including a recent Supreme Court decision affirming that services rendered on a cost-plus basis without direct nexus to the underlying supply do not constitute intermediary services. It also relied on various GST regime decisions and circulars clarifying the concept of intermediary services, emphasizing that sub-contracting for a service is not intermediary service. The appellant highlighted that the department had accepted refund claims under the GST regime for similar services, reinforcing their export of services claim.
The department, on the other hand, argued that the appellant acted as an intermediary, facilitating services between the foreign service recipient and vendors or ship owners. It pointed to contractual clauses indicating that the appellant acted "on behalf of" the foreign entity, and submitted that the appellant and the foreign enterprise were merely establishments of the same persons, thus falling within the ambit of "distinct persons" under Explanation 3(b) of Clause (44) of Section 65B of the Finance Act. The department maintained that the place of provision of intermediary services was in India, making the services taxable and not exportable.
The Tribunal noted the conflicting interpretations but refrained from deciding on merits due to the limitation bar. It emphasized that the appellant's bona fide belief, supported by consistent declarations in returns and prior departmental correspondence, negated any wilful misstatement or suppression of facts. The Tribunal also observed that the appellant's submissions and cited precedents presented a tenable legal view on the nature of services and export classification.
In conclusion, the Tribunal held that the impugned order upholding the demand, interest, and penalty was unsustainable as the entire demand was barred by limitation. The Tribunal set aside the demand along with the interest and penalty. It declined to adjudicate the merits of intermediary classification and export of services given the overriding limitation issue and the changes in law with the advent of GST. The appeal was allowed with consequential relief.
Significant holdings from the judgment include the following verbatim excerpt emphasizing the limitation principle:
"We find that the appellant has duly provided all the information sought in the mandatory returns prescribed... When the knowledge of the fact that the appellant has been claiming the said amounts received as towards export of service duly reflecting them in the returns, was already known to the Department, we are of the view that the learned adjudicating authority has egregiously erred in finding that the invoking of the extended period of limitation was tenable."
And further:
"When the appellant held a bona fide belief that its services were not liable to tax being export of services and had in fact declared the amounts received as towards export of service provided, there cannot be a finding of wilful misstatement or suppression of facts with intent to evade payment of duty attributable to the Appellant."
Also, the Tribunal adhered to the principle that once a demand is held barred by limitation, adjudication on merits is unnecessary and impermissible, citing:
"Once it is held that the demand is time barred, there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue."
Core principles established include:
Demand barred by time limitation or not - appellant is an intermediary as defined in Rule 2(f) of the Place of Provision of Services Rules, 2012 ( POPS Rules) or not - Export of Services as per Rule 6A of the Service Tax Rules, 1994.
Whether the Demand is wholly barred by limitation as contended by the Appellant? - HELD THAT:- From a perusal of sub-section (1) of section 73 of the Finance Act, it can be seen that where any service tax has not been levied or paid, the Central Excise Officer may, within thirty months from the relevant date, serve a notice on the person chargeable with the service tax which has not been levied or paid, requiring him to show cause why he should not pay amount specified in the notice - The proviso to section 73(1) of the Finance Act stipulates that where any service tax has not been levied or paid by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of the Chapter or the Rules made there under with intent to evade payment of service tax, by the person chargeable with the service tax, the provisions of the said section shall have effect as if, for the word “thirty months”, the word “five years” has been substituted.
The appellate authority has conceded that the appellant has declared the income under export of service. Thus, the appellant’s contention that it is regularly filing the returns with such declaration of income under export of service remains uncontroverted and on the contrary, stands conceded.
The responsibility of the jurisdictional departmental officers to scrutinize the returns filed, reflecting the information of amounts charged against export service provided, and declarations of deductions claimed and service tax payable that has been so declared by the appellant, and the abject failure to take up the information for scrutiny, is not to be held to the detriment of the appellant, by invoking of the extended period of limitation. In view of the mandatory responsibilities cast on the jurisdictional officers by various circulars, they cannot abdicate responsibility, more so when there is complete absence of any evidence that they have indeed embarked on such a scrutiny and called for the necessary information and that the assessee has not responded to their letters seeking such information. In the show cause notice too, there is no whisper of any finding that the returns that the appellant has so regularly filed have been scrutinized and a subsequent allegation that the appellant had not furnished any information that has been sought for consequent to such scrutiny - the mandate of the statute, as laid down in Section 14 of the Central Excise Act, 1944, made applicable under Section 83 of the Finance Act, 1994 in relation to service tax as they apply in relation to a duty of excise, empowers the jurisdictional range officers to issue summons requiring any person to give evidence or produce records etc., and can be resorted to by the said officers in the course of performance of their official duties as per extant Departmental instructions, if it so becomes necessary.
In the instant case, the extended period sought to be invoked is from October 2014 to June 2017 and hence, even before the present SCN issued on 23-06-2020 pursuant to investigations commenced on 09-05-2019, there was ample opportunity for the jurisdictional range officers to carry out their mandated responsibility and detect any irregularities, if at all any. In the light of the ratio of the decisions stated supra, when the knowledge of the fact that the appellant has been claiming the said amounts received as towards export of service duly reflecting them in the returns, was already known to the Department, the learned adjudicating authority has egregiously erred in finding that the invoking of the extended period of limitation was tenable.
In the present case the service tax returns were all filed well before January 2018 and the period under dispute is also only upto June 2017. Thus, the confirmation of the demand of service tax in the instant case, which was for the period from 01.10.2014 to 30.06.2017, was entirely barred by limitation and is therefore wholly unsustainable and is liable to be set aside.
Given the findings above that the extended period of limitation was not invokable and that the demand was wholly barred by limitation, it is disinclined to now go into the merits of the dispute for more reasons than one. Firstly, a finding on merits is rendered inconsequential, as the demands are even otherwise unsustainable being wholly barred by limitation. Secondly, there is no question of such a demand under Chapter V of the Finance Act, 1994, recurring in respect of the appellant. Thirdly, with the advent of the GST regime, the Finance Act 1994 has been amended and by virtue of Section 173 of the CGST Act, 2017, Chapter V of the Finance Act, 1994 has been omitted, of course subject to the repeal and savings as provided under Section 174 of the GST Act ibid, and for the proceedings initiated in respect of the appellant for the subsequent period under the prevailing GST Tax regime, it is seen that the Departmental Adjudicating Authority itself has dropped the proceedings rendering a finding in favour of the appellant on merits as evidenced by the Order in Original No.21/2025-DGGI (ADC) dated 17.01.2025 of the Additional Commissioner of GST & Central Excise, Chennai and nothing has been brought to notice to show that the order has not attained finality, Last, but not the least, having found in favour of the appellant on limitation, it is now forbidden from rendering a finding on merits as per the binding judicial precedents.
Conclusion - Given the findings that the demand is wholly barred by limitation for the reasons stated, adhering to judicial discipline and respectfully following the binding judicial precedents of the Honourable Apex Court and High Courts, it is refrained from delving into the merits of the matter and rendering a finding on merits.
Appeal allowed.
Demand barred by time limitation or not - appellant is an intermediary as defined in Rule 2(f) of the Place of Provision of Services Rules, 2012 ( POPS Rules) or not - Export of Services as per Rule 6A of the Service Tax Rules, 1994.
Whether the Demand is wholly barred by limitation as contended by the Appellant? - HELD THAT:- From a perusal of sub-section (1) of section 73 of the Finance Act, it can be seen that where any service tax has not been levied or paid, the Central Excise Officer may, within thirty months from the relevant date, serve a notice on the person chargeable with the service tax which has not been levied or paid, requiring him to show cause why he should not pay amount specified in the notice - The proviso to section 73(1) of the Finance Act stipulates that where any service tax has not been levied or paid by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of the Chapter or the Rules made there under with intent to evade payment of service tax, by the person chargeable with the service tax, the provisions of the said section shall have effect as if, for the word “thirty months”, the word “five years” has been substituted.
The appellate authority has conceded that the appellant has declared the income under export of service. Thus, the appellant’s contention that it is regularly filing the returns with such declaration of income under export of service remains uncontroverted and on the contrary, stands conceded.
The responsibility of the jurisdictional departmental officers to scrutinize the returns filed, reflecting the information of amounts charged against export service provided, and declarations of deductions claimed and service tax payable that has been so declared by the appellant, and the abject failure to take up the information for scrutiny, is not to be held to the detriment of the appellant, by invoking of the extended period of limitation. In view of the mandatory responsibilities cast on the jurisdictional officers by various circulars, they cannot abdicate responsibility, more so when there is complete absence of any evidence that they have indeed embarked on such a scrutiny and called for the necessary information and that the assessee has not responded to their letters seeking such information. In the show cause notice too, there is no whisper of any finding that the returns that the appellant has so regularly filed have been scrutinized and a subsequent allegation that the appellant had not furnished any information that has been sought for consequent to such scrutiny - the mandate of the statute, as laid down in Section 14 of the Central Excise Act, 1944, made applicable under Section 83 of the Finance Act, 1994 in relation to service tax as they apply in relation to a duty of excise, empowers the jurisdictional range officers to issue summons requiring any person to give evidence or produce records etc., and can be resorted to by the said officers in the course of performance of their official duties as per extant Departmental instructions, if it so becomes necessary.
In the instant case, the extended period sought to be invoked is from October 2014 to June 2017 and hence, even before the present SCN issued on 23-06-2020 pursuant to investigations commenced on 09-05-2019, there was ample opportunity for the jurisdictional range officers to carry out their mandated responsibility and detect any irregularities, if at all any. In the light of the ratio of the decisions stated supra, when the knowledge of the fact that the appellant has been claiming the said amounts received as towards export of service duly reflecting them in the returns, was already known to the Department, the learned adjudicating authority has egregiously erred in finding that the invoking of the extended period of limitation was tenable.
In the present case the service tax returns were all filed well before January 2018 and the period under dispute is also only upto June 2017. Thus, the confirmation of the demand of service tax in the instant case, which was for the period from 01.10.2014 to 30.06.2017, was entirely barred by limitation and is therefore wholly unsustainable and is liable to be set aside.
Given the findings above that the extended period of limitation was not invokable and that the demand was wholly barred by limitation, it is disinclined to now go into the merits of the dispute for more reasons than one. Firstly, a finding on merits is rendered inconsequential, as the demands are even otherwise unsustainable being wholly barred by limitation. Secondly, there is no question of such a demand under Chapter V of the Finance Act, 1994, recurring in respect of the appellant. Thirdly, with the advent of the GST regime, the Finance Act 1994 has been amended and by virtue of Section 173 of the CGST Act, 2017, Chapter V of the Finance Act, 1994 has been omitted, of course subject to the repeal and savings as provided under Section 174 of the GST Act ibid, and for the proceedings initiated in respect of the appellant for the subsequent period under the prevailing GST Tax regime, it is seen that the Departmental Adjudicating Authority itself has dropped the proceedings rendering a finding in favour of the appellant on merits as evidenced by the Order in Original No.21/2025-DGGI (ADC) dated 17.01.2025 of the Additional Commissioner of GST & Central Excise, Chennai and nothing has been brought to notice to show that the order has not attained finality, Last, but not the least, having found in favour of the appellant on limitation, it is now forbidden from rendering a finding on merits as per the binding judicial precedents.
Conclusion - Given the findings that the demand is wholly barred by limitation for the reasons stated, adhering to judicial discipline and respectfully following the binding judicial precedents of the Honourable Apex Court and High Courts, it is refrained from delving into the merits of the matter and rendering a finding on merits.
Appeal allowed.
In addressing this issue, the relevant legal framework includes Section 65B(44) of the Finance Act, 1994, which defines "service" and specifically excludes "a provision of service by an employee to the employer in the course of or in relation to his employment" from the definition of service. The appellant contends that the directors in question are whole-time directors who are in an employer-employee relationship with the company and receive remuneration akin to salary, which is subject to TDS under Section 192 of the Income Tax Act, 1961. Therefore, the appellant argues that the remuneration paid does not constitute a taxable service.
The Department, on the other hand, contends that services rendered by directors are taxable under the reverse charge mechanism effective from 07.08.2012, and that the remuneration paid to the directors should be treated as consideration for taxable services rendered.
The Court examined the factual matrix, including the nature of the directors' roles, the manner of their appointment, and the evidence of employer-employee relationship such as Board Resolutions and Form 16 certificates evidencing TDS on salary. It was noted that the directors were appointed as executive directors through an Extra Ordinary General Meeting and were engaged in managing day-to-day affairs of the company, receiving remuneration comparable to other employees.
In interpreting the law, the Court relied heavily on the exclusion clause in Section 65B(44)(b) of the Finance Act, which excludes services provided by an employee to the employer from the ambit of taxable services. The Court also referred to binding Board Circulars No. 115/09/2009-ST dated 31.07.2009 and earlier Circular No. 324/Comm.(ST)/2008 dated 01.12.2008, which clarify that remuneration paid to managing directors or whole-time directors, when they are employees, is not liable to service tax.
Precedents were pivotal in the Court's reasoning. The Tribunal's decision in a prior case involving remuneration paid to whole-time directors was cited, wherein it was held that such directors are employees under the Companies Act and that remuneration paid to them is akin to salary, not a taxable service. The Tribunal emphasized that the employer-employee relationship is determinative, and the mode of payment, whether salary, commission, or performance bonus, does not alter this relationship or attract service tax. The Tribunal further noted that the Income Tax Act's treatment of such remuneration as salary subject to TDS under Section 192 corroborates the existence of an employer-employee relationship.
In applying these principles to the facts, the Court found that the appellant had established the employer-employee relationship with the directors. There was no evidence that the directors were providing services outside the scope of their employment or acting as independent service providers. The remuneration paid was consistent with salary and other perquisites paid to employees. Therefore, the services rendered by the directors fell within the exclusion under Section 65B(44)(b).
The Court also addressed and rejected the Department's argument that the negative list regime introduced from 07.08.2012 made services by directors taxable. The Court clarified that the negative list regime does not override the exclusion of employer-employee services from the definition of service. The Court pointed out that the Department's reliance on the absence of appointment orders was misplaced, as the Board Resolutions and Form 16 certificates sufficiently established the employment relationship.
Regarding competing arguments, the Court acknowledged the Department's position but found it legally unsustainable in light of the statutory exclusions, binding circulars, and judicial precedents. The Court emphasized that the burden was on the Department to prove that the directors were not employees, which was not discharged.
Consequently, the Court concluded that the demand for service tax on remuneration paid to the whole-time directors was not tenable. The impugned order confirming the demand, interest, and penalty was set aside.
Significant holdings from the judgment include the following verbatim excerpt from the Tribunal's earlier decision cited by the Court:
"The whole-time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer-employee relationship and the mere fact that the whole-time director is compensated by way of variable pay will not in any manner alter or dilute the position of employer-employee status between the company assessee and the whole-time director."
Further, the Court affirmed that remuneration paid to whole-time directors, subject to TDS under the Income Tax Act, constitutes salary and is excluded from service tax liability under Section 65B(44)(b) of the Finance Act, 1994.
The final determination was that the appellant was not liable to pay service tax on the remuneration paid to the whole-time directors, and the demand, interest, and penalty imposed by the lower authorities were quashed. The appeal was allowed with consequential relief as per law.
Levy of service tax - Remuneration payment by the company to its whole-time directors - failed to pay appropriate service tax under the reverse charge on the services rendered by the Directors of the company - Contravention of the provisions of Section 68 of Finance Act 1994, read with Rule 2(1)(d)(i)(EE) and Rule 6 of Service tax Rules, 1994 and also Notification No.30/2012-ST - HELD THAT:- The Department filed an appeal to the Commissioner (Appeals) on the ground that the order has not clearly discussed about the employer and employee relationship of the Managing Director of the Company and in the Negative List regime of taxation, services provided or agreed to be provided by the Director of a company is made taxable w.e.f. 07.08.2012. Thus, the main ground raised for filing an appeal to the Commissioner (Appeals) is that the services rendered by the Directors of the Appellant will amount to services as defined under Section 65B(44) of the Finance Act, 1994 and does not qualify as a provision of service by an employer to the employee company in the course of employment to be included in the exclusion clause (6) to Section 65B(44) of the finance Act, 1994 and salary paid to the Directors shall be the ‘consideration’ in money and being treated as value as per Section 67 of the Finance Act, 1994 for the services rendered by the Directors to the Appellant.
The contention of the Ld. Advocate for the Appellant that there is an employee-employer relationship and so, there could not be any service tax payment and any payment by way of commission, stock options, performance related bonus, etc. will not alter the nature of the service is acceptable. The issue of payment of service tax on the remuneration paid to the Directors is no more res-integra where it is termed as salary and subjected to TDS under the Income Tax Act, the employer and employee relationship gets established and the same is excluded from the purview of the service tax. In the case of M/s. Dixcy Textiles Pvt. Ltd. Vs. The Commissioner of Central Excise & Service Tax, Salem [2025 (5) TMI 316 - CESTAT CHENNAI].
Appreciating the ratio of the above decisions as applicable to the facts of the appeal, the impugned Order-in-Appeal No. 101/2015-ST dated 26.06.2015 passed by the Commissioner of Central Excise (Appeals-I), Salem cannot be sustained and as such, ordered to be set aside. As such, both the demand of service tax and penalties confirmed are set aside.
Thus, the appeal is allowed with consequential relief, if any, as per the law.
Levy of service tax - Remuneration payment by the company to its whole-time directors - failed to pay appropriate service tax under the reverse charge on the services rendered by the Directors of the company - Contravention of the provisions of Section 68 of Finance Act 1994, read with Rule 2(1)(d)(i)(EE) and Rule 6 of Service tax Rules, 1994 and also Notification No.30/2012-ST - HELD THAT:- The Department filed an appeal to the Commissioner (Appeals) on the ground that the order has not clearly discussed about the employer and employee relationship of the Managing Director of the Company and in the Negative List regime of taxation, services provided or agreed to be provided by the Director of a company is made taxable w.e.f. 07.08.2012. Thus, the main ground raised for filing an appeal to the Commissioner (Appeals) is that the services rendered by the Directors of the Appellant will amount to services as defined under Section 65B(44) of the Finance Act, 1994 and does not qualify as a provision of service by an employer to the employee company in the course of employment to be included in the exclusion clause (6) to Section 65B(44) of the finance Act, 1994 and salary paid to the Directors shall be the ‘consideration’ in money and being treated as value as per Section 67 of the Finance Act, 1994 for the services rendered by the Directors to the Appellant.
The contention of the Ld. Advocate for the Appellant that there is an employee-employer relationship and so, there could not be any service tax payment and any payment by way of commission, stock options, performance related bonus, etc. will not alter the nature of the service is acceptable. The issue of payment of service tax on the remuneration paid to the Directors is no more res-integra where it is termed as salary and subjected to TDS under the Income Tax Act, the employer and employee relationship gets established and the same is excluded from the purview of the service tax. In the case of M/s. Dixcy Textiles Pvt. Ltd. Vs. The Commissioner of Central Excise & Service Tax, Salem [2025 (5) TMI 316 - CESTAT CHENNAI].
Appreciating the ratio of the above decisions as applicable to the facts of the appeal, the impugned Order-in-Appeal No. 101/2015-ST dated 26.06.2015 passed by the Commissioner of Central Excise (Appeals-I), Salem cannot be sustained and as such, ordered to be set aside. As such, both the demand of service tax and penalties confirmed are set aside.
Thus, the appeal is allowed with consequential relief, if any, as per the law.
1. Whether the construction services provided by the appellant qualify for exemption from service tax under Entry Number 14(b) of Notification No. 25/2012-ST, specifically regarding construction of a single residential unit otherwise than as part of a residential complex.
2. Whether the construction services rendered for the Samudhayik Bhavan of Rajput Niswarth Seva Sangh are exempt from service tax on the basis of their charitable nature and funding sources.
3. Whether the show cause notice issued to the appellant was valid and not vague.
4. Whether the extended period of limitation for issuing the demand notice could be invoked against the appellant.
5. Whether penalty under Section 78 of the Finance Act, 1994 is justified in the circumstances of the case.
Issue-wise Detailed Analysis:
1. Exemption under Notification No. 25/2012-ST for Construction of Single Residential Unit
The relevant legal framework is Entry Number 14(b) of Notification No. 25/2012-ST dated 20.06.2012, which exempts services by way of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex. The definitions of "single residential unit" and "residential complex" are provided under Section 2(ze) and 2(zc) of the notification.
The appellant contended that the construction work carried out for individuals and acquaintances was exempt under this provision. To support this, affidavits from the parties for whom the construction was done were produced. The appellant argued that these works were for personal residential use and not part of any residential complex, hence exempt.
The Revenue challenged this, relying on the principle established by the Supreme Court in Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar and Company, that the burden lies on the appellant to establish eligibility for exemption. The Revenue disputed the affidavits submitted, highlighting discrepancies in names and amounts, and argued that the appellant failed to provide sufficient documentary evidence to prove exemption.
The Tribunal, however, did not proceed to adjudicate on the merits of this issue in light of its finding on limitation (discussed below). The appellant's bona fide belief in exemption was noted but not conclusively determined.
2. Exemption for Construction of Samudhayik Bhavan for Rajput Niswarth Seva Sangh
The appellant claimed that the construction of the Samudhayik Bhavan was of charitable nature, supported by land allotment from the Chhattisgarh Government and funding from various government sources such as "Sansad Nidhi," "Vidhayak Nidhi," and "Sweksha Anudan." Based on this, the appellant argued no service tax was payable.
The Revenue disputed this contention, stating that the appellant failed to produce relevant documents to substantiate the claim of charitable status and exemption eligibility. The affidavits submitted were questioned for discrepancies.
The Tribunal did not decide on this issue substantively, as the limitation ruling rendered further discussion unnecessary.
3. Validity and Vagueness of the Show Cause Notice
The appellant raised the issue that the show cause notice was vague and did not properly specify the grounds for demand. The Tribunal did not explicitly address this issue in detail, as the limitation issue took precedence and led to the quashing of the entire demand.
4. Invocation of Extended Period of Limitation
This issue was pivotal in the Tribunal's decision. The show cause notice was issued on 12.10.2018 for the period 2013-2014, which was beyond the normal limitation period of 18 months applicable at the relevant time.
The appellant argued that the extended period could not be invoked as there was no suppression of facts, fraud, or collusion. The appellant had reflected the receipts in income tax returns and balance sheets, which are public documents accessible to the Revenue. The demand was based on information obtained from the Income Tax Department, and no malafide intention to evade tax was established.
The Revenue contended that the appellant deliberately concealed facts and thus the extended period and penalty were justified.
The Tribunal relied on a series of precedents, including:
Applying these principles, the Tribunal concluded that since the appellant had disclosed the receipts in public documents and acted under a bonafide belief of exemption, the extended period of limitation could not be invoked. Consequently, the demand was barred by limitation.
5. Penalty under Section 78 of the Finance Act, 1994
The penalty was predicated on the allegation of suppression and evasion. Given the Tribunal's finding that there was no suppression or malafide intention, and the extended period was not invokable, the penalty was implicitly set aside along with the demand. The Tribunal did not separately elaborate on penalty but the conclusion on limitation and bona fide belief negated the basis for penalty.
Significant Holdings:
The Tribunal held:
"It is not a case of suppression of facts, fraud or collusion, which would justify the invocation of the extended period. The appellant has duly reflected the receipt of the said amount which they had received from their service receivers in the income tax returns and the balance sheet which is a public document and accessible to the Revenue Authority."
"To justify the invocation of extended period, the settled principle of law is that once the declaration has been made with the Income Tax Department, there cannot be any suppression of facts and, therefore, the extended period of limitation cannot be invoked."
"In view of the exemption provisions, the appellant was under a bonafide belief that the services provided are not taxable. This seems to be evident by the fact that in the balance sheet and the income tax returns filed by them, they have fully described the receipt of the amount towards the services received."
"The demand raised is, therefore, barred by limitation and in view of the discussion, above the extended period is not invokable. Hence, the entire demand is quashed on the ground of time bar."
The core principle established is that where the appellant has disclosed receipts in income tax returns and balance sheets, and there is a bonafide belief of exemption, the Revenue cannot invoke the extended period of limitation for issuing a demand notice. Suppression or malafide must be clearly established to justify such invocation.
Accordingly, the Tribunal set aside the impugned order confirming the service tax demand and allowed the appeal on the ground of limitation without adjudicating the merits of exemption or other contentions.
Exemption from service tax - construction services rendered for the Samudhayik Bhavan of Rajput Niswarth Seva Sangh - Entry Number 14(b) of N/N. 25/2012-ST - suppression of facts or not - extended period of limitation - HELD THAT:- It is found that it is not a case of suppression of facts, fraud or collusion, which would justify the invocation of the extended period. The appellant has duly reflected the receipt of the said amount which they had received from their service receivers in the income tax returns and the balance sheet which is a public document and accessible to the Revenue Authority. In fact, the case has been made against the appellant on the basis of the records of the income tax returns.
In C.S.T. NEW DELHI VERSUS M/S. KAMAL LALWANI [2016 (12) TMI 398 - CESTAT NEW DELHI], it has been categorically observed that all the activities undertaken by the appellant were a part of the reflection made in the balance sheet and income tax returns in which case no suppression or malafide can be attributed to the assessee. Revenue has not been able to produce any evidence on record to show that tax, which, according to the Revenue was payable, was not being paid on account of any malafide. Hence the extended period would not be available to the Revenue.
Similarly in Shri Balaji Industrial Products Ltd [2020 (3) TMI 79 - CESTAT NEW DELHI] the Tribunal noticed that admittedly, the appellant was recording the entire activity in their balance sheet, which is a proper document and as per the settled law, it cannot be said that they suppressed anything with a malafide intention. Since there was confusion as to the liability of the tax, the Tribunal held that there can be a bonafide belief on the part of the assessee, especially even when the entire activities are being reflected in the books of accounts. Accordingly, the demand was maintained only for the normal period.
Applying the above principle to the instant case, it is found that in view of the exemption provisions, the appellant was under a bonafide belief that the services provided are not taxable. This seems to be evident by the fact that in the balance sheet and the income tax returns filed by them, they have fully described the receipt of the amount towards the services received. At the relevant time, the normal period prescribed for issuing the show cause notice was 18 months, however the show cause notice dated 12.10.2018 was issued raising the demand for the period 2013–2014. The demand raised is, therefore, barred by limitation and in view of the discussion, above the extended period is not invokable. Hence, the entire demand is quashed on the ground of time bar.
The impugned order is set aside - appeal allowed.
Exemption from service tax - construction services rendered for the Samudhayik Bhavan of Rajput Niswarth Seva Sangh - Entry Number 14(b) of N/N. 25/2012-ST - suppression of facts or not - extended period of limitation - HELD THAT:- It is found that it is not a case of suppression of facts, fraud or collusion, which would justify the invocation of the extended period. The appellant has duly reflected the receipt of the said amount which they had received from their service receivers in the income tax returns and the balance sheet which is a public document and accessible to the Revenue Authority. In fact, the case has been made against the appellant on the basis of the records of the income tax returns.
In C.S.T. NEW DELHI VERSUS M/S. KAMAL LALWANI [2016 (12) TMI 398 - CESTAT NEW DELHI], it has been categorically observed that all the activities undertaken by the appellant were a part of the reflection made in the balance sheet and income tax returns in which case no suppression or malafide can be attributed to the assessee. Revenue has not been able to produce any evidence on record to show that tax, which, according to the Revenue was payable, was not being paid on account of any malafide. Hence the extended period would not be available to the Revenue.
Similarly in Shri Balaji Industrial Products Ltd [2020 (3) TMI 79 - CESTAT NEW DELHI] the Tribunal noticed that admittedly, the appellant was recording the entire activity in their balance sheet, which is a proper document and as per the settled law, it cannot be said that they suppressed anything with a malafide intention. Since there was confusion as to the liability of the tax, the Tribunal held that there can be a bonafide belief on the part of the assessee, especially even when the entire activities are being reflected in the books of accounts. Accordingly, the demand was maintained only for the normal period.
Applying the above principle to the instant case, it is found that in view of the exemption provisions, the appellant was under a bonafide belief that the services provided are not taxable. This seems to be evident by the fact that in the balance sheet and the income tax returns filed by them, they have fully described the receipt of the amount towards the services received. At the relevant time, the normal period prescribed for issuing the show cause notice was 18 months, however the show cause notice dated 12.10.2018 was issued raising the demand for the period 2013–2014. The demand raised is, therefore, barred by limitation and in view of the discussion, above the extended period is not invokable. Hence, the entire demand is quashed on the ground of time bar.
The impugned order is set aside - appeal allowed.
The core legal questions considered by the Tribunal were:
(a) Whether the refund claim of Rs.1,67,04,086/- against services described as 'Work Contract Service' or 'Construction Works - Fitout' qualifies as input services under Rule 2(l) of the Cenvat Credit Rules, 2004 (CCR, 2004), thereby entitling the appellant to refund of accumulated Cenvat Credit paid on such services.
(b) Whether the refund claim of Rs.93,892/- pertaining to invoices issued prior to the issuance of the ST-2 certificate (i.e., prior to registration) can be denied on the ground of non-registration of the appellant's unit during that period.
(c) Whether the entire refund claim of Rs.2,92,85,930/- can be rejected on the ground that the appellant's unit is located in a Special Economic Zone (SEZ) and therefore the refund claim should have been filed under Notification No. 12/2013-ST dated 01.07.2013 applicable to SEZ units, rather than under Rule 5 of CCR, 2004 read with Notification No. 27/2012-CE dated 18.06.2012 applicable to regular assessees.
2. ISSUE-WISE DETAILED ANALYSIS
(a) Refund claim of Rs.1,67,04,086/- on 'Work Contract Service' / Construction Works
The relevant legal framework included Rule 2(l) of CCR, 2004 which defines 'input service' and Rule 5 of CCR, 2004 which prescribes the procedure and conditions for claiming refund of accumulated Cenvat Credit. Notification No. 27/2012-CE dated 18.06.2012 also governs refund claims by service providers. The appellant had paid service tax on input services such as Renting of Immovable Property Service, Manpower Recruitment, Telecom Service, Management Maintenance or Repair Service, Facility Management Service, including services described as 'Construction Works - Fitout' for modernization and renovation of leased office premises.
The Commissioner (Appeals) rejected the refund claim on the ground that the said services did not qualify as input services because there was no existing structure, and thus the services could not be classified as modernization, renovation or repair. The rejection was based solely on the invoice description and the absence of an existing structure.
The appellant contended that the substance of the transaction should prevail over the nomenclature, submitting that the office was leased and the services were for modernization and renovation, which fall within the inclusive definition of input service under Rule 2(l). The appellant relied on Supreme Court precedents establishing that the substance of the transaction governs classification rather than mere description.
The Tribunal examined the scope of services availed and found that they were indeed related to modernization, renovation, and repair of an existing leased office. It held that such services fall squarely within the definition of 'input service' under Rule 2(l) of CCR, 2004.
Further, the Tribunal relied on the amended Rule 5 of CCR, 2004 (substituted by Notification No. 18/2012-CE dated 17.03.2012) which does not require establishing a nexus between input services and output services for claiming refund. The Tribunal referred to a precedent from the Mumbai Bench of the Tribunal which held that the refund admissible is proportional to the ratio of export turnover to total turnover and the net Cenvat Credit taken, without requiring a one-to-one correlation or nexus.
The Tribunal also noted that denial of refund on the ground of lack of nexus or classification of input services should be done only through recovery proceedings under Rule 14 of CCR, 2004, which was not initiated in this case. Therefore, the refund claim could not be denied on the basis of classification or nexus.
The Tribunal further referred to the Circular dated 17.03.2012 issued by the Department's Tax Research Unit clarifying that nexus between input services and export services should not be insisted upon for refund under Rule 5.
(b) Refund claim of Rs.93,892/- pertaining to invoices prior to ST-2 certificate issuance
The Commissioner (Appeals) rejected this refund claim on the ground that the appellant had not provided any output service during the period prior to issuance of the ST-2 certificate (i.e., prior to registration). The appellant argued that non-registration cannot be a ground for denial of refund under Rule 5 of CCR, 2004, as there is no such condition in the relevant notification. The appellant had paid service tax on the input services received and was therefore entitled to refund.
The Tribunal agreed with the appellant, relying on judicial precedents including decisions of the Karnataka and Allahabad High Courts which held that refund cannot be denied solely on the ground of non-registration when the service tax has been paid on input services.
(c) Rejection of entire refund claim of Rs.2,92,85,930/- on ground of wrong refund procedure applicable to SEZ unit
The Commissioner (Appeals) rejected the entire refund claim on the ground that the appellant's unit was located in an SEZ and therefore the refund claim should have been filed under Notification No. 12/2013-ST dated 01.07.2013, which is specific to SEZ units, rather than under Rule 5 of CCR, 2004 read with Notification No. 27/2012-CE dated 18.06.2012 applicable to regular assessees.
The appellant contended that the SEZ provisions are optional and provide special facilities, but do not mandate that refund claims must be filed only under SEZ-specific notifications. The appellant bona fide believed that as a regular assessee it was entitled to file refund claims under the regular provisions. The appellant submitted that procedural lapses should not result in denial of substantive benefits.
The Tribunal referred to consistent judicial precedents holding that substantive benefits cannot be denied on technical or procedural grounds. It cited a recent decision of the Principal Bench of the Tribunal which emphasized that exemption and refund provisions for SEZ units are intended to be beneficial and must be liberally construed to promote economic growth and encourage SEZ activities.
The Tribunal quoted the decision which held that "the beneficial purpose of the exemption must be given full effect" and that procedural lapses "cannot be the basis to deny the refund" when substantive eligibility is established. The Tribunal noted that the appellant fulfilled all substantive criteria for refund and that the procedural lapse of filing under the wrong notification was not a ground to deny the refund.
3. SIGNIFICANT HOLDINGS
"The services availed by the appellant are used in relation to modernization, renovation and repair of an existing leased office and therefore, these services fall within the definition of 'input service' as defined under Rule 2(l) of the CCR, 2004."
"It is a settled law that one-to-one correlation is not required in law to claim a refund. The amended Rule 5 of CCR, 2004 does not require establishment of any nexus between input and export services. The admissible refund will be proportional to the ratio of export turnover of goods and services to the total turnover, during the period under consideration and the net Cenvat Credit taken during that period."
"In the absence of any notice for recovery as provided under Rule 14, the refund claimed by the assessee under Rule 5 cannot be denied on the ground of classification or nexus."
"Refund cannot be denied solely on the ground of non-registration of the unit when service tax has been paid on input services."
"Substantive benefit of refund cannot be denied on technical or procedural grounds such as filing refund claims under a wrong notification, especially when the appellant is otherwise eligible. The provisions applicable to SEZ units are intended to be beneficial and must be liberally construed to promote economic growth."
"The beneficial purpose of the exemption must be given full effect to and before interpreting a statute, 'we must first ask ourselves what is the object sought to be achieved by the provision and construe the statute in accordance with such object'. In the event of any ambiguity, such ambiguity must be resolved in favour of the exempted."
Ultimately, the Tribunal set aside the impugned order and allowed the appellant's appeal with consequential relief as per law.
Refund of accumulated Cenvat Credit which could not be utilized by the appellant due to the fact that the appellant was 100% EOU - rejection on the ground that the appellant had not provided any output service during that period - rejection on the ground that as the appellant’s unit is located in SEZ and therefore, the appellant should have filed the refund claim in terms of N/N. 12/2013-ST dated 01.07.2013 and not in terms of Rule 5 of the CCR, 2004 read with N/N. 27/2012-CE dated 18.06.2012.
Refund rejected only on the ground that the impugned services availed by the appellant are not input services - HELD THAT:- Perusal of the services availed by the appellant as mentioned in the scope of services, clearly proves that the services availed by the appellant are used in relation to modernization, renovation and repair of an existing leased office and therefore, these services fall within the definition of ‘input service’ as defied under Rule 2(l) of the CCR, 2004.
It is a settled law that one-to-one correlation is not required in law to claim a refund. While interpreting Rule 5 of the CCR, 2004, the Mumbai Bench of this Tribunal in the case of M/s Cross Tab Marketing Service Pvt Ltd vs. CGST, Mumbai East [2021 (9) TMI 979 - CESTAT MUMBAI], has held that the amended Rule 5 does not require establishment of any nexus between input and export services. The rule only provides that the admissible refund will be proportional to the ratio of export turnover of goods and services to the total turnover, during the period under consideration and the net Cenvat Credit taken during that period. Indisputably, in the refund proceedings under Rule 5 as amended, any such attempt to deny or to vary the credit availed during the period under consideration is not permissible.
The amended provisions of Rule 5 of CCR, 2004 have also been clarified by the Tax Research Unit of the Department of Revenue vide Circular dated 17.03.2012 wherein it has been stated that the nexus between the input service used in export of service should not be insisted upon and the benefit of refund should be granted on the basis of the ratio of export turnover to total turnover demonstrated by the assessee.
Rejection of refund claim on the ground of non-registration of the unit - HELD THAT:- The refund cannot be denied only on the basis of non-registration of the unit as held by the Hon’ble Allahabad High Court in the case of CST, Noida vs. Atrenta India Pvt Ltd [2017 (4) TMI 563 - ALLAHABAD HIGH COURT].
Rejection on the ground that the claim had not been filed as per N/N. 12/2013-ST dated 01.07.2013, but filed as per N/N. 27/2012-CE dated 18.06.2012 - HELD THAT:- It was a procedural lapse on the part of the assesse and it has been consistently held by various Courts that substantive benefit cannot be denied on technical reasons/procedural lapse.
Conclusion - i) The services availed by the appellant are used in relation to modernization, renovation and repair of an existing leased office and therefore, these services fall within the definition of 'input service' as defined under Rule 2(l) of the CCR, 2004. ii) Refund cannot be denied solely on the ground of non-registration of the unit when service tax has been paid on input services.
The impugned order is set aside - appeal allowed.
Refund of accumulated Cenvat Credit which could not be utilized by the appellant due to the fact that the appellant was 100% EOU - rejection on the ground that the appellant had not provided any output service during that period - rejection on the ground that as the appellant’s unit is located in SEZ and therefore, the appellant should have filed the refund claim in terms of N/N. 12/2013-ST dated 01.07.2013 and not in terms of Rule 5 of the CCR, 2004 read with N/N. 27/2012-CE dated 18.06.2012.
Refund rejected only on the ground that the impugned services availed by the appellant are not input services - HELD THAT:- Perusal of the services availed by the appellant as mentioned in the scope of services, clearly proves that the services availed by the appellant are used in relation to modernization, renovation and repair of an existing leased office and therefore, these services fall within the definition of ‘input service’ as defied under Rule 2(l) of the CCR, 2004.
It is a settled law that one-to-one correlation is not required in law to claim a refund. While interpreting Rule 5 of the CCR, 2004, the Mumbai Bench of this Tribunal in the case of M/s Cross Tab Marketing Service Pvt Ltd vs. CGST, Mumbai East [2021 (9) TMI 979 - CESTAT MUMBAI], has held that the amended Rule 5 does not require establishment of any nexus between input and export services. The rule only provides that the admissible refund will be proportional to the ratio of export turnover of goods and services to the total turnover, during the period under consideration and the net Cenvat Credit taken during that period. Indisputably, in the refund proceedings under Rule 5 as amended, any such attempt to deny or to vary the credit availed during the period under consideration is not permissible.
The amended provisions of Rule 5 of CCR, 2004 have also been clarified by the Tax Research Unit of the Department of Revenue vide Circular dated 17.03.2012 wherein it has been stated that the nexus between the input service used in export of service should not be insisted upon and the benefit of refund should be granted on the basis of the ratio of export turnover to total turnover demonstrated by the assessee.
Rejection of refund claim on the ground of non-registration of the unit - HELD THAT:- The refund cannot be denied only on the basis of non-registration of the unit as held by the Hon’ble Allahabad High Court in the case of CST, Noida vs. Atrenta India Pvt Ltd [2017 (4) TMI 563 - ALLAHABAD HIGH COURT].
Rejection on the ground that the claim had not been filed as per N/N. 12/2013-ST dated 01.07.2013, but filed as per N/N. 27/2012-CE dated 18.06.2012 - HELD THAT:- It was a procedural lapse on the part of the assesse and it has been consistently held by various Courts that substantive benefit cannot be denied on technical reasons/procedural lapse.
Conclusion - i) The services availed by the appellant are used in relation to modernization, renovation and repair of an existing leased office and therefore, these services fall within the definition of 'input service' as defined under Rule 2(l) of the CCR, 2004. ii) Refund cannot be denied solely on the ground of non-registration of the unit when service tax has been paid on input services.
The impugned order is set aside - appeal allowed.
The Tribunal examined two interrelated issues: (1) the taxability of charges deducted by foreign banks or financial service providers from export proceeds remitted to the Indian exporter, and (2) the applicability of Service Tax on amounts retained by an overseas agent under the category of 'cash management' or other financial services, particularly under the negative list regime post legislative amendments.
Regarding the first issue, the Tribunal analyzed the legal framework governing Service Tax on banking and financial services, including the Reverse Charge Mechanism under the Finance Act, 1994. The Revenue contended that the 3% amount retained by the overseas agent constituted consideration for banking and financial services rendered to the appellant and was thus taxable under Service Tax law. The appellant challenged this, arguing that the foreign bank or agent was not providing services directly to them but rather to the foreign buyer or the Indian bank, and that they had no direct contractual relationship with the foreign service providers.
The Tribunal relied heavily on precedents from its own bench and other judicial authorities which had addressed identical or analogous facts. Key decisions cited included rulings where the Tribunal held that charges deducted by foreign banks while remitting export proceeds to Indian banks did not constitute a service provided to the Indian exporter but rather a service rendered by the foreign bank to the Indian bank. In these cases, the exporters were not aware of the identity of the foreign banks, had no agreement with them, and did not directly pay the charges. The Tribunal emphasized that the mere deduction of charges by foreign banks from export proceeds could not be construed as a taxable service received by the Indian exporter under the Reverse Charge Mechanism.
Further, the Tribunal noted clarifications issued by the Central Board of Excise & Customs (CBEC) in Trade Notices and Circulars which supported the position that services rendered by foreign banks were not received by the Indian exporter, negating the applicability of Service Tax on such charges. The Tribunal also referenced the Place of Provision of Services Rules, 2012, and the definition of 'intermediary' to conclude that if the overseas agent was an intermediary, the service was rendered outside the taxable territory and hence not liable to Service Tax in India.
On the second issue concerning the amounts retained by the overseas agent under 'cash management' or other financial services, the Tribunal scrutinized the legislative intent and amendments to the Finance Act, 1994, particularly the shift to a negative list regime from 1st July 2012. It observed that prior to this date, the taxability of such services was limited and that the definition of 'cash management' services was intended to capture activities like chit funds, as clarified by RBI and CBEC circulars. The Tribunal found that the activity undertaken by the overseas agent did not fall within the ambit of taxable 'cash management' services as envisaged by the statute and clarifications.
For the post 1st July 2012 period, the Tribunal examined the concept of 'consideration' and the requirement that services must be rendered 'for another' to constitute taxable service under section 65B(44) of the Finance Act, 1994. It held that the contractual obligation to remit export proceeds rested with the foreign buyer, not the appellant, and that the overseas agent acted merely as a delegate or intermediary, performing services outside India. Therefore, the appellant could not be deemed to have received taxable services from the overseas agent, and the demand for Service Tax under the Reverse Charge Mechanism was unsustainable.
The Tribunal also addressed competing arguments raised by the Revenue that the appellant, having a permanent establishment in India and making payment of service fees, was liable under section 68(2) of the Finance Act, 1994. The Tribunal rejected this, finding that the appellant was not the recipient of the service in the requisite legal sense, and the foreign agent's role did not amount to a taxable service provided to the appellant.
In applying the law to the facts, the Tribunal emphasized the absence of a direct service provider-recipient relationship between the appellant and the foreign bank or agent, the contractual arrangements placing responsibility on the foreign buyer, and the nature of the overseas agent's activities as intermediaries outside India. It distinguished the mere transfer of money from the provision of comprehensive banking and financial services, underscoring that the latter was not established on the facts.
In conclusion, the Tribunal held that the demand for Service Tax on the amounts retained by the overseas agent as fees for banking and financial services was not sustainable. It set aside the impugned orders and allowed the appeals, granting consequential relief where applicable.
Significant holdings include the following verbatim excerpts capturing the Tribunal's legal reasoning:
"By no stretch of imagination can such foreign bank be considered as a service provider for the appellant who in most cases would not even be aware of the identity of such foreign bank. The act of deduction of an amount as charges for transfer of the foreign exchange to the Indian bank from the sale proceeds of the appellant is only a facility for collecting such charges from the Indian bank. This cannot be considered as payment of charges for services by the appellant to the foreign bank."
"The foreign bank in which the overseas buyer deposits the sale proceeds is chosen by the foreign buyer and not by the appellant, who is situated in India."
"The exporter or importer in India does not have any formal or informal agreement with the foreign bank, does not even know the quantum of charges which the foreign bank would be recovering. Therefore, services are provided by the foreign bank to the bank in India and not to the Indian exporter."
"It is not the contractual responsibility of the appellants to collect the dues and, therefore, by no stretch can it be held that the mediation of M/s Amsco Finance Ltd is a substitution for the task that would, otherwise, fall to the appellants."
"If at all, the Hong Kong entity is an 'intermediary' within the meaning assigned in Place of Provision of Service Rules, 2012 to render the service, it has been performed in Hong Kong and, thus, not in the taxable territory."
"The demand for the period after 1st July 2012 also fails. Consequently, the liability for allegedly having received services provided by M/s Amsco Finance Ltd also does not sustain."
"The service of remittance by a foreign bank to Indian bank of the exporter is not liable to service tax at the hands of the exporter."
Core principles established include:
- The absence of a direct contractual relationship and knowledge of the foreign bank or agent by the Indian exporter negates the existence of a taxable service received by the exporter.
- Charges deducted by foreign banks for remittance of export proceeds to Indian banks are bank-to-bank transactions and do not constitute taxable services rendered to the exporter.
- Under the negative list regime, the definition of 'service' requires the activity to be carried out 'for another' for consideration, and the place of provision rules and intermediary status are critical in determining taxability.
- The Reverse Charge Mechanism does not apply where the Indian recipient does not receive the service directly or where the service is rendered outside the taxable territory.
- Legislative clarifications and CBEC circulars must be given due weight in interpreting the scope of taxable financial services.
Final determinations were that the Service Tax demand on the amounts retained by the overseas agent and foreign banks was not sustainable either before or after the introduction of the negative list regime, and all impugned orders confirming such demand were set aside with appeals allowed accordingly.
Demand of Service Tax - remittance of export proceed funds - verifying export documents and payment processing to their Agent - whether the demand of Service Tax for an alleged banking and financial service is justified - HELD THAT:- We have carefully considered the Final Order No.40531-40533/2024 dated 08.05.2024 of this very Chennai Bench of CESTAT in the case of Eastman Exports Global Clothing Pvt. Ltd. Vs. Commissioner of Central Excise & Service Tax, Coimbatore in Service Tax [2024 (5) TMI 417 - CESTAT CHENNAI]. wherein an almost similar issue was considered. This Bench in the said case also considered various other judicial pronouncements and after considering the rival contentions, it was found proper to set aside the demand since, according to the Bench, the conditions of Banking and Financial Services were not satisfied.
We find that since the issue is similar in the present case as well, the above ruling would apply squarely and following the ratio decidendi, we are of the view that impugned order and demand therein cannot sustain, for which reason we set aside the impugned order and allow the appeal with consequential benefits, if any, as per law.
Demand of Service Tax - remittance of export proceed funds - verifying export documents and payment processing to their Agent - whether the demand of Service Tax for an alleged banking and financial service is justified - HELD THAT:- We have carefully considered the Final Order No.40531-40533/2024 dated 08.05.2024 of this very Chennai Bench of CESTAT in the case of Eastman Exports Global Clothing Pvt. Ltd. Vs. Commissioner of Central Excise & Service Tax, Coimbatore in Service Tax [2024 (5) TMI 417 - CESTAT CHENNAI]. wherein an almost similar issue was considered. This Bench in the said case also considered various other judicial pronouncements and after considering the rival contentions, it was found proper to set aside the demand since, according to the Bench, the conditions of Banking and Financial Services were not satisfied.
We find that since the issue is similar in the present case as well, the above ruling would apply squarely and following the ratio decidendi, we are of the view that impugned order and demand therein cannot sustain, for which reason we set aside the impugned order and allow the appeal with consequential benefits, if any, as per law.
Regarding the first issue-the taxability of commission received from the foreign airline-the appellant did not dispute the demand. The services rendered were classified as 'business auxiliary services' under sections 65(19) and 65(105)(zzb) of the Finance Act. The appellant had paid the service tax along with interest, and the amounts were appropriated in the impugned order. Thus, this issue was resolved in favor of the Revenue, with no further contest.
The second issue concerned the taxability under reverse charge of payments made by the appellant to foreign courier counterparts for services such as picking up and delivering parcels outside India. The Revenue contended that these services constituted 'business auxiliary services' chargeable under section 65(105)(zzb), and since the service providers were located outside India, the appellant, as the recipient, was liable to pay service tax under the reverse charge mechanism prescribed by section 66A. The appellant argued that the foreign counterparts acted on a principal-to-principal basis, not as agents, and that the services were rendered entirely outside India, thus not attracting service tax under the earlier Taxation of Services Rules, 2006, and subsequently under the Place of Provision of Services Rules, 2012.
The Tribunal analyzed the nature of the contractual relationships in the courier business, noting that the client contracts only with the appellant courier company, which in turn contracts with foreign counterparts to perform part of the service. The foreign counterparts do not have any direct contractual or payment relationship with the client. Hence, the foreign counterparts render services to the appellant, not independently to the clients. The service is rendered to the appellant in India, even though the physical acts of picking up or delivering parcels occur outside India. Consequently, the Tribunal held that the appellant received business auxiliary services from foreign counterparts and was liable to pay service tax under reverse charge. The appellant's argument regarding revenue neutrality-that payment of service tax under reverse charge would be offset by CENVAT credit-was found irrelevant to the question of liability, as revenue neutrality does not negate the charge of tax but only affects the question of intent to evade tax for limitation purposes.
The third issue involved the taxability of income received in foreign currency by the appellant for services rendered to foreign counterparts and, more critically, the question of limitation, specifically whether the extended period of limitation under the proviso to section 73(1) was rightly invoked. The appellant disputed the invocation of the extended limitation period for the first SCN covering 2007-2012, contending that the normal limitation period applied and that the extended period was wrongly invoked. The appellant also contested the non-appropriation of tax paid for the amounts demanded in the second and third SCNs.
The Tribunal undertook a detailed examination of the limitation provisions under section 73 of the Finance Act, which allows recovery of service tax not levied or paid within thirty months from the relevant date, but permits an extended period of five years where non-payment is due to fraud, collusion, willful misstatement, suppression of facts, or contravention of provisions with intent to evade tax. The Tribunal emphasized that invocation of the extended period requires proof of deliberate intent to evade tax, not merely a failure to pay or an omission. It reviewed authoritative Supreme Court decisions interpreting similar provisions under the Central Excise Act, notably Pushpam Pharmaceutical Co., Anand Nishikawa, Easland Combines, Uniworth Textiles, and Continental Foundation Joint Venture, which collectively establish that "suppression of facts" must be deliberate and with intent to evade tax, and mere non-payment or omission does not suffice.
The Tribunal further relied on recent High Court decisions, including Bharat Hotels and Mahanagar Telephone Nigam Ltd., which reinforced that extended limitation applies only where there is clear evidence of willful suppression or intent to evade tax, not where the assessee acts under a bona fide belief or misunderstanding of the law. The Tribunal highlighted that the appellant had been registered, filing returns, and the non-payment was discovered only upon audit, which the Revenue argued demonstrated intent to evade. However, the Tribunal found that mere failure of the department to detect non-payment earlier does not establish such intent on the part of the appellant. The appellant's bona fide belief and compliance with filing requirements negated the applicability of the extended limitation.
Accordingly, the Tribunal held that the extended period of limitation was wrongly invoked in the first SCN. The demand for service tax stands confirmed only within the normal limitation period. The appellant's payments of service tax on commission and foreign income were to be appropriated accordingly, and no refund was permissible.
On the question of interest under section 75, the Tribunal held that interest liability arises automatically upon confirmation of the service tax demand. Since the demands were upheld, interest was payable unless already discharged.
Regarding penalties under sections 76, 77, and 78, the Tribunal found that the imposition of penalty under section 78, which requires the same conditions as the extended limitation (i.e., intent to evade), was not sustainable given the finding against invocation of extended limitation. The appellant's failure to pay tax was due to reasonable cause-an incorrect understanding of the law-and the departmental officers' failure to scrutinize returns and conduct best judgment assessments under section 72. Invoking section 80, which exempts penalty where reasonable cause is proved, the Tribunal set aside all penalties.
In conclusion, the Tribunal upheld the service tax demand on commission received from the foreign airline and on payments made to foreign counterparts under reverse charge within the normal limitation period. It also upheld the demand on foreign income received within the normal limitation period. The Tribunal directed appropriation of all amounts paid by the appellant and confirmed interest liability. Penalties were set aside due to the appellant's reasonable cause. The matter was remanded for calculation and appropriation of amounts paid.
Significant holdings include the following verbatim legal reasoning:
"A perusal of the above framed provisions of Section 73 (1) of the Act, evidences inter-alia that where any service tax has not been levied or paid by reason of (a) fraud; or (b) collusion; or (c) willful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, SCN may be served upon a person chargeable with the service tax within five year from the relevant date."
"Suppression of facts must be deliberate and with an intent to escape payment of duty. ... Mere omission does not amount to suppression. The act must be deliberate."
"The mere fact that the belief was ultimately found to be wrong by the judgment of this Court does not render such belief of the assessee a mala fide belief particularly when such a belief was emanating from the view taken by a Division Bench of Tribunal."
"Failure to pay tax is not a justification for imposition of penalty. ... Invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty without intention."
"Revenue neutrality does not remove any charge of tax. It is not part of any section or Rule. This concept evolved through judicial pronouncements only to determine if it can be presumed that the assessee had an intent to evade payment of tax and invoke extended period of limitation."
Core principles established are that the extended period of limitation under section 73(1) can only be invoked upon proof of deliberate suppression or intent to evade tax; mere non-payment or omission does not suffice. The reverse charge mechanism applies to business auxiliary services received from foreign entities, even if the physical service is rendered outside India, when the service is effectively received in India. Penalties require proof of intent or reasonable cause; bona fide belief negates penalty liability. Interest follows confirmed demand automatically.
The Tribunal's final determinations on each issue are:
(i) The service tax demand on commission received from the foreign airline is valid and upheld.
(ii) The service tax demand under reverse charge on payments to foreign counterparts is valid within the normal limitation period.
(iii) The service tax demand on foreign income received is valid within the normal limitation period.
(iv) Extended period of limitation was wrongly invoked; only normal limitation applies.
(v) Interest is payable on confirmed demands.
(vi) Penalties are set aside due to reasonable cause and absence of intent to evade.
(vii) Appropriation of amounts paid by the appellant must be verified and effected by the Commissioner.
Taxability - amounts paid by the appellant to its foreign counterparts as “Business Auxiliary Services” received under reverse charge mechanism - Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - invocation of extended period of limitation under the proviso to section 73(1) of FA - Imposition of penalties under sections 76,77 and 78 of the Act.
Time limitation - whether the proviso to section 73(1) was correctly applied in the first SCN? - HELD THAT:- If the assessee does not pay service tax or short pays it, a notice under section 73 can be issued. According to the Revenue, in the first SCN, the extended period of limitation was correctly invoked and according to the appellant, it was not correctly invoked as none of the elements necessary to invoke extended period of limitation viz., fraud or collusion or wilful misstatement or suppression of facts or violation of act or rules with an intent to evade payment of service tax were present in the case - The reasons for invoking extended period of limitation given in the first SCN are that the appellant had violated Sections 69, 70,71A, 73, 66, 66A and 91 of the Act inasmuch as they failed to pay service tax correctly and hence it appears that the appellant had intentionally and wilfully suppressed the facts of providing and receiving taxable services and therefore, extended period of limitation was correctly invoked.
The grounds to invoke extended period of limitation while raising a demand under service tax are similar to the one under section 11A of the Central Excise Act, 1944. The question is whether the intent to evade has to be established or it can be presumed. If the appellant had not paid tax and had also violated some provisions of the Act or Rules, can it be presumed that the violation was with the intent to evade or the intent has to be established. A plain reading of the proviso to section 73 and numerous decisions make it clear as crystal that the intent has to be established - While it is the duty of the assessee to file the returns, it is the duty of the officer receiving the return to scrutinise them and it is his prerogative to call for any records and accounts to check if the service tax is correctly paid. If it is not correctly assessed or paid, he can raise a demand under section 73.
In Pushpam Pharmaceuticals Company [1995 (3) TMI 100 - SUPREME COURT], the Supreme Court examined whether the department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Central Excise Act. The proviso to section 11A of the Excise Act carved out an exception to the provisions that permitted the department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of which was suppression of facts. It is in this context that the Supreme Court observed that since “suppression of facts‟ has been used in the company of strong words such as fraud, collusion, or wilful default, suppression of facts must be deliberate and with an intent to escape payment of duty.
It would also be appropriate to refer the decision of the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others [2023 (4) TMI 216 - DELHI HIGH COURT]. The Delhi High Court observed that merely because MTNL had not declared the receipt of compensation as payment for taxable service, does not establish that it had willfully suppressed any material fact. The Delhi High Court further observed that the contention of MTNL that receipt was not taxable under the Act is a substantial one and no intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return.
In the present case, as noticed above, the Principal Commissioner held that there was violation of Act or Rules which would not have come to light but for the audit and hence larger period of limitation could be invoked. In this connection, it may be pertinent to refer to the decision of the Supreme Court in Commissioner of C. Ex. & Customs versus Reliance Industries Ltd. [2023 (7) TMI 196 - SUPREME COURT] The Supreme Court held that if an assessee bonafide believes that it was correctly discharging duty, then merely because the belief is ultimately found to be wrong by a judgment would not render such a belief of the assessee to be mala fide. If a dispute relates to interpretation of legal provisions, the department would be totally unjustified in invoking the extended period of limitation. The Supreme Court further held that in any scheme of self-assessment, it is the responsibility of the assessee to determine the liability correctly and this determination is required to be made on the basis of his own judgment and in a bona fide manner.
Extended period of limitation was wrongly invoked in the first SCN in this case. However, as already discussed above, this only affects the remedy available to the Revenue but does not alter the charge of the service tax. Therefore, the undisputed charge of service tax on the commission received by the appellant from M/s. Cathay Pacific remains and the amounts paid by the appellant stand appropriated in the impugned order. The appellant cannot claim any refund of this amount.
Taxability under Reverse charge of the amounts paid by the appellant to its foreign counterparts - HELD THAT:- There are no manner of doubt that the appellant received business auxiliary services from its counterparts abroad and paid for such services. Therefore, the appellant was liable to pay service tax on the same. While the packets were received or delivered outside India by the counterparts, the service in doing so, was rendered to the appellant in India - Revenue neutrality does not remove any charge of tax. It is not part of any section or Rule. This concept evolved through judicial pronouncements only to determine if it can be presumed that the assessee had an intent to evade payment of tax and invoke extended period of limitation. The logic is if the assessee is entitled to CENVAT credit, there could not have been any intention to evade payment of tax and hence extended period of limitation could not invoked. As already held in favour of the appellant on the question of limitation, Revenue neutrality is irrelevant to this case as the demand is being upheld only within the normal period.
Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - HELD THAT:- The appellant submits that the service tax which it had paid was not appropriated in the impugned order. It is found that this fact must be verified by the Commissioner and if any tax has been paid, it must be appropriated.
Demand of interest under section 75 of the Act - HELD THAT:- The charge of interest under section 75 applies automatically consequent upon the confirmation of demand. To the extent the demands are confirmed, the appellant is liable to pay appropriate interest.
Imposition of penalties under sections 76, 77 and 78 of the Act - HELD THAT:- The penalties were imposed under section 76, 77 and 78 of the Act. The requirement for imposing penalty under section 78 is the same as that for invoking extended period of limitation. Since we found in favour of the appellant on the question of extended period of limitation, it is found that penalty under section 78 is not imposable. The appellant had, albeit wrongly, believed some tax was not payable and had not paid. When pointed out, on two of the three disputed services, the appellant had paid service tax.
The appellant‘s failure in paying tax and complying with the provisions of the Act or Rules were due to reasonable cause, viz., it‘s incorrect understanding of the law. The Range officer could have taken corrective steps by scrutinising its returns and records and carrying out best judgment assessment under section 72 but the officer did not do so. It is deemed fit to set aside all penalties invoking section 80 of the Act.
Conclusion - i) The demand of service tax on the amounts received from M/s. Cathay Pacific is undisputed and is upheld and the amount already paid has been appropriated. ii) The demand of service tax under reverse charge mechanism on the amounts paid by the appellant to its foreign counterparts is upheld but only within the normal period of limitation. iii) The demand of service tax on the amounts received in foreign currency from the foreign counterparts is upheld within the normal period. iv) All amounts paid by the appellant must be appropriated towards the demand. v) Interest is payable on the amounts of service tax payable as above, if the interest is not already paid. vi) All penalties are set aside invoking section 80 of the Act.
Appeal allowed - The matter is remanded to the Commissioner for the limited purpose of calculation and appropriation of any amounts already paid as tax or interest.
Taxability - amounts paid by the appellant to its foreign counterparts as “Business Auxiliary Services” received under reverse charge mechanism - Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - invocation of extended period of limitation under the proviso to section 73(1) of FA - Imposition of penalties under sections 76,77 and 78 of the Act.
Time limitation - whether the proviso to section 73(1) was correctly applied in the first SCN? - HELD THAT:- If the assessee does not pay service tax or short pays it, a notice under section 73 can be issued. According to the Revenue, in the first SCN, the extended period of limitation was correctly invoked and according to the appellant, it was not correctly invoked as none of the elements necessary to invoke extended period of limitation viz., fraud or collusion or wilful misstatement or suppression of facts or violation of act or rules with an intent to evade payment of service tax were present in the case - The reasons for invoking extended period of limitation given in the first SCN are that the appellant had violated Sections 69, 70,71A, 73, 66, 66A and 91 of the Act inasmuch as they failed to pay service tax correctly and hence it appears that the appellant had intentionally and wilfully suppressed the facts of providing and receiving taxable services and therefore, extended period of limitation was correctly invoked.
The grounds to invoke extended period of limitation while raising a demand under service tax are similar to the one under section 11A of the Central Excise Act, 1944. The question is whether the intent to evade has to be established or it can be presumed. If the appellant had not paid tax and had also violated some provisions of the Act or Rules, can it be presumed that the violation was with the intent to evade or the intent has to be established. A plain reading of the proviso to section 73 and numerous decisions make it clear as crystal that the intent has to be established - While it is the duty of the assessee to file the returns, it is the duty of the officer receiving the return to scrutinise them and it is his prerogative to call for any records and accounts to check if the service tax is correctly paid. If it is not correctly assessed or paid, he can raise a demand under section 73.
In Pushpam Pharmaceuticals Company [1995 (3) TMI 100 - SUPREME COURT], the Supreme Court examined whether the department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Central Excise Act. The proviso to section 11A of the Excise Act carved out an exception to the provisions that permitted the department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of which was suppression of facts. It is in this context that the Supreme Court observed that since “suppression of facts‟ has been used in the company of strong words such as fraud, collusion, or wilful default, suppression of facts must be deliberate and with an intent to escape payment of duty.
It would also be appropriate to refer the decision of the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others [2023 (4) TMI 216 - DELHI HIGH COURT]. The Delhi High Court observed that merely because MTNL had not declared the receipt of compensation as payment for taxable service, does not establish that it had willfully suppressed any material fact. The Delhi High Court further observed that the contention of MTNL that receipt was not taxable under the Act is a substantial one and no intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return.
In the present case, as noticed above, the Principal Commissioner held that there was violation of Act or Rules which would not have come to light but for the audit and hence larger period of limitation could be invoked. In this connection, it may be pertinent to refer to the decision of the Supreme Court in Commissioner of C. Ex. & Customs versus Reliance Industries Ltd. [2023 (7) TMI 196 - SUPREME COURT] The Supreme Court held that if an assessee bonafide believes that it was correctly discharging duty, then merely because the belief is ultimately found to be wrong by a judgment would not render such a belief of the assessee to be mala fide. If a dispute relates to interpretation of legal provisions, the department would be totally unjustified in invoking the extended period of limitation. The Supreme Court further held that in any scheme of self-assessment, it is the responsibility of the assessee to determine the liability correctly and this determination is required to be made on the basis of his own judgment and in a bona fide manner.
Extended period of limitation was wrongly invoked in the first SCN in this case. However, as already discussed above, this only affects the remedy available to the Revenue but does not alter the charge of the service tax. Therefore, the undisputed charge of service tax on the commission received by the appellant from M/s. Cathay Pacific remains and the amounts paid by the appellant stand appropriated in the impugned order. The appellant cannot claim any refund of this amount.
Taxability under Reverse charge of the amounts paid by the appellant to its foreign counterparts - HELD THAT:- There are no manner of doubt that the appellant received business auxiliary services from its counterparts abroad and paid for such services. Therefore, the appellant was liable to pay service tax on the same. While the packets were received or delivered outside India by the counterparts, the service in doing so, was rendered to the appellant in India - Revenue neutrality does not remove any charge of tax. It is not part of any section or Rule. This concept evolved through judicial pronouncements only to determine if it can be presumed that the assessee had an intent to evade payment of tax and invoke extended period of limitation. The logic is if the assessee is entitled to CENVAT credit, there could not have been any intention to evade payment of tax and hence extended period of limitation could not invoked. As already held in favour of the appellant on the question of limitation, Revenue neutrality is irrelevant to this case as the demand is being upheld only within the normal period.
Non-appropriation of the amounts paid by the appellant on the foreign income received in respect of the second SCN - HELD THAT:- The appellant submits that the service tax which it had paid was not appropriated in the impugned order. It is found that this fact must be verified by the Commissioner and if any tax has been paid, it must be appropriated.
Demand of interest under section 75 of the Act - HELD THAT:- The charge of interest under section 75 applies automatically consequent upon the confirmation of demand. To the extent the demands are confirmed, the appellant is liable to pay appropriate interest.
Imposition of penalties under sections 76, 77 and 78 of the Act - HELD THAT:- The penalties were imposed under section 76, 77 and 78 of the Act. The requirement for imposing penalty under section 78 is the same as that for invoking extended period of limitation. Since we found in favour of the appellant on the question of extended period of limitation, it is found that penalty under section 78 is not imposable. The appellant had, albeit wrongly, believed some tax was not payable and had not paid. When pointed out, on two of the three disputed services, the appellant had paid service tax.
The appellant‘s failure in paying tax and complying with the provisions of the Act or Rules were due to reasonable cause, viz., it‘s incorrect understanding of the law. The Range officer could have taken corrective steps by scrutinising its returns and records and carrying out best judgment assessment under section 72 but the officer did not do so. It is deemed fit to set aside all penalties invoking section 80 of the Act.
Conclusion - i) The demand of service tax on the amounts received from M/s. Cathay Pacific is undisputed and is upheld and the amount already paid has been appropriated. ii) The demand of service tax under reverse charge mechanism on the amounts paid by the appellant to its foreign counterparts is upheld but only within the normal period of limitation. iii) The demand of service tax on the amounts received in foreign currency from the foreign counterparts is upheld within the normal period. iv) All amounts paid by the appellant must be appropriated towards the demand. v) Interest is payable on the amounts of service tax payable as above, if the interest is not already paid. vi) All penalties are set aside invoking section 80 of the Act.
Appeal allowed - The matter is remanded to the Commissioner for the limited purpose of calculation and appropriation of any amounts already paid as tax or interest.
The core legal questions considered by the Tribunal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of Bariatric Surgery as Cosmetic Surgery for Service Tax Purposes
Relevant legal framework and precedents: The service tax liability arises under Section 65(105)(zzzzk) of the Finance Act, which includes cosmetic or plastic surgery services. The Central Board of Excise and Customs (CBEC) Circular No. 334/13/2009-TRUm dated 06.07.2009 and exemption notifications such as the one dated 30.06.2012 provide guidance on the scope of taxable cosmetic surgery. The Medical Council of India and Indian Medical Association have issued clarifications distinguishing bariatric surgery from cosmetic surgery.
Court's interpretation and reasoning: The Tribunal analyzed the nature and purpose of bariatric surgery, noting that it is a gastrointestinal surgical procedure aimed at treating morbid obesity and associated co-morbidities such as hypertension, Type-II diabetes, arthritis, lipid disorders, and obstructive sleep apnea. Bariatric surgery is performed only on patients with a Body Mass Index (BMI) above 32.5 with co-morbid conditions, following internationally recognized surgical guidelines endorsed by the Asia Pacific International Federation of Surgical Obesity and the Obesity Surgical Society of India.
The Tribunal emphasized that bariatric surgery's objective is therapeutic-to reduce weight and control obesity-related diseases-rather than cosmetic enhancement. This distinction was supported by the Circular dated 06.07.2009, minutes of the Postgraduate Medical Education Committee meeting held on 25.07.2014, and a letter from the Indian Medical Association, Indore Branch (2013-14), all clarifying that bariatric surgery is not plastic or cosmetic surgery.
Key evidence and findings: The appellant provided medical literature on bariatrics, official clarifications from the Medical Council of India, and prior orders of the Additional Commissioner and Tribunal holding bariatric surgery distinct from cosmetic surgery. The Additional Commissioner's order dated 22.02.2014 in a similar case (M/s Asian Bariatric) was particularly relied upon, which held bariatric surgery as non-taxable under the relevant service tax provisions.
Application of law to facts: Applying the statutory definition and the clarifications from medical authorities, the Tribunal concluded that bariatric surgery is a medically necessary treatment for a disease condition (morbid obesity) and not a cosmetic procedure aimed at enhancing physical appearance.
Treatment of competing arguments: The Department argued for the applicability of service tax on bariatric surgery by treating it as cosmetic surgery. However, the Department's Authorized Representative conceded the earlier Tribunal decisions favoring the appellant. The Tribunal found that the impugned order failed to follow binding precedents and did not adequately consider the medical and regulatory clarifications distinguishing bariatric surgery from cosmetic surgery.
Conclusions: Bariatric surgery is not taxable as cosmetic surgery under the Finance Act. The service tax demand on the appellant for bariatric surgery services is unsustainable.
Issue 2: Adherence to Judicial Discipline and Precedents in the Impugned Order
Relevant legal framework and precedents: The Tribunal referred to its own prior decisions in the appellant's cases reported as 2021 (45) GSTL 149 (Tr.-Del) and 2023 (6) TMI 898-CESTAT NEW DELHI, which had ruled in favor of the appellant on identical issues. The Supreme Court decision in Damodar J Malpani v. Collector of Central Excise was cited to emphasize the principle that once an order has attained finality, the Department cannot take a contradictory stand in subsequent proceedings.
Court's interpretation and reasoning: The Tribunal observed that the impugned order under challenge failed to follow the earlier decisions of the Tribunal and the principle of judicial discipline. The Department had allowed earlier demands to be set aside by the Tribunal, and the same issue was being re-agitated without justification.
Key evidence and findings: The Tribunal noted that show cause notices for earlier periods had been decided in favor of the appellant and that the Department's own Circulars and clarifications supported the appellant's stance. The appellant's reliance on these prior decisions and clarifications was well-founded.
Application of law to facts: The Tribunal applied the principle of consistency and finality in judicial decisions, holding that the Department cannot reopen settled issues arbitrarily. The impugned order's failure to follow binding precedents rendered it unsustainable.
Treatment of competing arguments: The Department's plea to dismiss the appeal was rejected due to its concession of earlier Tribunal rulings and failure to distinguish the present case from those rulings.
Conclusions: The impugned order is set aside for non-adherence to judicial discipline and failure to follow binding precedents.
3. SIGNIFICANT HOLDINGS
The Tribunal held as follows:
"Bariatric surgery is a procedure through which the intake capacity of the patient is restricted, thereby resulting in weight loss which is necessary for control of obesity related diseases, while plastic or cosmetic surgery is intended to improve the outer shape and appearance of the body."
"The Central Board of Excise and Customs has also clarified that the service proposed to be taxed were cosmetic surgery and such plastic surgery which is undertaken to preserve or enhance physical appearance or beauty. The aim and object of bariatric surgery is to cure the state of morbid obesity and related disease."
"In coming to this conclusion, reliance can be placed on the decision of the Tribunal in Shri Niraj Prasad vs. Commissioner of Central Excise and Service Tax, Kanpur (2019-TIOL-3237-CESTAT-ALL 2020 (38) GST 78 (Tr All.). A similar issue had arisen for consideration. In one matter, the demand of service tax under "business auxiliary service by a similarly situated assessee had been set aside by the Commissioner and that order had attained finality. The Division Bench of the Tribunal held that when the Department had permitted that order to attain finality, it cannot be permitted to urge in the case of the appellant that the appellant should pay service tax under "business auxiliary service", In coming to this conclusion, reliance was placed by the Division Bench on the decision of the Supreme Court in Damodar J Malpani v. Collector of Central Excise [2002 (146) ELT. 483 (S.C.)."
The Tribunal concluded that the impugned order was contrary to established legal principles and prior findings and therefore set aside the order, allowing the appeal.
Liability of payment of service tax - bariatric surgery - taxable as cosmetic surgery or not - cum-tax benefit service - HELD THAT:- Having heard both the parties and perusal of entire records including the decisions as have already been passed in favour of the appellant on the identical issue by this Tribunal. We find that it is evident from the Circular No. 334/13/2009-TRUm dated 06.07.2009, the minutes of the Postgraduate Medical Education Committee held on 25th July 2014 at 10.30 AM in the Council Office, Sector-VIII, Pocket-14, Dwarka, New Delhi and clarification by Indian Medical Association, Indore Branch 2013-14, it is clear that bariatric surgery is distinct from the plastic or cosmetic surgery. Bariatric surgery is a procedure through which the intake capacity of the patient is restricted, thereby resulting in weight loss which is necessary for control of obesity related diseases, while plastic or cosmetic surgery is intended to improve the outer shape and appearance of the body. Bariatric surgery is undertaken only on those patients who are diagnosed with morbid obesity which itself is a disease, with other co-morbidities and on such patients who have a BMI of over 32.5.
The President of the Indian Medical Association in a letter dated May 6, 2014 also wrote that cosmetic surgery is done to improve the looks of a person, but bariatric surgery is done to correct the metabolic and hormonal state of the diseased body along with weight loss. After referring to the Circular dated July 6, 2009, the exemption Notification dated June 30,2012, the literature provided by the appellant therein relating to bariatrics, the letter of the Medical Council of India, the Additional Commissioner in another case of identical demand against M/s Asian Bariatric vide order dated 22.02.2014 has held as a fact, that bariatric surgery cannot be considered as cosmetic surgery and therefore, not taxable under Section 65(105)(zzzzk) of the Finance Act.
Thus, we find no reason to differ from the said earlier decisions. The order under challenge has failed to follow the outcome and to observe judicial discipline. Resultantly, we hereby set-aside the impugned order and consequent thereto, the appeal is allowed.
Liability of payment of service tax - bariatric surgery - taxable as cosmetic surgery or not - cum-tax benefit service - HELD THAT:- Having heard both the parties and perusal of entire records including the decisions as have already been passed in favour of the appellant on the identical issue by this Tribunal. We find that it is evident from the Circular No. 334/13/2009-TRUm dated 06.07.2009, the minutes of the Postgraduate Medical Education Committee held on 25th July 2014 at 10.30 AM in the Council Office, Sector-VIII, Pocket-14, Dwarka, New Delhi and clarification by Indian Medical Association, Indore Branch 2013-14, it is clear that bariatric surgery is distinct from the plastic or cosmetic surgery. Bariatric surgery is a procedure through which the intake capacity of the patient is restricted, thereby resulting in weight loss which is necessary for control of obesity related diseases, while plastic or cosmetic surgery is intended to improve the outer shape and appearance of the body. Bariatric surgery is undertaken only on those patients who are diagnosed with morbid obesity which itself is a disease, with other co-morbidities and on such patients who have a BMI of over 32.5.
The President of the Indian Medical Association in a letter dated May 6, 2014 also wrote that cosmetic surgery is done to improve the looks of a person, but bariatric surgery is done to correct the metabolic and hormonal state of the diseased body along with weight loss. After referring to the Circular dated July 6, 2009, the exemption Notification dated June 30,2012, the literature provided by the appellant therein relating to bariatrics, the letter of the Medical Council of India, the Additional Commissioner in another case of identical demand against M/s Asian Bariatric vide order dated 22.02.2014 has held as a fact, that bariatric surgery cannot be considered as cosmetic surgery and therefore, not taxable under Section 65(105)(zzzzk) of the Finance Act.
Thus, we find no reason to differ from the said earlier decisions. The order under challenge has failed to follow the outcome and to observe judicial discipline. Resultantly, we hereby set-aside the impugned order and consequent thereto, the appeal is allowed.
1. Whether the various charges collected by the appellant from clients-such as IAAI Charges, Delivery Order charges, Air Freight Charges, Booking Charges, Survey Charges, Warehousing Charges, Steamer Agent Charges, Container Freight Station Charges, Repacking Charges, Insurance Charges, Godown rent, etc.-constitute part of the taxable value for the purpose of service tax under the Finance Act, 1994.
2. Whether these charges, which were reimbursed by clients on actuals and supported by a Chartered Accountant's certificate, should be treated as consideration for taxable service or as pure reimbursements (pure agent expenses) not liable to service tax.
3. The validity and applicability of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 in including reimbursed expenses within the gross value of taxable services.
4. The effect of the Supreme Court's decision in UOI v Intercontinental Consultants and Technocrats Pvt Ltd on the valuation of taxable services and the inclusion of reimbursed expenses in taxable value.
5. The applicability of extended period of limitation and imposition of penalties under Sections 76 and 78 of the Finance Act, 1994, in the context of the above valuation issues.
Issue-wise Detailed Analysis:
1. Inclusion of Various Charges in Taxable Value:
Legal Framework and Precedents: The valuation of taxable services is governed by Section 67 of the Finance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006. Rule 5(1) of these Rules mandated inclusion of all expenditures or costs incurred by the service provider in the course of providing taxable services in the gross value charged. The issue was whether these reimbursed charges collected from clients form part of the 'gross amount charged' for taxable services.
Court's Interpretation and Reasoning: The appellate authority initially upheld the Department's demand relying on Rule 5(1), holding that all such charges are part of the taxable value. However, the Tribunal found this approach inconsistent with the Supreme Court's ruling in UOI v Intercontinental Consultants and Technocrats Pvt Ltd, which struck down Rule 5(1) as ultra vires Sections 66 and 67 of the Act. The Supreme Court held that only the consideration received as quid pro quo for the taxable service forms part of the taxable value, and reimbursed expenses, being merely pass-through costs, do not constitute consideration for the service.
Key Evidence and Findings: The appellant produced a Chartered Accountant certificate affirming that these charges were reimbursed on actuals and did not form part of the service consideration. The adjudicating authority accepted this and dropped the demands, but the appellate authority reversed this without verifying the genuineness of the certificate.
Application of Law to Facts: The Tribunal applied the Supreme Court's interpretation that valuation must be confined to the gross amount charged for the taxable service itself, excluding reimbursed expenses. Since the appellant's charges were reimbursed on actuals and not consideration for service, they fall outside the taxable value.
Treatment of Competing Arguments: The Department argued for inclusion of all expenses under Rule 5(1). The appellant relied on the apex court ruling and the CA certificate to assert that these were pure reimbursements. The Tribunal favored the appellant's position, emphasizing the binding Supreme Court precedent and the principle that rules cannot override the statute.
Conclusion: The charges reimbursed by the appellant are not part of the taxable value for service tax purposes for the relevant period prior to legislative amendment in 2015.
2. Validity of Rule 5(1) of the Valuation Rules:
Legal Framework and Precedents: Rule 5(1) sought to include reimbursed expenses in taxable value. The Supreme Court in the Intercontinental Consultants case held this rule ultra vires the statutory provisions in Sections 66 and 67 of the Finance Act.
Court's Interpretation and Reasoning: The Supreme Court reasoned that Section 66 charges service tax on the value of taxable services, which means the consideration for the service rendered. Section 67 mandates valuation based on the gross amount charged for 'such' taxable service. Rule 5(1) attempted to extend this valuation to reimbursed expenses which are not consideration for the service itself, thereby exceeding the statutory mandate.
The Court underscored the principle that subordinate legislation cannot override or extend beyond the parent statute. It also noted that the legislature itself amended Section 67 in 2015 to explicitly include reimbursable expenditure as part of taxable value, indicating that prior to this amendment, such inclusion was not permissible.
Key Evidence and Findings: The Tribunal relied on the Supreme Court's detailed reasoning, including the statutory interpretation of Sections 66 and 67, and the principle of lex prospicit non respicit (law looks forward, not backward) to hold that Rule 5(1) could not be applied retrospectively.
Application of Law to Facts: Since the period under consideration was prior to the 2015 amendment, Rule 5(1) could not be invoked to include reimbursed expenses in taxable value.
Treatment of Competing Arguments: The Department maintained reliance on Rule 5(1), but the Tribunal rejected this in light of the apex court ruling, which had explicitly invalidated the rule's application for the relevant period.
Conclusion: Rule 5(1) of the Valuation Rules was not applicable for the period in question, and the inclusion of reimbursed expenses in taxable value was impermissible.
3. Liability for Service Tax, Interest, and Penalties:
Legal Framework and Precedents: The show cause notices invoked extended limitation and proposed penalties under Sections 76 and 78 of the Finance Act for non-payment of service tax on the reimbursed expenses.
Court's Interpretation and Reasoning: Since the Tribunal held that reimbursed expenses were not taxable during the relevant period, the demand of service tax, interest, and penalties on such amounts could not be sustained.
Key Evidence and Findings: The appellant's CA certificate and the Supreme Court's ruling negated the existence of any taxable consideration on the reimbursed amounts.
Application of Law to Facts: The absence of taxable value on reimbursed expenses nullified the basis for service tax demand, interest, and penalties.
Treatment of Competing Arguments: The Department's argument for extended limitation and penalties was contingent on the validity of the tax demand, which the Tribunal rejected.
Conclusion: The demand of service tax along with interest and penalties on reimbursed expenses was not sustainable.
4. Prospective Effect of Legislative Amendment:
Legal Framework and Precedents: The Finance Act, 2015 amended Section 67 to include reimbursable expenditure or cost as part of consideration for taxable services with effect from May 14, 2015.
Court's Interpretation and Reasoning: The Tribunal relied on the constitutional principle that legislation is presumed prospective unless expressly made retrospective. The amendment being substantive, it cannot be applied retrospectively to validate demands for periods prior to its commencement.
Key Evidence and Findings: The Tribunal cited the Constitution Bench judgment in Commissioner of Income Tax v Vatika Township Pvt Ltd, which emphasized fairness and the principle lex prospicit non respicit, underscoring that taxpayers have the right to arrange affairs based on existing law.
Application of Law to Facts: The appellant's liability was assessed for periods prior to the 2015 amendment; hence, the amendment could not be applied to impose tax on reimbursed expenses for those periods.
Treatment of Competing Arguments: The Department did not argue for retrospective application of the amendment, and the Tribunal found no basis to do so.
Conclusion: The amendment to Section 67 is prospective and does not affect the appellant's liability for the periods under dispute.
Significant Holdings:
"Rule 5(1) of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider 'for such service' and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro quo for rendering such a service."
"It is trite that rules cannot go beyond the statute. ... The statutory provision has precedence and must be complied with."
"Legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect."
"The service tax is to be paid only on the services actually provided by the service provider."
Final determinations on the issues are:
- The various reimbursed charges collected by the appellant do not form part of the taxable value for service tax purposes for the relevant period prior to May 14, 2015.
- Rule 5(1) of the Service Tax Valuation Rules, 2006 is ultra vires Sections 66 and 67 of the Finance Act, 1994 and cannot be applied retrospectively to include reimbursed expenses in taxable value.
- The demand of service tax, interest, and penalties on reimbursed expenses for the period prior to the 2015 amendment is unsustainable.
- The amendment to Section 67 of the Finance Act, 1994, effective from May 14, 2015, including reimbursable expenditure in taxable value, is prospective and does not affect the appellant's liability for earlier periods.
Accordingly, the appeal is allowed and the impugned appellate orders demanding service tax on reimbursed expenses are set aside.
Taxability - service tax on reimbursed warehousing charges for the period 2006-07 - CHA charges, IAAI Charges, Delivery Order charges/Air Freight Charges, Booking Charges, Survey Charges, Warehousing Charges, Steamer Agent Charges, Container Freight Station Charges, Repacking Charges, Insurance Charges, Godown rent etc. - whether the above charges collected from the clients are to be treated as expenditure or costs incurred by the appellant in the course of providing taxable service and all such expenditure or cost form part of the taxable service provided or not - HELD THAT:- The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, [2018 (3) TMI 357 - SUPREME COURT] which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client, apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax.
The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI, wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections.
Conclusion - i) The amendment to Section 67 of the Finance Act, 1994, effective from May 14, 2015, including reimbursable expenditure in taxable value, is prospective and does not affect the appellant's liability for earlier periods. ii) The demand of service tax, interest, and penalties on reimbursed expenses for the period prior to the 2015 amendment is unsustainable.
Appeal allowed.
Taxability - service tax on reimbursed warehousing charges for the period 2006-07 - CHA charges, IAAI Charges, Delivery Order charges/Air Freight Charges, Booking Charges, Survey Charges, Warehousing Charges, Steamer Agent Charges, Container Freight Station Charges, Repacking Charges, Insurance Charges, Godown rent etc. - whether the above charges collected from the clients are to be treated as expenditure or costs incurred by the appellant in the course of providing taxable service and all such expenditure or cost form part of the taxable service provided or not - HELD THAT:- The issue is no more res-integra in view of the decision of the Honourable Supreme Court in the case of UOI v Intercontinental Consultants and Technocrats Pvt Ltd, [2018 (3) TMI 357 - SUPREME COURT] which has considered the issue of liability to pay service tax on reimbursable expenses received by the service provider in the course of rendering services for the client, apart from the consideration received for rendering the services on which the client has discharged the liability to pay service tax.
The Honourable Supreme Court affirmed the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI, wherein Rule 5(1) of the Service Tax Valuation Rules, 2006 which provided for inclusion of expenditures or costs incurred by the service provider in the course of providing taxable services, in the value of such taxable services, was stuck down as ultra vires Section 66 and Section 67 of the Act and as travelling beyond the scope of the said sections.
Conclusion - i) The amendment to Section 67 of the Finance Act, 1994, effective from May 14, 2015, including reimbursable expenditure in taxable value, is prospective and does not affect the appellant's liability for earlier periods. ii) The demand of service tax, interest, and penalties on reimbursed expenses for the period prior to the 2015 amendment is unsustainable.
Appeal allowed.
1. Whether CENVAT credit on welding electrodes used in repair and maintenance of plant and machinery is admissible under the CENVAT Credit Rules, 2004, particularly after the amendment to the definition of inputs effective from 01.04.2011.
2. Whether the refund claim for CENVAT credit on welding electrodes for the period March 2013 to June 2017 is maintainable, given that the earlier dispute and tribunal decision pertained only to the period June 2010 to February 2013.
3. Whether the appellant had actually availed and subsequently reversed the CENVAT credit on welding electrodes during the period March 2013 to June 2017, as required to claim refund.
4. Whether the refund claim is barred by limitation or is otherwise impermissible under the Central Excise Act, 1944 and related provisions.
5. The legal effect and admissibility of the appellant's letter dated 19.07.2013, which stated cessation of claiming credit on welding electrodes but reserved the right to claim credit if allowed by higher authority.
6. The applicability of the principles of self-assessment and finality of assessment orders in the context of refund claims under the Central Excise Act, 1944.
Issue-wise Detailed Analysis
1. Admissibility of CENVAT Credit on Welding Electrodes Post-Amendment
The Tribunal had earlier held in a decision covering June 2010 to February 2013 that welding electrodes used for repair and maintenance of plant and machinery are inputs eligible for CENVAT credit, notwithstanding the amendment to the definition of inputs under Rule 2(k) of the CENVAT Credit Rules, 2004 effective from 01.04.2011. The Tribunal relied on precedents including decisions of various High Courts and held that repair and maintenance activities are integral to manufacture and thus credit on welding electrodes used therein is admissible.
However, this appeal concerns the period subsequent to February 2013. The revenue contended that the Tribunal's decision was limited to the earlier period and does not extend to the period March 2013 to June 2017. The appellant contended that the principle established by the Tribunal should apply to the later period as well.
The Court noted that the refund claim for the later period was not before the Tribunal and no adjudication or denial of credit had been made for that period. The appellant failed to produce documentary evidence of having availed or reversed CENVAT credit on welding electrodes during March 2013 to June 2017. Without such evidence, the claim for refund was not maintainable.
2. Maintainability of Refund Claim for March 2013 to June 2017
The appellant filed a refund claim for Rs. 3,52,728, including amounts reversed and deposited for the earlier period and additional amounts relating to welding electrodes for March 2013 to June 2017. The jurisdictional Assistant Commissioner allowed refund only of the pre-deposit amounts related to the earlier period and rejected the balance refund claim for the later period.
The Court emphasized that the Tribunal's order dated 14.03.2019 pertained only to June 2010 to February 2013 and did not cover the subsequent period. Therefore, the refund claim for March 2013 to June 2017 was not consequential to the Tribunal's order and was outside its scope.
The Court observed that no cause of action arose for refund for the later period as no denial of credit or show cause notice had been issued for that period. The attempt to claim refund for that period was held to be improper and "fraudulent."
3. Evidence of Availment and Reversal of CENVAT Credit
The appellant did not produce copies of CENVAT accounts or ER-1 returns evidencing the availing and reversal of credit on welding electrodes for the period March 2013 to June 2017. The appellant's letter dated 19.12.2019 admitted that reversal entries were not submitted as the amounts were credited in store accounts and material receipt notes, and that the appellant reserved the right to claim credit if allowed by higher authorities.
The Court found that since no credit was availed or reversed under protest during the relevant period, the refund claim was inadmissible. The refund claim must be based on actual availing and reversal of credit in accordance with statutory provisions.
4. Bar of Limitation and Finality of Assessment
The Tribunal had earlier held that the demand for denial of credit for June 2010 to February 2013 was barred by limitation as no malafide was attributable to the appellant. The present refund claim for the later period could not be sustained on the basis of the earlier decision.
The Court extensively relied on the authoritative Supreme Court decision in Mafatlal Industries Ltd., which clarified that refund claims must be filed under the statutory provisions (Section 11B and Rule 11) and cannot be based on a "discovery of mistake of law" arising from decisions in other cases. The finality of assessment orders and adjudications must be respected, and claims cannot be reopened beyond limitation periods or by invoking principles of mistake of law.
The Court also referred to recent Supreme Court decisions emphasizing strict interpretation of taxing statutes, the finality of self-assessment orders, and the limited scope of refund proceedings which are in the nature of execution of orders rather than fresh adjudications.
5. Legal Effect of Letter dated 19.07.2013
The appellant's letter informing cessation of claiming credit on welding electrodes and reserving the right to claim credit if allowed by higher authorities was examined. The Court found that the letter was not a formal protest under any statutory provision and was not admissible to support the refund claim. It was a suo moto communication based on informal discussions and did not comply with procedural requirements.
The Court cited binding Supreme Court precedents holding that statutory actions must be taken in the manner prescribed by law, and informal or unilateral communications cannot substitute for formal proceedings.
6. Self-Assessment and Appeal Provisions
The Court reiterated that under the Central Excise Act, self-assessment is integral and binding unless modified by an appeal or review. The appellant's failure to challenge any assessment or adjudication order for the period March 2013 to June 2017 precludes reopening of the matter through refund claims.
The Court referred to the provisions of Section 128 of the Central Excise Act allowing appeals against any order including self-assessment. It held that refund claims cannot be used as a backdoor to challenge assessment orders that were not appealed within prescribed time limits.
Further, the Court emphasized that refund proceedings are not meant for re-assessment or review of the merits but only for execution of orders granting refunds.
Treatment of Competing Arguments
The appellant relied on earlier Tribunal decisions and various High Court rulings to support the admissibility of credit and refund claims. However, the Court distinguished these decisions as pertaining to different facts and periods, and prior to the Supreme Court's binding pronouncements on finality and limitation.
The revenue's arguments emphasizing the limited scope of the Tribunal's order, absence of documentary evidence of credit availing, and bar of limitation were accepted. The Court found the appellant's refund claim for the later period to be without legal basis and procedurally defective.
Conclusions
The Court concluded that the refund claim for CENVAT credit on welding electrodes for the period March 2013 to June 2017 is inadmissible for want of evidence of availing and reversal of credit, is outside the scope of the Tribunal's earlier order, and is barred by limitation and principles of finality of assessment.
The informal letter dated 19.07.2013 does not constitute a valid protest or basis for refund claim. The appellant cannot reopen concluded assessments or claims through refund applications without following statutory procedures.
The appeal was dismissed accordingly.
Significant Holdings
"Though the period involved in the present appeal is subsequent to 01.04.2011 when the definition of inputs underwent change but I note that even after the amendment, the goods used in the manufacture of the final products are Cenvatable. Admittedly, repair and maintenance of plant and machinery is one of the activities which are related to the manufacture of final product. Inasmuch as, without the said activity, the manufacturing process cannot be continued, it has to be held that the welding electrodes used for repair and maintenance of plant and machinery are Cenvatable."
"The refund claimed by the appellant for the Cenvat Credit on Welding Electrodes for the period of March, 2013 to June, 2017 is not an issue before the Tribunal, and therefore, the Order of the Tribunal dated 14.03.2019 has got nothing to do with such a refund claim... no cause of action had arisen to enable the appellant to surreptitiously include a claim for refund of Cenvat Credit for a period which does not pertain to the period covered by the decision of the Tribunal."
"The appellant neither availed Cenvat credit of welding electrodes received during the period 1.03.2013 to June, 2017 nor reversed the same under protest subsequently... As the Cenvat credit amounting to Rs 3,19,400.00 in respect of Welding electrodes was neither availed nor reversed under protest, I opine that the refund of the same is inadmissible to the party."
"When a statute provides for the doing an Act in particular manner then that action must be done in that way only and all other manners are necessarily barred."
"Where a duty has been collected under a particular order which has become final, the refund of that duty cannot be claimed unless the order (whether it is an order of assessment, adjudication or any other order under which the duty is paid) is set aside according to law... no claim for refund is permissible except under and in accordance with Rule 11/Section 11B and under no other provision and in no other forum."
"A taxing statute must be construed by having regard to the strict letter of the law... The machinery provisions must be so construed as would effectuate the object and purpose of the statute and not defeat the same."
"Refund proceedings are in the nature of execution for refunding amount. It is not open to the authority which processes the refund to make a fresh assessment on merits and to correct assessment on the basis of mistake or otherwise."
"If an order which is appealable under the Act is not challenged then the order is not liable to be questioned and the matter is not to be reopened in a proceeding for the refund which, if we may term it so, is in the nature of execution of a decree/order."
"The provisions of Section 128 make appealable any decision or order under the Act including that of self-assessment... The order of self-assessment is an order of assessment as per Section 2(2), as such, it is appealable in case any person is aggrieved by it."
"The appellant's refund claim for the period March 2013 to June 2017 is dismissed."
CENVAT credit on welding electrodes used in repair and maintenance of plant and machinery - amendment to the definition of inputs effective from 01.04.2011 - refund claim for CENVAT credit on welding electrodes for the period March 2013 to June 2017 - time limitation - HELD THAT:- Admittedly in the present case appellant has not placed on record the copies of the CENVAT Account maintained by the appellant or the ER-1 return filed by them during the period March 2017 to June 2017, to show that they had ever claimed the CENVAT Credit in respect of the welding electrodes against the invoices on the basis of which the present refund claim has been filed. No reversal entry has been produced, to show that they had ever reversed the CENVAT Credit taken by them in respect of welding electrodes.
Self assessment has been introduced in the scheme of levy of Central Excise duty from 1997 and the assessee/ appellant is mandated to assess his duty and credits himself and file the return accordingly. Revenue authorities do not have any role in the assessment made by the appellant of duties payable and the credits availed. They will come into picture subsequent to filing of the return and in case of any short/ nonpayment of duties or availment of inadmissible credits in the returns action will be initiated as provided by Section 11A of the Central Excise Act, 1944, Rule 14 of the Cenvat Rules, 2004 etc. The scheme of Central Excise Act, 1944 do not permit any other method of making the claim to credit or for postponement of the right to credit for any reason.
The claim of the appellant that this refund claim is covered by the decision of the tribunal M/S YADU SUGAR LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NOIDA [2019 (3) TMI 2085 - CESTAT ALLAHABAD] is also not acceptable as that decision was rendered in case where the appellant had claimed the credit and the same was sought to be denied by initiating the proceedings as provided by the statute even if the discussion referred in the letter dated 19.07.2023 is accepted as an assessment order disallowing the credit. The said decision cannot be made applicable to allow this refund claim in favour of the appellant.
Appeal dismissed.
CENVAT credit on welding electrodes used in repair and maintenance of plant and machinery - amendment to the definition of inputs effective from 01.04.2011 - refund claim for CENVAT credit on welding electrodes for the period March 2013 to June 2017 - time limitation - HELD THAT:- Admittedly in the present case appellant has not placed on record the copies of the CENVAT Account maintained by the appellant or the ER-1 return filed by them during the period March 2017 to June 2017, to show that they had ever claimed the CENVAT Credit in respect of the welding electrodes against the invoices on the basis of which the present refund claim has been filed. No reversal entry has been produced, to show that they had ever reversed the CENVAT Credit taken by them in respect of welding electrodes.
Self assessment has been introduced in the scheme of levy of Central Excise duty from 1997 and the assessee/ appellant is mandated to assess his duty and credits himself and file the return accordingly. Revenue authorities do not have any role in the assessment made by the appellant of duties payable and the credits availed. They will come into picture subsequent to filing of the return and in case of any short/ nonpayment of duties or availment of inadmissible credits in the returns action will be initiated as provided by Section 11A of the Central Excise Act, 1944, Rule 14 of the Cenvat Rules, 2004 etc. The scheme of Central Excise Act, 1944 do not permit any other method of making the claim to credit or for postponement of the right to credit for any reason.
The claim of the appellant that this refund claim is covered by the decision of the tribunal M/S YADU SUGAR LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NOIDA [2019 (3) TMI 2085 - CESTAT ALLAHABAD] is also not acceptable as that decision was rendered in case where the appellant had claimed the credit and the same was sought to be denied by initiating the proceedings as provided by the statute even if the discussion referred in the letter dated 19.07.2023 is accepted as an assessment order disallowing the credit. The said decision cannot be made applicable to allow this refund claim in favour of the appellant.
Appeal dismissed.
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of Services Provided by IHCL
Relevant legal framework and precedents: The classification of services under the Finance Act, 1994 and the Cenvat Credit Rules, 2004 is critical. Rule 6 of the Cenvat Credit Rules, 2004 governs the availment and reversal of credit where input services are used for both taxable and exempted services. Sub-rule (5) of Rule 6 specifically excludes certain services, including Management Consultancy Services, from reversal requirements, allowing 100% credit. The definition of "Business Auxiliary Services" was amended w.e.f. 01.05.2011 to include "operational or administrative assistance in any manner."
Court's interpretation and reasoning: The department initially held that the services provided by IHCL were comprehensive and collaborative, involving operation, running, maintenance, and promotion of the hotel, effectively exercising actual power over hotel operations. Consequently, these services were classified as "Business Auxiliary Services," which do not fall under the exempted category in sub-rule (5) of Rule 6, thereby limiting Cenvat credit.
The appellant contended that the services fall within the ambit of "Management or Business Consultancy Services," which entitles them to 100% credit under Rule 6(5). The appellant further argued that the amendment expanding the definition of Business Auxiliary Services was effective only from 01.05.2011, whereas the dispute period is prior to that, making the department's classification and consequent denial of credit unsustainable.
The Tribunal examined the contract terms and prior judicial pronouncements, including decisions of the Hon'ble Supreme Court and the Tribunal itself, which have consistently held that such services rendered by IHCL to hotel companies are management consultancy services and not business auxiliary services for the relevant period.
Key evidence and findings: The contract between the appellant and IHCL delineates IHCL's role as institution and supervision of operating policies, formulating procedures, planning advertising, public relations, licensing negotiations, and supervision of licensees, which are quintessential management consultancy activities rather than mere auxiliary services.
Application of law to facts: Since the services qualify as management consultancy services under the definitions prevailing during the period, the appellant was entitled to 100% Cenvat credit without reversal under Rule 6.
Treatment of competing arguments: The department's reliance on the collaborative and comprehensive nature of the services to classify them as business auxiliary was rejected because the statutory amendment expanding business auxiliary services' definition was not applicable during the relevant period. The appellant's reliance on binding precedents was accepted.
Conclusion: The Tribunal held that the services rendered by IHCL were management consultancy services and not business auxiliary services for the period under dispute, entitling the appellant to full Cenvat credit.
Issue 2: Entitlement to 100% Cenvat Credit on Input Services
Relevant legal framework and precedents: Rule 6(3)(ii) of Cenvat Credit Rules, 2004 mandates reversal of credit attributable to exempted services, except for input services listed in sub-rule (5), which includes management consultancy services. The notification dated 01.03.2011 omitted sub-rule (5) effective 01.04.2011, impacting credit availment post that date.
Court's interpretation and reasoning: The Tribunal observed that for the period up to 31.03.2011, the appellant was entitled to 100% credit on management consultancy services even if used partly for exempted services. The department's denial of credit based on the notification omitting sub-rule (5) was held to be wrongly applied for the period before 01.04.2011.
Key evidence and findings: The adjudicating authority itself recognized the appellant's entitlement to 100% credit on such services during the relevant period but denied relief on the basis of the notification's retrospective application, which was incorrect.
Application of law to facts: Since the notification omitting sub-rule (5) was effective only from 01.04.2011, the appellant's claim for full credit for the period prior to that date was valid.
Treatment of competing arguments: The department's argument that the credit reversal was mandatory was rejected in light of statutory provisions and binding judicial decisions upholding full credit on management consultancy services during the relevant period.
Conclusion: The appellant was correctly entitled to 100% Cenvat credit on management consultancy services for the period prior to 01.04.2011.
Issue 3: Applicability of Extended Period of Limitation
Relevant legal framework: Extended period of limitation under service tax laws is invoked in cases of fraud, suppression, or willful misstatement.
Court's interpretation and reasoning: The appellant contended that extended period was wrongly invoked. The Tribunal did not find sufficient grounds or evidence in the record to uphold the extended period invocation, implicitly rejecting the department's contention.
Conclusion: The invocation of extended period was not justified.
Issue 4: Whether Classification Can Be Changed by the Appellant or Department
Legal framework and precedents: Classification of services is a question of law and fact, and once settled by judicial pronouncements, cannot be arbitrarily changed by either party.
Court's reasoning: The appellant argued that classification as management consultancy services was settled and binding, supported by multiple Supreme Court and Tribunal decisions. The Tribunal concurred, emphasizing that classification cannot be altered to deny rightful credit.
Conclusion: The classification as management consultancy services stands binding and cannot be changed to business auxiliary services for the relevant period.
Issue 5: Reliance on Judicial Precedents
Relevant precedents: The appellant relied on several Supreme Court decisions including Commissioner vs. Piem Hotels Ltd., Indian Hotels Co. Ltd., Taj GVK Hotels & Resorts, and Newlight Hotels & Resorts Limited, which held that services provided by hotel chains in similar contexts qualify as management consultancy services and entitle the recipient to full Cenvat credit.
Court's reasoning: The Tribunal noted that these precedents are binding and squarely applicable to the present facts, reinforcing the appellant's entitlement to full credit and invalidating the department's denial.
Conclusion: The Tribunal upheld the appellant's reliance on binding precedents and applied them to allow the appeal partly.
3. SIGNIFICANT HOLDINGS
"The provisions of Rule 6 of Cenvat Credit Rules, 2004 are not applicable on 16 services as mentioned in the said provision. One of such services is of Management Consultancy Service defined under Section 65 (105) (r) of Finance Act, 1994. According to the said provision 100% credit on the Management Consultancy Service is specifically allowed even if it is partially used in providing the exempted services. The rule clarifies that the credit taken on Management Consultancy Service is not liable for proportionate reversal under Rule 6 of Cenvat Credit Rules, 2004. We accordingly hold that the amount of Cenvat credit was not supposed to be reversed vis-`a-vis Management Consultancy Services."
"The Appellate Tribunal in its impugned order had held that Management Consultancy services received by the assessee, a hotel company from another hotel company i.e. Indian Hotels Company Ltd. being in the nature of advice, consultancy and assistance in respect of its management cannot be considered as Franchisee services and the assessee is entitled to avail 100% Cenvat credit of Service Tax paid on such services and the same cannot be restricted to 20% in terms of Rule 6(3) of Cenvat Credit Rules, 2004."
Core principles established include:
Final determinations on each issue:
CENVAT Credit - appellant were not following the procedure laid down under Rule 6 (3)(ii) of Cenvat Credit Rules, 2004 - HELD THAT:- There is no denial of the fact that the appellant has been receiving the taxable services from M/s. IHCL and others as named in the Show Cause Notice. This clarifies that the appellants were entitled to claim the Cenvat credit thereof. The issue here is with respect to the availment of 100% Cenvat Credit on the services when the appellant has been receiving various other non-taxable services. It is observed that this issue of availment of 100% Cenvat Credit despite being the collaborative agreement of receiving several services by the hospitality industry stands already covered by the decision of this Bench itself in addition to various other decisions.
This decision has been upheld even by the Hon’ble Apex Court in the case titled as Commissioner vs. Piem Hotels Limited holding that 'The Appellate Tribunal in its impugned order had held that Management Consultancy services received by the assessee, a hotel company from another hotel company i.e. Indian Hotels Company Ltd. being in the nature of advice, consultancy and assistance in respect of its management cannot be considered as Franchisee services and the assessee is entitled to avail 100% Cenvat credit of Service Tax paid on such services and the same cannot be restricted to 20% in terms of Rule 6(3) of Cenvat Credit Rules, 2004.'
Conclusion - i) The services provided by IHCL to the appellant are management consultancy services and not business auxiliary services for the relevant period. ii) The appellant is entitled to 100% Cenvat credit on service tax paid on such services for the period up to 31.03.2011.
Appeal allowed.
CENVAT Credit - appellant were not following the procedure laid down under Rule 6 (3)(ii) of Cenvat Credit Rules, 2004 - HELD THAT:- There is no denial of the fact that the appellant has been receiving the taxable services from M/s. IHCL and others as named in the Show Cause Notice. This clarifies that the appellants were entitled to claim the Cenvat credit thereof. The issue here is with respect to the availment of 100% Cenvat Credit on the services when the appellant has been receiving various other non-taxable services. It is observed that this issue of availment of 100% Cenvat Credit despite being the collaborative agreement of receiving several services by the hospitality industry stands already covered by the decision of this Bench itself in addition to various other decisions.
This decision has been upheld even by the Hon’ble Apex Court in the case titled as Commissioner vs. Piem Hotels Limited holding that 'The Appellate Tribunal in its impugned order had held that Management Consultancy services received by the assessee, a hotel company from another hotel company i.e. Indian Hotels Company Ltd. being in the nature of advice, consultancy and assistance in respect of its management cannot be considered as Franchisee services and the assessee is entitled to avail 100% Cenvat credit of Service Tax paid on such services and the same cannot be restricted to 20% in terms of Rule 6(3) of Cenvat Credit Rules, 2004.'
Conclusion - i) The services provided by IHCL to the appellant are management consultancy services and not business auxiliary services for the relevant period. ii) The appellant is entitled to 100% Cenvat credit on service tax paid on such services for the period up to 31.03.2011.
Appeal allowed.
The core legal questions considered by the Court were:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Compliance with directions issued on remand
Relevant legal framework and precedents: Under the Uttar Pradesh Value Added Tax Act, 2008, when an appellate authority remands a matter to the Assessing Authority, the latter is required to pass fresh orders in accordance with the directions given, considering all relevant documents and evidence. The principles of administrative law and natural justice require that the authority apply its mind and not merely reiterate earlier findings mechanically.
Court's interpretation and reasoning: The Court compared the impugned order dated 26.03.2025 with the earlier order dated 23.03.2021, which had been set aside on appeal. It was found that the impugned order was a verbatim copy of the earlier order, including the mistakes that had been rectified by the appellate authority. The Assessing Authority failed to acknowledge the appellate order or the fact that it was passing an order on remand.
Key evidence and findings: The identical language and content of the two orders, the absence of any reference to the remand directions, and the failure to consider documents produced by the petitioner were critical findings.
Application of law to facts: The Court held that the Assessing Authority's failure to comply with the remand directions and to consider relevant documents amounted to non-application of mind and a mechanical exercise, which is impermissible under the law.
Treatment of competing arguments: Although the respondents contended that the orders were appealable and thus could be challenged, they conceded that the Assessing Authority had simply copy-pasted the earlier order without due consideration.
Conclusion: The impugned orders were held to be ex facie illegal and contrary to the remand directions, warranting quashing.
Issue 2: Application of mind and adherence to principles of natural justice
Relevant legal framework and precedents: Administrative authorities are bound to act fairly, consider all relevant material, and apply their mind to the issues before them. A mechanical or perfunctory exercise violates these principles and renders the order liable to be set aside.
Court's interpretation and reasoning: The Court observed that the Assessing Authority's conduct reflected a dereliction of duty and non-application of mind. The mere reiteration of earlier orders without addressing the appellate directions or the petitioner's submissions was a clear breach of procedural fairness.
Key evidence and findings: The identical repetition of earlier mistakes and failure to provide any reasoned consideration of documents produced by the petitioner were pivotal.
Application of law to facts: The Court applied the principle that an order passed without application of mind is liable to be quashed and set aside.
Treatment of competing arguments: The respondents' argument that the orders were appealable was rejected as a mere formality given the Assessing Authority's conduct.
Conclusion: The impugned orders failed to meet the standards of reasoned decision-making and natural justice.
Issue 3: Remedy and administrative consequences
Relevant legal framework and precedents: Courts have the power to quash orders that are illegal or passed without jurisdiction or application of mind. Further, where there is evident misconduct or dereliction of duty by a public authority, the Court may direct administrative authorities to take appropriate action.
Court's interpretation and reasoning: The Court quashed the impugned orders and remanded the matter back to the Assessing Authority with directions to pass fresh orders in accordance with the appellate directions and after providing an opportunity of hearing to the petitioner.
Key evidence and findings: The mechanical reiteration of earlier orders and failure to consider evidence justified the remedy of quashing and remand.
Application of law to facts: The Court emphasized the necessity of a fresh, reasoned order reflecting application of mind and compliance with procedural fairness.
Treatment of competing arguments: The Court rejected the suggestion that the petitioner should merely file appeals against the impugned orders, recognizing that such appeals would be an "empty formality" given the Assessing Authority's conduct.
Conclusion: The matter was remanded with clear directions, and a copy of the judgment was directed to be sent to the Principal Secretary, State Tax, for appropriate administrative action.
3. SIGNIFICANT HOLDINGS
"The order dated 26.03.2025 is verbatim the copy of the order dated 23.03.2021... The Assessing Authority has not even cared to indicate the fact about passing of the previous order, the appellate order and that he was passing the order on remand and, surprisingly has incorporated even the mistakes, which were there in the earlier order and have been rectified, in the orders impugned."
"The manner in which the Assessing Authority has dealt with the matter, clearly reflects non application of mind and a totally mechanical exercise has been undertaken in passing the orders impugned."
"Looking to the conduct of the Assessing Authority in passing the orders requiring the petitioner to file appeals, would be an empty formality."
"The assessment orders dated 26.03.2025 passed by the Assessing Authority cannot be sustained."
"The matter is remanded back to the Assessing Authority to pass appropriate orders after taking into consideration the directions given in the orders of remand and after providing opportunity of hearing to the petitioner."
"A copy of this order be communicated to the Principal Secretary, State Tax, Government of Uttar Pradesh, who would look into the conduct of the Assessing Authority and take appropriate measures in accordance with law."
Core principles established include the requirement that on remand, the Assessing Authority must pass fresh orders reflecting application of mind and compliance with appellate directions, failure of which renders the order illegal and liable to be quashed. Mechanical reiteration of earlier orders without consideration of documents and directions violates principles of natural justice and administrative law. Further, the Court underscored the need for administrative accountability for dereliction of duty by public authorities.
Challenge to impugned assessment orders passed by respondent no.2 under Section 28(2)(ii) read with Section 32 of the Uttar Pradesh Value Added Tax Act, 2008 - proper application of mind or not - violation of principles of natural justice - HELD THAT:- The facts are glaring, wherein the two orders passed by the Assessing Authority are compared, one which was passed on 23.03.2021, which was set aside in appeal on 31.01.2023, and the order impugned dated 26.03.2025. The order dated 26.03.2025 is verbatim the copy of the order dated 23.03.2021. The Assessing Authority has not even cared to indicate the fact about passing of the previous order, the appellate order and that he was passing the order on remand and, surprisingly has incorporated even the mistakes, which were there in the earlier order and have been rectified, in the orders impugned.
The manner of dealing with the matter on remand by the Assessing Authority is ex facie contrary to the requirements on remand and are essentially in dereliction of his duty to act in a manner which may reflect his application of mind to the issue before him. The manner in which the Assessing Authority has dealt with the matter, clearly reflects non application of mind and a totally mechanical exercise has been undertaken in passing the orders impugned.
The assessment orders dated 26.03.2025 passed by the Assessing Authority cannot be sustained - Petition allowed.
Challenge to impugned assessment orders passed by respondent no.2 under Section 28(2)(ii) read with Section 32 of the Uttar Pradesh Value Added Tax Act, 2008 - proper application of mind or not - violation of principles of natural justice - HELD THAT:- The facts are glaring, wherein the two orders passed by the Assessing Authority are compared, one which was passed on 23.03.2021, which was set aside in appeal on 31.01.2023, and the order impugned dated 26.03.2025. The order dated 26.03.2025 is verbatim the copy of the order dated 23.03.2021. The Assessing Authority has not even cared to indicate the fact about passing of the previous order, the appellate order and that he was passing the order on remand and, surprisingly has incorporated even the mistakes, which were there in the earlier order and have been rectified, in the orders impugned.
The manner of dealing with the matter on remand by the Assessing Authority is ex facie contrary to the requirements on remand and are essentially in dereliction of his duty to act in a manner which may reflect his application of mind to the issue before him. The manner in which the Assessing Authority has dealt with the matter, clearly reflects non application of mind and a totally mechanical exercise has been undertaken in passing the orders impugned.
The assessment orders dated 26.03.2025 passed by the Assessing Authority cannot be sustained - Petition allowed.
The core legal questions considered by the Court are:
(a) Whether the order dismissing the writ petition for non-prosecution should be recalled in light of the explanation provided by the petitioner.
(b) Whether the cause title of the writ petition can be amended to reflect a change in the name of the petitioner company based on the Certificate of Incorporation.
(c) Whether the imposition of penalty on the petitioner for not having a valid way-bill at the time of detention of the vehicle is justified, given that the way-bill was produced within the time permitted by the detaining authority.
(d) Whether the vehicle's detention at the check post between Jharkhand and West Bengal, without the vehicle entering West Bengal, triggers liability under the relevant tax provisions for failure to produce a way-bill.
(e) The applicability of precedents concerning penalty imposition under Section 28-A of the relevant Sales Tax Act, particularly regarding the discretionary nature of penalty imposition and the constitutional protection of free inter-state trade under Article 301.
2. ISSUE-WISE DETAILED ANALYSIS
(a) Recall of Order Dismissing Writ Petition for Non-Prosecution
The Court examined the explanation tendered by the petitioner for the absence of their advocate when the matter was called on 18th December 2023. The petitioner's explanation was found satisfactory. Additionally, the writ petition had been pending since 2015 and was dismissed due to non-prosecution after a protracted period. The Court held that in such circumstances, recalling the dismissal order was justified to enable adjudication on merits.
The Court's reasoning was grounded in principles of justice and procedural fairness, ensuring that technical lapses do not result in denial of substantive rights. The order dismissing the writ petition was therefore recalled, and the petition restored for hearing on merits.
(b) Amendment of Cause Title
The petitioner sought to amend the cause title to reflect the change in its corporate name from Darcl Logistics Limited to CJ Darcl Logistics Limited. The application was supported by a Certificate of Incorporation issued by the Registrar of Companies dated 13th September 2017.
The Court allowed the amendment, recognizing the change in legal identity of the petitioner company. This procedural correction was deemed necessary for accurate representation of parties and did not affect substantive rights.
(c) Validity of Penalty Imposed for Non-Production of Way-Bill
The principal issue concerned the penalty imposed on the petitioner on the ground that the driver of the vehicle did not have a valid way-bill at the time of detention at the check post on 18th September 2013.
Key facts established that:
The Court held that the petitioner did not violate the law as the valid way-bill was produced within the time permitted and before the vehicle entered the State of West Bengal. The mere absence of the way-bill at the moment of detention did not justify penalty.
The Court relied heavily on the precedent set by the High Court of Karnataka in Prakash Roadlines (P) Ltd. v. Commissioner of Commercial Taxes, which clarified that penalty under Section 28-A is discretionary and not automatic. The Karnataka Court emphasized:
"Section 28-A is not a charging provision at all. It is only a machinery provision... The Act does not impose a strict liability imposing penalty as a matter of course. Section 28-A (4) itself uses the word 'may' and creates a discretionary power in the authority to levy the penalty... The production of the documents in question immediately on demand should not be understood in isolation to create a liability provided the bona fides of the carrier and the purpose of carrying the goods are not doubted and found against the concerned persons."
The Court also noted that the penalty imposed solely due to failure to produce documents immediately on demand, without doubting the bona fides of the carrier or the legitimacy of the consignment, amounted to arbitrary exercise of power potentially infringing Article 301, which guarantees free inter-state trade.
(d) Jurisdictional Scope of Penalty for Non-Production of Way-Bill at Check Post
The Court considered whether the vehicle's detention at the check post between Jharkhand and West Bengal, without the vehicle having entered West Bengal, attracted penalty under the relevant tax provisions.
The Division Bench's decision in HDFC Bank Limited v. Sales Tax Officer was cited, which held that interception of goods at a check post does not imply that goods have been taken "across or beyond" the check post into the State for purposes of applying the Act's provisions.
Applying this principle, the Court concluded that since the vehicle had not entered West Bengal, the penalty provisions were not triggered. This supported the petitioner's position that penalty was unjustified.
(e) Application of Legal Framework and Precedents
The Court applied the legal framework under Section 28-A of the Sales Tax Act, which provides for penalties relating to non-production of prescribed documents such as way-bills. The provision confers discretionary power on authorities to levy penalties, subject to the person being given a reasonable opportunity of hearing.
Precedents emphasized the non-automatic nature of penalty imposition and the necessity to consider bona fides and the purpose of carriage of goods. The Court underscored that penalties must be exercised judiciously and not as a matter of routine or strict liability.
Moreover, constitutional safeguards under Article 301 were invoked to caution against arbitrary restrictions on free inter-state trade.
3. SIGNIFICANT HOLDINGS
The Court held:
"The Act does not impose a strict liability imposing penalty as a matter of course. Section 28-A (4) itself uses the word 'may' and creates a discretionary power in the authority to levy the penalty... The production of the documents in question immediately on demand should not be understood in isolation to create a liability provided the bona fides of the carrier and the purpose of carrying the goods are not doubted and found against the concerned persons."
Core principles established include:
Final determinations:
Levy of penalty - penalty imposed on the ground that the driver of the vehicle did not have a waybill when the vehicle was detained - HELD THAT:- Admittedly, the vehicle was detained in the check post between Jharkhand and the State of West Bengal and the vehicle has not come into the State of West Bengal. Apart from that on a request made by the driver of the vehicle, the detaining authority had granted time to produce the way-bill till up to 10:52 a.m. on 19th September, 2013. It is also not in dispute that within the time permitted, the way-bill was generated on 20th September, 2013 at 08:19 a.m., which is about 45 hours from the time of detention - Thus, the petitioner cannot be stated to have violated the law, but has produced the valid way-bill, much before the vehicle had crossed the check post between the two States.
More or less, an identical case was decided by the High Court of Karnataka in the case of Prakash Roadlines (P) Ltd. Vs. Commissioner of Commercial Taxes in Karnataka [1991 (1) TMI 394 - KARNATAKA HIGH COURT], wherein the Court held that 'The exercise of the power and levy of penalty as a matter of course will be an arbitrary exercise of power and the very exercise of the power may be repugnant to the provisions of article 301. The right guaranteed under article 301 and its content will have to be applied even to the exercise of an executive power traceable to the law made by the competent Legislature.'
Another decision of the Division Bench of this Court in the case of HDFC Bank Limited Vs. Sales Tax Officer, Duburdih Checkpost & Ors. would also support the case of the writ petitioner, wherein it was held that “Interception of consignment of goods at the check-post cannot mean that it has been taken “across or beyond” the check post into the State of West Bengal for the purpose of application of the said provisions of the said Act”.
Thus, the order passed by the authority imposing penalty is liable to be set aside. Consequently, the writ petition is allowed and the order passed by the learned Tribunal is set aside as also the order passed by the authorities levying penalty.
Levy of penalty - penalty imposed on the ground that the driver of the vehicle did not have a waybill when the vehicle was detained - HELD THAT:- Admittedly, the vehicle was detained in the check post between Jharkhand and the State of West Bengal and the vehicle has not come into the State of West Bengal. Apart from that on a request made by the driver of the vehicle, the detaining authority had granted time to produce the way-bill till up to 10:52 a.m. on 19th September, 2013. It is also not in dispute that within the time permitted, the way-bill was generated on 20th September, 2013 at 08:19 a.m., which is about 45 hours from the time of detention - Thus, the petitioner cannot be stated to have violated the law, but has produced the valid way-bill, much before the vehicle had crossed the check post between the two States.
More or less, an identical case was decided by the High Court of Karnataka in the case of Prakash Roadlines (P) Ltd. Vs. Commissioner of Commercial Taxes in Karnataka [1991 (1) TMI 394 - KARNATAKA HIGH COURT], wherein the Court held that 'The exercise of the power and levy of penalty as a matter of course will be an arbitrary exercise of power and the very exercise of the power may be repugnant to the provisions of article 301. The right guaranteed under article 301 and its content will have to be applied even to the exercise of an executive power traceable to the law made by the competent Legislature.'
Another decision of the Division Bench of this Court in the case of HDFC Bank Limited Vs. Sales Tax Officer, Duburdih Checkpost & Ors. would also support the case of the writ petitioner, wherein it was held that “Interception of consignment of goods at the check-post cannot mean that it has been taken “across or beyond” the check post into the State of West Bengal for the purpose of application of the said provisions of the said Act”.
Thus, the order passed by the authority imposing penalty is liable to be set aside. Consequently, the writ petition is allowed and the order passed by the learned Tribunal is set aside as also the order passed by the authorities levying penalty.
a. Whether the High Court erred in rejecting the appellant's petition on the ground that the application under Order I Rule 10(2) of the Code of Civil Procedure (CPC) seeking deletion of his name from the array of parties was barred by the doctrine of res judicata.
b. Whether the appellant is entitled to the protection under Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965, on the basis of tenancy rights inherited from his deceased father.
c. Whether, in the facts of this case, the transfer of possession of the suit property was implicit in the decree of specific performance granted by the Trial Court.
2. ISSUE-WISE DETAILED ANALYSIS
a. Applicability of Res Judicata to the Application under Order I Rule 10(2) CPC
Relevant Legal Framework and Precedents: Order I Rule 10(2) CPC empowers courts to add or strike out parties at any stage of proceedings to ensure effective adjudication of all questions involved in the suit. The power is broad and discretionary but must be exercised judiciously. The principle of res judicata, embodied in Section 11 CPC, bars re-litigation of issues that have been finally decided between the same parties. It applies not only between separate suits but also at different stages of the same proceeding. This Court has emphasized that once a matter is finally decided by a court of competent jurisdiction, it cannot be re-agitated in subsequent stages of the same proceeding (Bhanu Kumar Jain v. Archana Kumar; Satyadhyan Ghosal v. Deorajin Debi; S. Ramachandra Rao v. S. Nagabhushana Rao).
Court's Interpretation and Reasoning: The appellant was impleaded as a legal heir of the deceased original defendant under Order XXII Rule 4 CPC after due inquiry and without objection at the time. The appellant participated in subsequent proceedings without challenging his status. The Trial Court and High Court found that the appellant's belated application under Order I Rule 10(2) seeking deletion from the party array was an attempt to circumvent the finality of the earlier order and delay execution proceedings.
The Court held that although Order I Rule 10(2) allows deletion of parties at any stage, it does not permit repetitive challenges to a settled issue. The appellant's failure to object at the appropriate stage and his participation in related proceedings estopped him from reopening the question. The High Court's rejection of the application on the ground of res judicata was upheld as legally sound.
Key Evidence and Findings: The appellant was served notice and appeared when impleaded; no objection was raised for over four years. The appellant was also a respondent in the application for rescission of contract but did not object then. The timing of the application for deletion, filed immediately after dismissal of a related revision petition, indicated a strategy to delay execution.
Application of Law to Facts: The legal framework mandates finality in litigation to prevent multiplicity of proceedings. The appellant's conduct and delay negated his entitlement to challenge impleadment at a belated stage. The doctrine of res judicata applied to bar the application under Order I Rule 10(2).
Treatment of Competing Arguments: The appellant argued that impleadment under Order I Rule 10(2) is a summary procedure and cannot operate as res judicata, citing precedents allowing deletion of parties at any stage. The Court distinguished these by emphasizing the settled nature of the issue and the appellant's failure to raise objections earlier.
Conclusion: The Court concluded that the High Court correctly dismissed the application as barred by res judicata and that the appellant's attempt to delete his name was an abuse of process.
b. Entitlement of the Appellant to Protection under Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965
Relevant Legal Framework and Precedents: Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965, contains a non obstante clause protecting tenants from eviction except in accordance with the Act. The tenancy rights of a protected tenant continue until validly terminated (B. Bal Reddy v. Teegala Narayana Reddy). The appellant claimed tenancy rights inherited from his deceased father, who was acknowledged as tenant in the 1976 assignment deed and held municipal licenses.
Court's Interpretation and Reasoning: The Court found that while the appellant's father was a tenant prior to his death in 1992, the appellant failed to establish tenancy or possession post-1996 agreement to sell. The 1996 agreement, to which the appellant was a witness, did not mention tenancy rights, unlike the 1976 deed. The appellant did not raise tenancy objections during earlier proceedings and failed to produce documentary evidence of tenancy or possession from the time of the agreement to sell until execution proceedings.
Key Evidence and Findings: The appellant's reliance on municipal licenses issued in 1992 and 2011 was insufficient to prove tenancy or possession, especially since the 2011 license was issued during pendency of execution proceedings. Both Trial Court and High Court rejected the tenancy claim based on the absence of evidence and inconsistent conduct.
Application of Law to Facts: The tenancy protection under the Act does not extend to the appellant without proof of valid tenancy rights and possession. The omission of tenancy clauses in the 1996 agreement and failure to raise tenancy claims earlier undermined the appellant's case.
Treatment of Competing Arguments: The appellant argued that tenancy rights inherited from his father entitled him to protection against eviction. The Court rejected this, noting the absence of tenancy transfer in the sale agreement and the appellant's failure to assert such rights timely.
Conclusion: The appellant was not entitled to protection under Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965, as tenancy rights were not established or continued in his favor.
c. Whether Transfer of Possession was Implicit in the Decree for Specific Performance
Relevant Legal Framework and Precedents: The decree for specific performance under the Specific Relief Act, 1963, may or may not include possession depending on pleadings and facts. This Court in Babu Lal v. Hazari Lal Kishori Lal and recently in Rohit Kochhar v. Vipul Infrastructure Developers Ltd. held that where exclusive possession is with the contracting party, transfer of possession may be implicit in the decree for specific performance. Conversely, possession relief must be specifically sought if the property is in possession of a third party (Birma Devi v. Subhash).
Court's Interpretation and Reasoning: The Court found that exclusive possession of the suit property was with the original defendant when the suit was decreed. The decree directing execution of the sale deed implicitly included transfer of possession. The appellant's contention that possession relief was not granted and thus the decree was satisfied by execution of sale deed alone was rejected.
Key Evidence and Findings: The decree dated 17.03.2003 directed the original defendant to execute the sale deed upon payment of balance consideration. The appellant's tenancy claim was rejected. The courts below held possession was implicit in the decree given the circumstances.
Application of Law to Facts: The Court applied settled principles that possession transfer can be implicit in specific performance decrees where the defendant held exclusive possession. The appellant's failure to raise tenancy or possession claims earlier supported this conclusion.
Treatment of Competing Arguments: The appellant relied on precedents requiring specific pleadings for possession relief. The Court distinguished those by emphasizing the factual possession status and the nature of the decree in this case.
Conclusion: The decree for specific performance implicitly included transfer of possession, entitling the decree-holder to possession of the suit property.
3. SIGNIFICANT HOLDINGS
"The power to strike out or add a party under Order I Rule 10(2) CPC is a broad discretion exercisable at any stage of the proceedings; however, this power cannot be used to re-agitate an issue already finally decided between the parties, as such would be barred by the doctrine of res judicata."
"The doctrine of res judicata applies not only to separate proceedings but also to different stages of the same proceeding, ensuring finality and preventing vexatious litigation."
"Tenancy rights under the Kerala Buildings (Lease and Rent Control) Act, 1965, require proof of valid tenancy and possession; mere inheritance of tenancy rights without evidence of continuation or transfer is insufficient to claim protection."
"Where exclusive possession of the suit property is with the contracting party at the time of decree for specific performance, the transfer of possession is implicit in the decree even if not expressly granted."
"An application under Order I Rule 10(2) CPC seeking deletion of a party is not maintainable if the party was validly impleaded earlier after due inquiry and without objection, and the issue has attained finality."
"The Court observed that the appellant's application was a 'ruse' to delay execution and was barred by constructive res judicata and devoid of bonafides."
"The Executing Court is directed to ensure vacant and peaceful possession is handed over to the decree-holder within two months, if necessary with police aid."
Application under Order I Rule 10(2) of the Code of Civil Procedure (CPC) - impleadment as a legal heir - seeking the deletion of his name from the array of parties - doctrine of res judicata - failure of the original defendant to execute the sale deed after accepting the balance consideration - entitlement to the benefit of Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965 - transfer of possession of the suit property - failed to establish his tenancy or possession over the suit property - HELD THAT:- The position of law is well settled that the power to strike out or add a party to the proceedings under Order I Rule 10 can be exercised by the court at any stage of the proceeding. However, the same cannot be construed to mean that when a particular party has been impleaded as a legal heir under Order XXII Rule 4 after due inquiry by the court and without any objections, the party can approach the court anytime later and seek his deletion from the array of parties by filing an application under Order I Rule 10. If at all the appellant was aggrieved by his impleadment as a legal heir, the suitable course of action was to first object to his impleadment under Sub-rule (2) of Order XXII Rule 4.
Even then if the Trial Court would have decided against the appellant, it would have been open to him to approach the High Court by filing a revision application against the order of impleadment. However, the appellant chose to sit tight in the impleadment proceedings despite entering appearance. He was also a respondent in the application preferred by some of the legal heirs under Section 28 of the SRA seeking rescission of the contract, both before the Trial Court and later before the High Court in the revision preferred against the rejection of the said application. However, he chose not to raise any objection in either of these proceedings as well.
In the present case, the order for impleadment of the appellant as a legal heir was made by the Trial Court after due inquiry under Order XXII, as also observed by the Trial Court in its order rejecting the application under Order I Rule 10. Evidently, neither any objection was raised by the appellant before the Trial Court nor any revision was preferred subsequently against the said order. Thus, it could be said that the issue as regards the impleadment of the appellant as a legal heir of the original defendant had attained finality between the parties and thus the subsequent application under Order I Rule 10 seeking to get his name deleted from the array of parties could be said to be barred by res judicata.
Undoubtedly, the expression “at any stage of the proceedings” used in Order I Rule 10 allows the court to exercise its power at any stage, however the same cannot be construed to mean that the defendant can keep reagitating the same objection at different stages of the same proceeding, when the issue has been determined conclusively at a previous stage. Allowing the same would run contrary to the considerations of fair play and justice and would amount to keeping the parties in a state of limbo as regards the adjudication of the disputes.
We are aware of the decision of this Court in Pankajbhai Rameshbhai Zalavadiya v. Jethabhai Kalabhai Zalavadiya [2017 (10) TMI 1397 - SUPREME COURT] wherein it was held that an application under Order I Rule 10 would not be liable to be rejected solely on the ground that an application under Order XXII Rule 4 had been found to not be maintainable.
However, the facts before us are quite different from the facts before the Court in Jethabhai (supra). Therein, the subsequent application under Order I Rule 10 was allowed on the ground that the initial application under Order XXII Rule 4 was filed under a mistake of law and fact as the defendant had passed away prior to the institution of the suit, whereas order XXII Rule 4 only contemplates a situation wherein the defendant passes away during the pendency of the proceedings. Thus, in such a scenario, it was observed that the appropriate application would be under Order I Rule 10. However, in the present case, the appropriate remedy for the appellant lay in raising an objection under Sub-rule (2) of Rule (4) of Order XXII at the time of the impleadment and not under Order I Rule 10 four years after the impleadment came to be allowed.
Thus, had the appellant taken up the objection at the right stage of the proceedings, it would have been open to the court to look into the said objection under Order XXII Rule 5 and disallow his impleadment as a legal heir of the original defendant. However, having failed to act at the appropriate stage, it was not open to the appellant to subsequently approach the court with an application under Order I Rule 10. Further, as we shall shortly discuss, the appellant having failed to raise the plea of his tenancy and possession over the suit property, the rejection of his application under Order I Rule 10 has no material effect on the ultimate outcome of the lis.
Thus, as in the present case, both the courts below have arrived at the conclusion that the exclusive possession of the suit property could be said to be with the original defendant when the suit was decreed, the relief of transfer of possession is implicit in the decree for specific performance directing the original defendant to execute a sale deed in the favour of the original plaintiff.
Thus, we are of the view that the High Court, as well as the Trial Court, committed no error, much less any error of law, in arriving at their respective decisions. As a result, the appeal fails and is, hereby, dismissed with costs of Rs 25,000/- to be paid by the appellant and deposited with the Supreme Court Legal Services Committee within a period of two weeks from today.
The sale deed having already been executed in favour of the respondent no. 1, the Executing Court shall now proceed to ensure that vacant and peaceful possession of the suit property is handed over to the respondent no.1 in his capacity as the decree holder as well as the title holder of the suit property and, if necessary, with the aid of police. This exercise shall be completed within a period of two months from today without fail.
Pending application(s), if any, shall also stand disposed of.
Application under Order I Rule 10(2) of the Code of Civil Procedure (CPC) - impleadment as a legal heir - seeking the deletion of his name from the array of parties - doctrine of res judicata - failure of the original defendant to execute the sale deed after accepting the balance consideration - entitlement to the benefit of Section 11 of the Kerala Buildings (Lease and Rent Control) Act, 1965 - transfer of possession of the suit property - failed to establish his tenancy or possession over the suit property - HELD THAT:- The position of law is well settled that the power to strike out or add a party to the proceedings under Order I Rule 10 can be exercised by the court at any stage of the proceeding. However, the same cannot be construed to mean that when a particular party has been impleaded as a legal heir under Order XXII Rule 4 after due inquiry by the court and without any objections, the party can approach the court anytime later and seek his deletion from the array of parties by filing an application under Order I Rule 10. If at all the appellant was aggrieved by his impleadment as a legal heir, the suitable course of action was to first object to his impleadment under Sub-rule (2) of Order XXII Rule 4.
Even then if the Trial Court would have decided against the appellant, it would have been open to him to approach the High Court by filing a revision application against the order of impleadment. However, the appellant chose to sit tight in the impleadment proceedings despite entering appearance. He was also a respondent in the application preferred by some of the legal heirs under Section 28 of the SRA seeking rescission of the contract, both before the Trial Court and later before the High Court in the revision preferred against the rejection of the said application. However, he chose not to raise any objection in either of these proceedings as well.
In the present case, the order for impleadment of the appellant as a legal heir was made by the Trial Court after due inquiry under Order XXII, as also observed by the Trial Court in its order rejecting the application under Order I Rule 10. Evidently, neither any objection was raised by the appellant before the Trial Court nor any revision was preferred subsequently against the said order. Thus, it could be said that the issue as regards the impleadment of the appellant as a legal heir of the original defendant had attained finality between the parties and thus the subsequent application under Order I Rule 10 seeking to get his name deleted from the array of parties could be said to be barred by res judicata.
Undoubtedly, the expression “at any stage of the proceedings” used in Order I Rule 10 allows the court to exercise its power at any stage, however the same cannot be construed to mean that the defendant can keep reagitating the same objection at different stages of the same proceeding, when the issue has been determined conclusively at a previous stage. Allowing the same would run contrary to the considerations of fair play and justice and would amount to keeping the parties in a state of limbo as regards the adjudication of the disputes.
We are aware of the decision of this Court in Pankajbhai Rameshbhai Zalavadiya v. Jethabhai Kalabhai Zalavadiya [2017 (10) TMI 1397 - SUPREME COURT] wherein it was held that an application under Order I Rule 10 would not be liable to be rejected solely on the ground that an application under Order XXII Rule 4 had been found to not be maintainable.
However, the facts before us are quite different from the facts before the Court in Jethabhai (supra). Therein, the subsequent application under Order I Rule 10 was allowed on the ground that the initial application under Order XXII Rule 4 was filed under a mistake of law and fact as the defendant had passed away prior to the institution of the suit, whereas order XXII Rule 4 only contemplates a situation wherein the defendant passes away during the pendency of the proceedings. Thus, in such a scenario, it was observed that the appropriate application would be under Order I Rule 10. However, in the present case, the appropriate remedy for the appellant lay in raising an objection under Sub-rule (2) of Rule (4) of Order XXII at the time of the impleadment and not under Order I Rule 10 four years after the impleadment came to be allowed.
Thus, had the appellant taken up the objection at the right stage of the proceedings, it would have been open to the court to look into the said objection under Order XXII Rule 5 and disallow his impleadment as a legal heir of the original defendant. However, having failed to act at the appropriate stage, it was not open to the appellant to subsequently approach the court with an application under Order I Rule 10. Further, as we shall shortly discuss, the appellant having failed to raise the plea of his tenancy and possession over the suit property, the rejection of his application under Order I Rule 10 has no material effect on the ultimate outcome of the lis.
Thus, as in the present case, both the courts below have arrived at the conclusion that the exclusive possession of the suit property could be said to be with the original defendant when the suit was decreed, the relief of transfer of possession is implicit in the decree for specific performance directing the original defendant to execute a sale deed in the favour of the original plaintiff.
Thus, we are of the view that the High Court, as well as the Trial Court, committed no error, much less any error of law, in arriving at their respective decisions. As a result, the appeal fails and is, hereby, dismissed with costs of Rs 25,000/- to be paid by the appellant and deposited with the Supreme Court Legal Services Committee within a period of two weeks from today.
The sale deed having already been executed in favour of the respondent no. 1, the Executing Court shall now proceed to ensure that vacant and peaceful possession of the suit property is handed over to the respondent no.1 in his capacity as the decree holder as well as the title holder of the suit property and, if necessary, with the aid of police. This exercise shall be completed within a period of two months from today without fail.
Pending application(s), if any, shall also stand disposed of.
- Whether the 1st to 5th plaintiffs and 1st to 10th defendants constitute the Governing Body of ISKCON Bangalore, and whether the 11th to 17th defendants have any right to manage or control ISKCON Bangalore (Suit No. 1758 of 2003).
- Whether ISKCON Bangalore or ISKCON Mumbai (through its Bangalore branch) is the absolute owner of the immovable and movable properties described in Schedules 'A', 'B', and 'C' (Suit No. 7934 of 2001).
- Whether the Executive Committee or Bureau of ISKCON Mumbai has authority to remove office bearers or control the possession and administration of ISKCON Bangalore's temples and properties.
- Whether the application for allotment of Schedule 'A' property by the Bangalore Development Authority (BDA) was made by ISKCON Bangalore or by ISKCON Mumbai through its Bangalore branch.
- Whether ISKCON Bangalore was a defunct society post-registration or whether it continued to function.
- Whether the minutes of the Annual General Meeting held on 1st July 1984, wherein the Governing Body was purportedly elected, are valid and whether the 11th to 17th defendants were duly elected members.
- Whether the suit filed by the plaintiffs is barred by limitation.
- Whether allegations of fraud and manipulation of documents by Madhu Pandit and others are substantiated.
- Whether the committee appointed by the Supreme Court to oversee management of the Bangalore temple and properties should continue or be dissolved.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Composition and Control of ISKCON Bangalore's Governing Body (Suit No. 1758 of 2003)
Legal Framework and Precedents: The governance of a society registered under the Karnataka Societies Registration Act is determined by its Memorandum of Association, Rules and Regulations, and duly held General Body Meetings. Membership and election to the Governing Body require compliance with the society's rules.
Court's Interpretation and Reasoning: The Trial Court and High Court found that the plaintiffs failed to prove that the 1st to 5th plaintiffs and 1st to 10th defendants constituted the Governing Body. The 11th to 17th defendants demonstrated that they were elected as members of the Governing Body in the Annual General Meeting held on 1st July 1984. The courts accepted the minutes of this meeting, despite allegations of discrepancies and late production.
Key Evidence and Findings: The plaintiffs admitted that ISKCON Bangalore became defunct shortly after registration and did not hold general meetings or elections. The 11th to 17th defendants produced minutes of the 1984 General Body Meeting showing their election. The plaintiffs' witnesses failed to provide documentary evidence supporting their claim to the Governing Body.
Application of Law to Facts: Since the plaintiffs could not prove their membership or control and the 11th to 17th defendants showed valid election, the courts held that the latter had the right to manage ISKCON Bangalore.
Treatment of Competing Arguments: Plaintiffs argued that the minutes were fabricated and that the 11th to 17th defendants were never admitted members. The defendants countered with documentary evidence and consistent conduct. The courts favored the defendants' position due to lack of evidence from plaintiffs and acceptance of the minutes.
Conclusion: The 11th to 17th defendants constitute the Governing Body of ISKCON Bangalore, and plaintiffs' claims to management were rejected.
Issue 2: Ownership of Schedule 'A', 'B', and 'C' Properties (Suit No. 7934 of 2001)
Legal Framework and Precedents: Ownership of property by a registered society is governed by the Karnataka Societies Registration Act and the Maharashtra Public Trusts Act (for ISKCON Mumbai). The Bangalore Development Authority Act, 1976, specifically Section 38B, governs allotment of bulk land to societies registered under the Karnataka Societies Registration Act or to charitable trusts.
Court's Interpretation and Reasoning: The Trial Court held ISKCON Bangalore as the absolute owner of the Schedule 'A' property, based on the application for allotment, sale deed, and subsequent documents. The High Court reversed this, holding that ISKCON Mumbai, through its Bangalore branch, owned the property. The Supreme Court examined the documentary evidence and found that the application for allotment, sale deed, and exemption under the Urban Land Ceiling Act were all in the name of ISKCON Bangalore, a registered society under the Karnataka Societies Registration Act.
Key Evidence and Findings: The application dated 5th February 1987 for allotment was made by ISKCON Bangalore, signed by Madhu Pandit as President of ISKCON Bangalore. The sale deed dated 3rd August 1988 was executed in favor of ISKCON Bangalore. Exemption orders under the Urban Land Ceiling Act were granted to ISKCON Bangalore. No document was produced showing that ISKCON Mumbai or its Bangalore branch made any application for allotment. The High Court's finding of manipulation by Madhu Pandit was not supported by evidence.
Application of Law to Facts: Section 38B(v) of the BDA Act allows allotment to societies registered under the Karnataka Societies Registration Act. ISKCON Mumbai, being a public trust under Maharashtra law, was not eligible for allotment under this provision. The absence of registration of the Schedule 'A' property under the Maharashtra Public Trusts Act did not affect ownership by ISKCON Bangalore. The Supreme Court emphasized that ownership depends on the registered allottee and not the source of funds.
Treatment of Competing Arguments: ISKCON Mumbai contended that the property was acquired through its Bangalore branch and that funds and exemptions under the Income Tax Act were utilized by ISKCON Mumbai. The Supreme Court rejected these arguments, noting the lack of documentary proof of branch status and that the application and sale deed were in ISKCON Bangalore's name. The Court also drew adverse inference against ISKCON Mumbai for not examining material witnesses who could have supported their case.
Conclusion: ISKCON Bangalore is the absolute owner of the Schedule 'A' property and related movable properties. The High Court's contrary finding was set aside, and the Trial Court's decree restored.
Issue 3: Authority of ISKCON Mumbai's Executive Committee over ISKCON Bangalore
Legal Framework: Societies registered under different statutes are separate legal entities. The executive committee of one society cannot exercise control over another unless authorized by law or agreement.
Court's Interpretation and Reasoning: The Trial Court and Supreme Court held that ISKCON Mumbai's Executive Committee or Bureau has no power to remove office bearers or control the possession or administration of ISKCON Bangalore's properties or temples.
Key Evidence and Findings: Despite ISKCON Mumbai's claim of a Bangalore branch, the evidence showed ISKCON Bangalore was a separate registered society with its own governing body. The use of ISKCON Mumbai's tax exemption certificates by Bangalore branch did not confer ownership or control over Bangalore society's properties.
Application of Law to Facts: The separate registration and ownership documents established independent management and ownership. No authority was shown to ISKCON Mumbai's Executive Committee to interfere with ISKCON Bangalore's affairs.
Conclusion: ISKCON Mumbai's Executive Committee has no authority over ISKCON Bangalore's management or properties.
Issue 4: Validity of the Annual General Meeting of 1st July 1984 and Election of Governing Body
Legal Framework: Valid election of a Governing Body requires a duly convened General Body Meeting with proper notice and quorum.
Court's Interpretation and Reasoning: The Trial Court and High Court accepted the minutes of the Annual General Meeting held on 1st July 1984, despite allegations of discrepancies and late production. The Supreme Court found no error in this acceptance, noting the plaintiffs' failure to impeach the minutes or produce contrary evidence.
Key Evidence and Findings: Certified copies of the meeting proceedings and notice were produced. The 11th to 17th defendants were shown to have been elected in this meeting. Plaintiffs' witnesses admitted lack of knowledge or participation in ISKCON Bangalore's affairs during this period.
Application of Law to Facts: The evidence supported the validity of the 1984 meeting and election of the Governing Body comprising the 11th to 17th defendants.
Conclusion: The 11th to 17th defendants were validly elected to the Governing Body in 1984, and plaintiffs' claims to the contrary failed.
Issue 5: Whether ISKCON Bangalore was Defunct Post-Registration
Court's Interpretation and Reasoning: The plaint itself admitted that ISKCON Bangalore became defunct shortly after registration. The High Court found that ISKCON Bangalore did not file income tax returns until 2002 and was largely inactive till then. However, the Trial Court found that ISKCON Bangalore revived and functioned, especially in relation to acquiring and managing Schedule 'A' property.
Key Evidence and Findings: Letters filed with the Registrar of Societies, bank accounts, and applications to BDA showed some activity. The Supreme Court noted that the plaintiff society filed statutory accounts and conducted activities, including property acquisition.
Conclusion: ISKCON Bangalore was dormant for a period but revived and functioned sufficiently to acquire property and manage affairs.
Issue 6: Allegations of Fraud and Document Manipulation
Court's Interpretation and Reasoning: ISKCON Mumbai alleged that documents submitted by ISKCON Bangalore, including applications to BDA, were forged or manipulated. The Supreme Court held that fraud must be specifically pleaded with material facts and proved. No convincing evidence of fraud was produced. The Court also drew adverse inference against ISKCON Mumbai for failure to examine material witnesses who could have supported the fraud allegations.
Conclusion: Allegations of fraud and manipulation were unsubstantiated and did not affect the validity of ISKCON Bangalore's ownership.
Issue 7: Limitation and Locus Standi of Appellants
Court's Interpretation and Reasoning: The 5th defendant appellant in Suit No. 1758 of 2003 was allowed to be transposed as appellant after the original plaintiff withdrew. The respondents contended this gave no locus to prosecute the appeal and alleged lack of bona fide. The Supreme Court did not find merit in this objection and proceeded to adjudicate on the merits.
Limitation: The suit was filed after a long period, but the Court did not specifically hold the suit barred by limitation, focusing instead on merits and evidence.
Issue 8: Dissolution of Oversight Committee
Court's Reasoning: The Supreme Court noted that the committee headed by a retired Justice was appointed to oversee management of the Bangalore temple and properties. Given the resolution of disputes and passage of time, the Court ordered dissolution of the committee one month after the judgment.
3. SIGNIFICANT HOLDINGS
"The application dated 5th February 1987 was made by ISKCON Bangalore, a society registered under the Karnataka Societies Registration Act, and the sale deed dated 3rd August 1988 was executed in its favour. There is nothing on record to show that the application was manipulated or fabricated."
"The High Court's finding that ISKCON Mumbai, through its branch in Bangalore, was the owner of the Schedule 'A' property is completely erroneous and deserves to be set aside."
"The Executive Committee or Bureau of ISKCON Mumbai has no power or authority to remove the President or office bearers of ISKCON Bangalore or to exercise control over the possession of the property or administration of affairs of ISKCON Bangalore."
"The 11th to 17th defendants were duly elected as members of the Governing Body of ISKCON Bangalore in the Annual General Meeting held on 1st July 1984. The plaintiffs have failed to prove otherwise."
"Fraud must always be specifically pleaded with material facts and proved. In the absence of such evidence, the allegations of fraud and manipulation are rejected."
"The committee appointed by this Court to oversee management of the Bangalore temple and properties shall stand dissolved on expiry of one month from the date of this judgment."
Core principles established include the primacy of documentary evidence in determining ownership and governance of societies, the requirement of proper membership and elections for governing body claims, and the necessity of specific pleading and proof of fraud. The judgment underscores that a society registered under a particular statute holds ownership of property allotted to it, notwithstanding the source of funds, and that branches of societies do not have independent legal status unless separately registered.
Final determinations:
- The decree of the Trial Court in Suit No. 7934 of 2001, holding ISKCON Bangalore as owner of Schedule 'A' property, is restored.
- The High Court's judgment in Regular First Appeal No. 421 of 2009 is set aside.
- The suit No. 1758 of 2003 is dismissed, confirming the 11th to 17th defendants as the Governing Body of ISKCON Bangalore.
- The Executive Committee of ISKCON Mumbai has no authority over ISKCON Bangalore's management or properties.
- The oversight committee appointed by the Supreme Court is dissolved.
Suit filled for right to manage or control ISKCON Bangalore - BDA allotted property in Schedule ‘A’ to ISKCON Mumbai through its Bangalore branch - absolute owner of the immovable and movable properties described in Schedules 'A', 'B', and 'C - failure of Madhu Pandit to enter the witness box - Rules and Regulations of ISKCON Bangalore are riddled with inconsistencies - suit barred by limitation - terms ‘Managing Committee’ and ‘Governing Body’ - HELD THAT:- As noted in the plaint itself, according to the plaintiffs' case, ISKCON Bangalore was dormant for some time. The allegation in the plaint is that the 11th to 17th defendants surreptitiously took over the affairs of ISKCON Bangalore. The High Court, as well as the Trial Court, noted that although the plaintiffs claimed the 1st to 10th defendants were members of the Governing Body, only the 1st, 3rd, and 10th defendants supported the plaintiffs' case. 2nd, 7th and 8th defendants contended that 11 to 17 defendants were elected as members of the Governing Body. As the first two plaintiffs withdrew from the suit, their evidence ceased to be of any significance. Plaintiff no.3 did not tender any documentary evidence to show that 1st to 5th plaintiffs along with 1st to 10th defendants constituted Governing Body of ISKCON Bangalore. There is no reference to any such evidence in his examination-in-chief.
Perusal of the examination-in- chief of PW-4 shows that from 1979 till at least 1984, he was away from Bangalore. In fact, he pleaded that he was not aware of the existence of ISKCON Bangalore until 2001. Therefore, his evidence also does not support the plaintiffs' case that the 1st to 5th plaintiffs and the 1st to 10th defendants were members of the Governing Body.
DW-1, who is the 2nd defendant, stated that the original proceedings of the Annual General Body Meeting dated 1st July 1984 (Exhibit D-13) bear the signatures of the 1st to 11th defendants. He stated that from 1st July 1984, the 1st defendant ceased to be the President of ISKCON Bangalore.
The Trial Court has examined (Exhibit D-1), which is a certified copy of the proceedings of the General Body Meeting dated 1st July 1984, of which D-13 is the original. Exhibit D-9 is the certified copy of the notice dated 25th May 1984 of the said meeting. The Trial Court also examined the other documentary evidence on record. After considering his cross-examination, the Trial Court held that the plaintiffs were not in a position to impeach the testimony of DW-1, insofar as it related to the Annual General Body Meeting held on July 1, 1984. Ultimately, the Trial Court came to the conclusion that the case of the 11th to 17th defendants, for which a General Body Meeting was held on 1st July 1984, deserves to be accepted.
We may note here that plaintiffs have adduced no evidence to prove their case. Both the Courts have accepted the case of the 11th to 17th defendants, who claim that they were elected in the July 1984 meeting. After having perused the pleadings and evidence on record, we find no error in the view taken by the Trial Court as well as the High Court.
According to the available records, Late Bhaktivedanta Swami Prabhupada initiated the Hare Krishna movement. Looking to the case made out regarding the object of the said movement, in fact, the dispute between ISKCON Mumbai and ISKCON Bangalore ought not to have been brought to the Court. However, they have done so, and in the process, they have litigated for a span of more than 20 years. Therefore, we need to bring the dispute to a close, and that is how we are inclined to quash the FIR. For the same reason, we are not inclined to proceed further in the contempt petition.
As we are setting aside the impugned judgment in Regular First Appeal No.423 of 2009, the remaining appeals will not survive.
Therefore, we pass the following order:
a) Civil Appeal Nos.3821-3822 of 2023 are hereby dismissed.
b) Civil Appeal No.9313 of 2014 is allowed by setting aside the judgment of the High Court in RFA No.421 of 2009. Subject to what we have held in the Judgment, the decree passed in Suit No. 7934 of 2001 by the City Civil Court, Bangalore on 17th April 2009 is restored.
c) In view of findings recorded in Civil Appeal No.9313 of 2014, Civil Appeal Nos. 9314-9315 of 2014, Civil Appeal Nos.9311-9312 of 2014, Civil Appeal Nos.9307-9308 of 2014, Civil Appeal Nos.9305-9306 of 2014, Civil Appeal Nos.9309-9310 of 2014 and Civil Appeal No.9316 of 2014 stand disposed of as the same do not survive.
d) The committee headed by Justice R.V. Raveendran, a former Judge of this Court shall stand dissolved on expiry of period of one month from the date of this judgment.
There will be no orders as to costs.
Suit filled for right to manage or control ISKCON Bangalore - BDA allotted property in Schedule ‘A’ to ISKCON Mumbai through its Bangalore branch - absolute owner of the immovable and movable properties described in Schedules 'A', 'B', and 'C - failure of Madhu Pandit to enter the witness box - Rules and Regulations of ISKCON Bangalore are riddled with inconsistencies - suit barred by limitation - terms ‘Managing Committee’ and ‘Governing Body’ - HELD THAT:- As noted in the plaint itself, according to the plaintiffs' case, ISKCON Bangalore was dormant for some time. The allegation in the plaint is that the 11th to 17th defendants surreptitiously took over the affairs of ISKCON Bangalore. The High Court, as well as the Trial Court, noted that although the plaintiffs claimed the 1st to 10th defendants were members of the Governing Body, only the 1st, 3rd, and 10th defendants supported the plaintiffs' case. 2nd, 7th and 8th defendants contended that 11 to 17 defendants were elected as members of the Governing Body. As the first two plaintiffs withdrew from the suit, their evidence ceased to be of any significance. Plaintiff no.3 did not tender any documentary evidence to show that 1st to 5th plaintiffs along with 1st to 10th defendants constituted Governing Body of ISKCON Bangalore. There is no reference to any such evidence in his examination-in-chief.
Perusal of the examination-in- chief of PW-4 shows that from 1979 till at least 1984, he was away from Bangalore. In fact, he pleaded that he was not aware of the existence of ISKCON Bangalore until 2001. Therefore, his evidence also does not support the plaintiffs' case that the 1st to 5th plaintiffs and the 1st to 10th defendants were members of the Governing Body.
DW-1, who is the 2nd defendant, stated that the original proceedings of the Annual General Body Meeting dated 1st July 1984 (Exhibit D-13) bear the signatures of the 1st to 11th defendants. He stated that from 1st July 1984, the 1st defendant ceased to be the President of ISKCON Bangalore.
The Trial Court has examined (Exhibit D-1), which is a certified copy of the proceedings of the General Body Meeting dated 1st July 1984, of which D-13 is the original. Exhibit D-9 is the certified copy of the notice dated 25th May 1984 of the said meeting. The Trial Court also examined the other documentary evidence on record. After considering his cross-examination, the Trial Court held that the plaintiffs were not in a position to impeach the testimony of DW-1, insofar as it related to the Annual General Body Meeting held on July 1, 1984. Ultimately, the Trial Court came to the conclusion that the case of the 11th to 17th defendants, for which a General Body Meeting was held on 1st July 1984, deserves to be accepted.
We may note here that plaintiffs have adduced no evidence to prove their case. Both the Courts have accepted the case of the 11th to 17th defendants, who claim that they were elected in the July 1984 meeting. After having perused the pleadings and evidence on record, we find no error in the view taken by the Trial Court as well as the High Court.
According to the available records, Late Bhaktivedanta Swami Prabhupada initiated the Hare Krishna movement. Looking to the case made out regarding the object of the said movement, in fact, the dispute between ISKCON Mumbai and ISKCON Bangalore ought not to have been brought to the Court. However, they have done so, and in the process, they have litigated for a span of more than 20 years. Therefore, we need to bring the dispute to a close, and that is how we are inclined to quash the FIR. For the same reason, we are not inclined to proceed further in the contempt petition.
As we are setting aside the impugned judgment in Regular First Appeal No.423 of 2009, the remaining appeals will not survive.
Therefore, we pass the following order:
a) Civil Appeal Nos.3821-3822 of 2023 are hereby dismissed.
b) Civil Appeal No.9313 of 2014 is allowed by setting aside the judgment of the High Court in RFA No.421 of 2009. Subject to what we have held in the Judgment, the decree passed in Suit No. 7934 of 2001 by the City Civil Court, Bangalore on 17th April 2009 is restored.
c) In view of findings recorded in Civil Appeal No.9313 of 2014, Civil Appeal Nos. 9314-9315 of 2014, Civil Appeal Nos.9311-9312 of 2014, Civil Appeal Nos.9307-9308 of 2014, Civil Appeal Nos.9305-9306 of 2014, Civil Appeal Nos.9309-9310 of 2014 and Civil Appeal No.9316 of 2014 stand disposed of as the same do not survive.
d) The committee headed by Justice R.V. Raveendran, a former Judge of this Court shall stand dissolved on expiry of period of one month from the date of this judgment.
There will be no orders as to costs.
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