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The core legal questions considered by the Court are:
(a) Whether the appellate authority was justified in refusing to entertain the appeal due to non-payment of the mandatory pre-deposit under Section 107(6) of the WBGST/CGST Act, 2017;
(b) Whether the appellate authority was obligated under Section 107(12) of the said Act to dispose of the appeal by passing a reasoned order stating points of determination and decisions thereon, despite the appeal not being entertained;
(c) Whether the petitioners could seek relief by way of writ petition challenging the appellate authority's refusal to entertain the appeal on the ground of financial hardship and non-payment of pre-deposit;
(d) The interpretation and application of the mandatory pre-deposit requirement under Section 107(6) and the scope of judicial review in the context of appeals under the said Act.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Validity of appellate authority's refusal to entertain appeal for non-payment of pre-deposit under Section 107(6)
Relevant legal framework and precedents: Section 107(6) of the WBGST/CGST Act, 2017 mandates that no appeal shall be entertained by the appellate authority unless the appellant has made a pre-deposit of the amount of tax, interest, fine, and penalty admitted by him, plus 10% of the remaining tax amount in dispute (subject to a cap of Rs. 25 crores). This provision is a statutory condition precedent for entertaining appeals under the Act.
Court's interpretation and reasoning: The Court emphasized the clear and unambiguous language of Section 107(6), which imposes a mandatory pre-deposit condition for filing an appeal. The appellate authority's refusal to entertain the appeal due to non-compliance with this statutory requirement was held to be in strict accordance with the law. The Court rejected the petitioners' contention that the appellate authority should have entertained the appeal despite non-payment of the pre-deposit.
Key evidence and findings: The petitioners admitted non-payment of the pre-deposit citing financial hardship and submitted a letter requesting hearing without pre-deposit. However, no statutory exception to the mandatory pre-deposit requirement was established.
Application of law to facts: Since the petitioners failed to comply with the statutory pre-deposit, the appellate authority had no jurisdiction to entertain the appeal. The Court held that the appellate authority acted correctly in refusing to entertain the appeal.
Treatment of competing arguments: The petitioners argued financial catastrophe and hardship as grounds for waiver or relaxation of the pre-deposit requirement. The Court found no provision in the Act permitting such waiver and rejected this argument.
Conclusion: The appellate authority's refusal to entertain the appeal for non-payment of pre-deposit under Section 107(6) was lawful and justified.
Issue (b): Obligation of appellate authority to pass reasoned order under Section 107(12) despite refusal to entertain appeal
Relevant legal framework and precedents: Section 107(12) of the Act requires the appellate authority to dispose of appeals by stating points of determination and decisions thereon with reasons. This provision governs the manner of disposal of appeals once entertained.
Court's interpretation and reasoning: The Court observed that the statutory obligation to pass a reasoned order under Section 107(12) arises only when the appeal is entertained and proceeds to disposal. Since the appeal was not entertained in the present case due to non-payment of pre-deposit, the appellate authority was not required to pass a reasoned order on the merits.
Key evidence and findings: The impugned order dated 29th August 2024 simply refused to entertain the appeal. No adjudication on merits or points of determination was made.
Application of law to facts: The Court held that the petitioners' contention that the appellate authority failed to comply with Section 107(12) was misplaced because the appeal was never admitted for adjudication.
Treatment of competing arguments: The petitioners argued that the order refusing to entertain the appeal was unreasoned and violative of Section 107(12). The Court rejected this, clarifying the procedural distinction between admission and disposal of appeals.
Conclusion: The appellate authority was under no obligation to pass a reasoned order under Section 107(12) when refusing to entertain an appeal for non-payment of pre-deposit.
Issue (c): Availability of writ jurisdiction to challenge refusal to entertain appeal on grounds of financial hardship
Relevant legal framework and precedents: The writ jurisdiction under Article 226 of the Constitution is discretionary and is not ordinarily exercised to override clear statutory mandates unless exceptional circumstances exist.
Court's interpretation and reasoning: The Court noted that the petitioners failed to demonstrate any exceptional or special circumstances warranting interference with the statutory scheme. Mere financial hardship does not constitute sufficient ground to bypass the mandatory pre-deposit requirement.
Key evidence and findings: The petitioners' letter expressing financial crisis was not supported by any substantive evidence or legal basis for waiver of pre-deposit.
Application of law to facts: The Court held that the petitioners had not made out a special case for relief by writ petition and that the statutory provisions must be strictly enforced.
Treatment of competing arguments: The petitioners sought equitable relief on grounds of hardship. The Court declined to extend relief beyond the statutory framework.
Conclusion: The writ petition challenging the refusal to entertain the appeal on grounds of financial hardship was dismissed for lack of merit.
Issue (d): Interpretation and application of mandatory pre-deposit requirement under Section 107(6)
Relevant legal framework and precedents: Section 107(6) is a statutory bar designed to ensure compliance with tax demands before entertaining appeals, thereby preventing frivolous or vexatious litigation and protecting revenue interests.
Court's interpretation and reasoning: The Court underscored the mandatory nature of the pre-deposit and its role in the
Refusal to entertain the appeal by reasons of failure on the part of the petitioners to make payment of pre-deposit as is required under Section 107(6) of the WBGST/CGST Act, 2017 - petitioners did not comply with the mandatory requirement for payment of pre-deposit - HELD THAT:- The petitioners had preferred an appeal challenging the said order. Although, the learned advocate for the petitioners insists that the appellate authority was duty bound to dispose of the appeal by passing a reasoned order having regard to the provisions contained in Section 107(12) of the said Act, it is however found that in terms of the provisions contained in Section 107(6) of the said Act, the appellate authority could not have accepted the appeal filed by the petitioner unless, the petitioner no.1 who was the appellant had paid the amount of tax, interest, fine and penalty arising from the impugned order as admitted by him and a sum equal to 10% of the remaining amount of tax in dispute arising out of the order (subject to maximum of 25 crores of rupees) in relation to which the appeal has been filed. The language of Section 107(6) of the said Act is distinct and clear and mandates that no appeal shall be filed under sub-Section 1 unless the appellant has paid the amount.
If the petitioner did not comply with the above directive for mandatory pre-deposit, there is no scope for the appellate authority to entertain the appeal.
Conclusion - Since, the appeal was not entertained, question of the appellate authority disposing the appeal by stating the points of determination and the decision thereon could not have arisen. The petitioners have not been able to make out any special case for entertaining the writ petition.
There are no merit in the writ petition. The writ petition is accordingly dismissed without any order as to costs.
Refusal to entertain the appeal by reasons of failure on the part of the petitioners to make payment of pre-deposit as is required under Section 107(6) of the WBGST/CGST Act, 2017 - petitioners did not comply with the mandatory requirement for payment of pre-deposit - HELD THAT:- The petitioners had preferred an appeal challenging the said order. Although, the learned advocate for the petitioners insists that the appellate authority was duty bound to dispose of the appeal by passing a reasoned order having regard to the provisions contained in Section 107(12) of the said Act, it is however found that in terms of the provisions contained in Section 107(6) of the said Act, the appellate authority could not have accepted the appeal filed by the petitioner unless, the petitioner no.1 who was the appellant had paid the amount of tax, interest, fine and penalty arising from the impugned order as admitted by him and a sum equal to 10% of the remaining amount of tax in dispute arising out of the order (subject to maximum of 25 crores of rupees) in relation to which the appeal has been filed. The language of Section 107(6) of the said Act is distinct and clear and mandates that no appeal shall be filed under sub-Section 1 unless the appellant has paid the amount.
If the petitioner did not comply with the above directive for mandatory pre-deposit, there is no scope for the appellate authority to entertain the appeal.
Conclusion - Since, the appeal was not entertained, question of the appellate authority disposing the appeal by stating the points of determination and the decision thereon could not have arisen. The petitioners have not been able to make out any special case for entertaining the writ petition.
There are no merit in the writ petition. The writ petition is accordingly dismissed without any order as to costs.
Violation of principles of natural justice - adjudicating authority did not consider the submissions and the relevant judgments relied upon by the petitioner - appealable order under the provisions of Section 107 of the WBGST/CGST Act, 2017 or not - HELD THAT:- Having heard the learned advocates appearing for the respective parties and noting that an appellate remedy having been provided, the petitioner having failed to take benefit of such appellate remedy, there being no appropriate explanation in approaching this Court belatedly and the only explanation being the pendency of an arbitral proceedings, the petitioner has not been able to justify or provide appropriate explanation for the delay in approaching this Court. On such ground ordinarily, there is no scope to entertain the present writ petition.
The petitioner shall be at liberty to approach the appellate authority in accordance with law and, if an appeal is filed within a period of four weeks from date along with an application for condonation of delay, the appellate authority having regard to the observations made hereinabove and upon considering the explanation for the delay shall hear out and dispose of the appeal on merits, subject to compliance of other formalities by the petitioner.
Petition disposed off.
Violation of principles of natural justice - adjudicating authority did not consider the submissions and the relevant judgments relied upon by the petitioner - appealable order under the provisions of Section 107 of the WBGST/CGST Act, 2017 or not - HELD THAT:- Having heard the learned advocates appearing for the respective parties and noting that an appellate remedy having been provided, the petitioner having failed to take benefit of such appellate remedy, there being no appropriate explanation in approaching this Court belatedly and the only explanation being the pendency of an arbitral proceedings, the petitioner has not been able to justify or provide appropriate explanation for the delay in approaching this Court. On such ground ordinarily, there is no scope to entertain the present writ petition.
The petitioner shall be at liberty to approach the appellate authority in accordance with law and, if an appeal is filed within a period of four weeks from date along with an application for condonation of delay, the appellate authority having regard to the observations made hereinabove and upon considering the explanation for the delay shall hear out and dispose of the appeal on merits, subject to compliance of other formalities by the petitioner.
Petition disposed off.
The core legal questions considered by the Court in this matter are:
(a) Whether service of an order under the WBGST/CGST Act, 2017 by uploading it on the common portal as per Clause (d) of Section 169(1) constitutes valid and complete service, especially when service by modes under Clauses (a) to (c) has not been effected;
(b) Whether the State is obligated to first exhaust the modes of service specified in Clauses (a) to (c) of Section 169(1) before resorting to service by uploading on the portal under Clause (d);
(c) Whether the appellate authority was correct in rejecting the petitioner's appeal on the ground of delay without appropriately considering the petitioner's application for condonation of delay;
(d) The interpretation and application of Section 169 of the WBGST/CGST Act, 2017, particularly the hierarchy and permissibility of various modes of service;
(e) The applicability and effect of precedents, specifically the decision of the Madras High Court in P.N. Traders vs. Deputy State Tax Officer, on the mode of service under Section 169.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Validity of service by uploading on the portal under Section 169(1)(d) without prior service under Clauses (a) to (c)
Relevant legal framework and precedents: Section 169(1) of the WBGST/CGST Act, 2017 prescribes six alternative modes of service for any decision, order, summons, notice or other communication under the Act. These are:
Subsections (2) and (3) clarify the date of deemed service and presumption of receipt in case of registered post.
The Madras High Court in P.N. Traders held that service under Section 169 mandates personal service or service by registered post or e-mail at the first instance, and only if these modes fail, can service by uploading on the portal or publication in newspapers be resorted to.
Court's interpretation and reasoning: The Court carefully examined the language of Section 169(1), noting the use of the word "or" after each clause, indicating that the modes of service are alternative and not hierarchical, except for Clause (f) which expressly applies only "if none of the modes aforesaid is practicable." The Court emphasized that Clause (f) contains a clear precondition, but no such restriction exists for Clauses (a) to (e).
Therefore, service by making the order available on the common portal under Clause (d) is a valid mode of service without the necessity to first attempt service under Clauses (a) to (c). The Court rejected the petitioner's contention that service by uploading on the portal is incomplete or invalid unless preceded by service under Clauses (a) to (c).
The Court respectfully disagreed with the Madras High Court's interpretation in P.N. Traders, holding that the plain and unambiguous language of Section 169 does not support the hierarchical approach suggested therein.
Key evidence and findings: The order under Section 73(9) was uploaded on the common portal as per Clause (d). The petitioner had notice of the proceedings, having responded to the show-cause notice also uploaded on the portal. There was no evidence that service by other modes was attempted or necessary.
Application of law to facts: The Court applied the statutory language strictly and held that uploading the order on the portal sufficed as valid service. Therefore, the petitioner's appeal was not delayed due to failure of service.
Treatment of competing arguments: The petitioner argued that service must be personal or by registered post or e-mail first, relying on P.N. Traders. The State contended that service by uploading on the portal is an independent and valid mode. The Court sided with the State, emphasizing the plain statutory language and rejecting the hierarchical interpretation.
Conclusions: Service of notice by uploading on the portal under Section 169(1)(d) is valid and complete. The petitioner's claim of defective service and consequent delay in filing the appeal is untenable.
Issue (c): Consideration of the application for condonation of delay by the appellate authority
Relevant legal framework and precedents: Section 107(4) of the WBGST/CGST Act, 2017 deals with the time limit for filing appeals and the power of the appellate authority to condone delay. The appellate authority had rejected the appeal on the ground of delay, holding it lacked power to condone delay beyond the extended period of one month.
A Division Bench of the Calcutta High Court in S.K. Chakraborty & ors. vs. Union of India (MAT 81 & 82 of 2022) has taken a view on the power of the appellate authority to condone delay beyond the extended period.
Court's interpretation and reasoning: The Court found that the appellate authority mechanically rejected the appeal relying on a restrictive interpretation of Section 107(4), without properly considering the petitioner's application for condonation of delay. The Court held that the appellate authority's reasoning was flawed and inconsistent with the Division Bench precedent.
Key evidence and findings: The appellate authority did not examine the merits of the petitioner's explanation for delay and summarily dismissed the appeal.
Application of law to facts: The Court set aside the appellate authority's order dated 24th December 2024 and directed the appellate authority to hear the appeal on merit, subject to the petitioner making a payment of Rs. 25,000/- to the High Court Legal Services Committee within four weeks.
Treatment of competing arguments: The petitioner urged for consideration of the condonation application; the State relied on the statutory time limits. The Court favored a fair hearing on merits rather than a mechanical rejection.
Conclusions: The appellate authority erred in rejecting the appeal solely on the ground of delay without proper consideration of the condonation application. The appeal must be heard on merits.
3. SIGNIFICANT HOLDINGS
The Court held:
"The unambiguous and plain language employed in Section 169(1) read with sub-Sections 2 and 3 makes it amply clear that the service of notice can be effected by any of the modes provided for in Clauses (a) to (f) of Section 169(1) of the said Act. The only restriction in my view in effecting service, is found in Clause 169(1)(f) since, the opening words of the said Clause requires that 'if none of the modes as aforesaid is practicable', that is to say modes of service provided for in Clauses (a) to (e) is not practicable, then the mode of service as provided in Clause (f) can be applied."
"No view, contrary to the intention expressed in the above section is acceptable. As such I respectfully disagree with the view expressed by the Hon'ble Madras High Court in the case of P.N. Traders (supra)."
"The appellate authority had mechanically by relying on the provisions of sub-Section 4 of Section 107 of the said Act and by treating that it has no power to condone the delay beyond the extended period of one month, had rejected the appeal. In this context, I may note a Division Bench of our High Court in the case of S.K. Chakraborty & ors. vs. Union of India ... has already taken a view on the power of the appellate authority to condone the delay beyond the extended period of one month. Having regard thereto, I am unable to accept the reasoning provided by the appellate authority."
Core principles established include:
Final determinations on each issue:
(a) Service by uploading on the portal is valid and complete service under Section 169(1)(d);
(b) The State is not required to first attempt service under Clauses (a) to (c) before resorting to Clause (d);
(c) The appellate authority erred in rejecting the appeal for delay without proper consideration of condonation; the order dated 24th December 2024 is set aside;
(d) The appeal shall be heard on merit upon payment of Rs. 25,000/- to the High Court Legal Services Committee within four weeks.
Mode of service of notice - no service was effected by adhering to the mode of service provided for in Section 169(1) Clauses (a) to (c) of the WBGST/CGST Act, 2017 - condonation of delay in filing appeal.
Mode of service of notice - no service was effected by adhering to the mode of service provided for in Section 169(1) Clauses (a) to (c) of the WBGST/CGST Act, 2017 - HELD THAT:- Admittedly, in this case, the order issued under Section 73 of the said Act for the tax period of 2017-2018 to 2019-2020 was preceded with a show-cause notice. The show-cause was duly uploaded on the portal. The petitioner had duly responded to the show-cause and thus, had notice of the proceeding.
The unambiguous and plain language employed in Section 169(1) read with sub-Sections 2 and 3 makes it amply clear that the service of notice can be effected by any of the modes provided for in Clauses (a) to (f) of Section 169(1) of the said Act. The only restriction in my view in effecting service, is found in Clause 169(1)(f) since, the opening words of the said Clause requires that “if none of the modes as aforesaid is practicable’, that is to say modes of service provided for in Clauses (a) to (e) is not practicable, then the mode of service as provided in Clause (f) can be applied. Thus, having regard to the clear language employed in Section 169 of the said Act, no view, contrary to the intention expressed in the above section is acceptable.
The contention that service of notice of the order under Section 73 of the said Act on the petitioner was not complete without a personal service thereof on the petitioner as per the mode provided in Section 169(1) Clauses (a) to (c) of the said Act cannot be accepted.
Condonation of delay - HELD THAT:- The appellate authority had mechanically by relying on the provisions of sub-Section 4 of Section 107 of the said Act and by treating that it has no power to condone the delay beyond the extended period of one month, had rejected the appeal - Division Bench of High Court in the case of S.K. Chakraborty & ors. vs. Union of India [2023 (12) TMI 290 - CALCUTTA HIGH COURT] has already taken a view on the power of the appellate authority to condone the delay beyond the extended period of one month.
Conclusion - i) Service by uploading on the portal is valid and complete service under Section 169(1)(d). ii) The appellate authority erred in rejecting the appeal for delay without proper consideration of condonation; the order dated 24th December 2024 is set aside.
The impugned order set aside - petition disposed off.
Mode of service of notice - no service was effected by adhering to the mode of service provided for in Section 169(1) Clauses (a) to (c) of the WBGST/CGST Act, 2017 - condonation of delay in filing appeal.
Mode of service of notice - no service was effected by adhering to the mode of service provided for in Section 169(1) Clauses (a) to (c) of the WBGST/CGST Act, 2017 - HELD THAT:- Admittedly, in this case, the order issued under Section 73 of the said Act for the tax period of 2017-2018 to 2019-2020 was preceded with a show-cause notice. The show-cause was duly uploaded on the portal. The petitioner had duly responded to the show-cause and thus, had notice of the proceeding.
The unambiguous and plain language employed in Section 169(1) read with sub-Sections 2 and 3 makes it amply clear that the service of notice can be effected by any of the modes provided for in Clauses (a) to (f) of Section 169(1) of the said Act. The only restriction in my view in effecting service, is found in Clause 169(1)(f) since, the opening words of the said Clause requires that “if none of the modes as aforesaid is practicable’, that is to say modes of service provided for in Clauses (a) to (e) is not practicable, then the mode of service as provided in Clause (f) can be applied. Thus, having regard to the clear language employed in Section 169 of the said Act, no view, contrary to the intention expressed in the above section is acceptable.
The contention that service of notice of the order under Section 73 of the said Act on the petitioner was not complete without a personal service thereof on the petitioner as per the mode provided in Section 169(1) Clauses (a) to (c) of the said Act cannot be accepted.
Condonation of delay - HELD THAT:- The appellate authority had mechanically by relying on the provisions of sub-Section 4 of Section 107 of the said Act and by treating that it has no power to condone the delay beyond the extended period of one month, had rejected the appeal - Division Bench of High Court in the case of S.K. Chakraborty & ors. vs. Union of India [2023 (12) TMI 290 - CALCUTTA HIGH COURT] has already taken a view on the power of the appellate authority to condone the delay beyond the extended period of one month.
Conclusion - i) Service by uploading on the portal is valid and complete service under Section 169(1)(d). ii) The appellate authority erred in rejecting the appeal for delay without proper consideration of condonation; the order dated 24th December 2024 is set aside.
The impugned order set aside - petition disposed off.
Service of SCN - Challenge to order passed u/s 73 of the SGST/CGST Act, 2017 - even though the notice to the petitioner was uploaded in the portal, the same was not served upon the petitioner - violation of principles of natural justice - HELD THAT:- As far as the service of notice is concerned, Section 169 of the SGST/CGST Act, contemplates various methods for the same. Section 169(1)(d) contemplates for service of notice by way of making it available in the common portal. Since the statute recognizes any one of the modes as referred to in Section 169(1) as the proper service of notice, the effective service through any one of the modes would amount to sufficient notice for initiating or continuing proceedings under the Act.
The issue raised by the petitioner has been decided by a Division Bench of this Court in Sunil Kumar K. v. The State Tax Officer -I, Kottarakkara [2024 (7) TMI 915 - KERALA HIGH COURT], wherein, it was held that, the service of notice by making it available on the portal, would be sufficient.
There are no justifiable reasons to entertain this writ petition and accordingly, it is dismissed.
Service of SCN - Challenge to order passed u/s 73 of the SGST/CGST Act, 2017 - even though the notice to the petitioner was uploaded in the portal, the same was not served upon the petitioner - violation of principles of natural justice - HELD THAT:- As far as the service of notice is concerned, Section 169 of the SGST/CGST Act, contemplates various methods for the same. Section 169(1)(d) contemplates for service of notice by way of making it available in the common portal. Since the statute recognizes any one of the modes as referred to in Section 169(1) as the proper service of notice, the effective service through any one of the modes would amount to sufficient notice for initiating or continuing proceedings under the Act.
The issue raised by the petitioner has been decided by a Division Bench of this Court in Sunil Kumar K. v. The State Tax Officer -I, Kottarakkara [2024 (7) TMI 915 - KERALA HIGH COURT], wherein, it was held that, the service of notice by making it available on the portal, would be sufficient.
There are no justifiable reasons to entertain this writ petition and accordingly, it is dismissed.
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to Refund of IGST Paid on Exports Without LUT Scheme
The petitioner exported automobile parts and paid IGST through GSTR-3B returns, without opting for the LUT scheme at the time of filing shipping bills. The legal framework relevant here includes the CGST Act, 2017 and the Customs Act, 1962, along with Rule 96 of the CGST Rules, 2017, which governs refund of IGST paid on exports.
The Court noted that the petitioner acted under a bonafide belief that refunds would be processed under Rule 96, despite the procedural lapse of not filing under LUT. The petitioner's IGST payments were duly recorded in GST returns, although not reflected initially in shipping bills. The petitioner's claim is supported by the fact that the IGST amount was later manually amended in shipping bills under Section 149 of the Customs Act, indicating recognition of the payment.
The Court recognized the petitioner's position that the failure to opt for LUT was inadvertent, occurring during the nascent stage of GST implementation in 2017. The petitioner's entitlement to refund is thus analyzed in light of the substantive payment of IGST and the procedural rectifications made subsequently.
Issue 2: Jurisdiction and Responsibility for Sanctioning Refund
The petitioner's refund applications were rejected on the ground that the Customs Department, not the GST authorities, was responsible for sanctioning refunds under Rule 96. The Court considered the interplay between Customs Act provisions and CGST Rules regarding refund claims.
The petitioner's efforts to rectify the issue included raising tickets through the ICEGATE portal and obtaining confirmations that shipping bills were validated. However, technical glitches in scroll generation and procedural delays by Customs authorities impeded the refund process.
The Court acknowledged that the refund sanctioning authority must consider the representations on merits, irrespective of the initial confusion regarding jurisdiction, especially after amendments under Section 149 of the Customs Act clarified the IGST payment status.
Issue 3: Effect of Technical and Procedural Errors on Refund Claim
The petitioner's claims were complicated by technical glitches in the Customs electronic system, including failure of scroll generation and incorrect display of IGST values on final confirmation pages. Despite multiple communications from the Deputy Commissioner of Customs to technical teams, the issue remained unresolved for an extended period.
The Court took note of the petitioner's persistent efforts to correct errors, including representations to the Additional Director General, Directorate General of Systems, Indirect Taxes & Customs. The Court recognized that such technical and procedural errors should not prejudice the petitioner's substantive right to refund, particularly when the IGST payment was recorded and amendments were effected.
Issue 4: Consideration of Petitioner's Representations on Merits and Procedural Fairness
The petitioner had submitted numerous representations, including the final one dated 05.03.2025, which had not been considered on merits or in accordance with law. The respondents admitted to raising queries seeking clarifications from the petitioner, which remained unanswered.
The Court emphasized the necessity of procedural fairness, directing that the petitioner be afforded an opportunity for personal hearing and that the representation be decided within a stipulated timeframe. This approach ensures compliance with principles of natural justice and administrative law.
3. SIGNIFICANT HOLDINGS
The Court held that:
"No prejudice would be caused to the respondents, if the petitioner's representation dated 05.03.2025 seeking for refund, is considered on merits and in accordance with law, after providing an opportunity of personal hearing to the petitioner and after giving due consideration to the documents produced by the petitioner, within the time frame to be fixed by this Court."
This underscores the principle that procedural irregularities or technical glitches should not defeat substantive rights, especially when the petitioner has made bona fide payments and taken steps to rectify errors.
The Court directed the 2nd respondent to pass final orders on the petitioner's representation within four weeks, after providing a personal hearing, thereby reinforcing the requirement of due process and timely adjudication of refund claims.
In conclusion, the Court preserved the petitioner's right to claim refund of IGST paid on exports notwithstanding the initial failure to opt for LUT, recognized the need for inter-departmental coordination to resolve technical issues, and mandated adherence to principles of natural justice before final disposal of the refund claim.
Seeking for a direction to the respondents to consider the representation of the petitioner - grant of refund of IGST paid along with interest - HELD THAT:- No prejudice would be caused to the respondents, if the petitioner's representation dated 05.03.2025 referred, seeking for refund, is considered on merits and in accordance with law, after providing an opportunity of personal hearing to the petitioner and after giving due consideration to the documents produced by the petitioner, within the time frame to be fixed by this Court.
This Court directs the 2nd respondent to pass final orders, on merits and in accordance with law, on the petitioner's representation dated 05.03.2025 seeking for refund as stated supra, within a period of four weeks from the date of receipt of a copy of this order, after affording an opportunity of personal hearing to the petitioner.
Petition disposed off.
Seeking for a direction to the respondents to consider the representation of the petitioner - grant of refund of IGST paid along with interest - HELD THAT:- No prejudice would be caused to the respondents, if the petitioner's representation dated 05.03.2025 referred, seeking for refund, is considered on merits and in accordance with law, after providing an opportunity of personal hearing to the petitioner and after giving due consideration to the documents produced by the petitioner, within the time frame to be fixed by this Court.
This Court directs the 2nd respondent to pass final orders, on merits and in accordance with law, on the petitioner's representation dated 05.03.2025 seeking for refund as stated supra, within a period of four weeks from the date of receipt of a copy of this order, after affording an opportunity of personal hearing to the petitioner.
Petition disposed off.
The issue arises from the petitioner's challenge to a confiscation order under Section 130 of the GST Act, which imposed fines in lieu of confiscation and provided an option to release the goods upon payment of such fines within a stipulated period. The petitioner had filed an appeal against the confiscation order and sought a writ of certiorari to quash a notice threatening auction of the vehicle and goods, as well as a writ of mandamus for release of the vehicle and goods pending appeal.
Regarding the relevant legal framework, Section 130 of the CGST Act governs the confiscation of goods and conveyances involved in the commission of an offence under the Act. Subsection (2) authorizes confiscation where an offence is established, while Subsection (7) provides a limited period-three months-to the person concerned to pay a fine in lieu of confiscation and thereby secure release of the goods. The statutory scheme does not contemplate release of confiscated goods outside the conditions prescribed in Section 130(2) or 130(7).
The Court's interpretation focused on the statutory language and intent of Section 130. It acknowledged that the petitioner had already been granted the option to pay a fine in lieu of confiscation within three months, but that period had expired. However, the Court noted that the goods had not yet been sold or otherwise disposed of. This fact was pivotal in the Court's reasoning, as the State had not suffered prejudice by allowing the petitioner an additional opportunity to pay the fine and reclaim the goods.
In applying the law to the facts, the Court balanced the petitioner's right to avail the statutory remedy against the State's interest in enforcing the GST provisions. The Court reasoned that permitting the petitioner to pay the fine within a further limited period would not undermine the statutory scheme or cause prejudice. The Court thus exercised its discretion to direct release of the goods upon payment of the fine within one month.
The competing arguments involved the petitioner's plea for immediate release pending appeal, which was not directly supported by the statute, versus the respondent's reliance on the statutory scheme restricting release to the prescribed procedure and timeline. The Court found that the statutory provisions did not expressly bar granting an extension where the goods remained unsold, and thus the petitioner's interest warranted accommodation.
The Court concluded that the goods subject to confiscation under Section 130 shall be released upon payment of the fine in lieu of confiscation within an outer limit of one month from the date of the order. This direction was given notwithstanding the expiry of the initial three-month period, on the ground that no prejudice would be caused to the State and the goods had not been sold.
Significant holdings include the Court's statement that "as the goods are not reportedly sold, I do not find any reason to deny the opportunity to the petitioner to avail the option of getting the goods released, by making the payment of fine in lieu of the confiscation as mentioned in Ext.P8 order. Such an exercise would not cause any prejudice to the State as well." This encapsulates the core principle that the statutory option to pay fine in lieu of confiscation may be extended in appropriate circumstances where the goods remain available and the State's interests are not compromised.
The Court's final determination was to dispose of the writ petition with a direction to the second respondent to release the confiscated goods upon payment of the fine within one month, thereby granting relief to the petitioner while respecting the statutory framework governing confiscation and release under the GST Act.
Confiscation u/s 130 of the GST Act - propriety in release of goods already confiscated u/s 130 of the GST Act, pending consideration of the appeal - HELD THAT:- As the goods are not reportedly sold, there are no reason to deny the opportunity to the petitioner to avail the option of getting the goods released, by making the payment of fine in lieu of the confiscation as mentioned in Ext.P8 order. Such an exercise would not cause any prejudice to the State as well.
This writ petition is disposed of, directing the 2nd respondent to release the goods which are the subject matter of Ext.P8 order, upon the petitioner paying the fine in lieu of confiscation. The payment shall be done within an outer limit of one month, and upon making the payment, the goods shall be released immediately.
Confiscation u/s 130 of the GST Act - propriety in release of goods already confiscated u/s 130 of the GST Act, pending consideration of the appeal - HELD THAT:- As the goods are not reportedly sold, there are no reason to deny the opportunity to the petitioner to avail the option of getting the goods released, by making the payment of fine in lieu of the confiscation as mentioned in Ext.P8 order. Such an exercise would not cause any prejudice to the State as well.
This writ petition is disposed of, directing the 2nd respondent to release the goods which are the subject matter of Ext.P8 order, upon the petitioner paying the fine in lieu of confiscation. The payment shall be done within an outer limit of one month, and upon making the payment, the goods shall be released immediately.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Justification for invoking extended period of limitation under Section 74 of the GST Act in absence of fraud or suppression
Legal framework and precedents: Section 74 of the GST Act empowers authorities to initiate proceedings beyond the normal limitation period only if evasion of tax is due to fraud, wilful misstatement, or suppression of facts. The Court referred to a prior decision of the same High Court where the absence of any finding or allegation of fraud or suppression led to setting aside an assessment order passed under Section 74.
Court's interpretation and reasoning: The Court observed that the petitioner's case did not involve any finding or even an allegation of fraud, wilful misstatement, or suppression of facts. The impugned assessment order invoked Section 74 without establishing these requisite conditions, rendering the invocation without jurisdiction.
Application of law to facts: Since the assessment order did not demonstrate any fraud or suppression, the Court held that the extended period under Section 74 was not applicable.
Treatment of competing arguments: The petitioner relied heavily on the precedent holding that Section 74 cannot be invoked without fraud or suppression. The respondent contended that the petitioner had alternate remedies and that no procedural or natural justice violations occurred, but did not dispute the absence of fraud findings.
Conclusion: The Court found no merit in invoking Section 74 in the absence of fraud or suppression and referenced previous rulings to that effect.
Issue 2: Denial of Input Tax Credit due to supplier's failure to remit tax
Legal framework: Section 41 of the TNGST Act, 2017 (as applicable during 2017-18) provided that Input Tax Credit was provisional and subject to conditions. The provision was later amended (effective 01.10.2022) to explicitly require reversal of ITC if the supplier fails to pay the tax, with a provision for re-availment if the supplier subsequently pays.
Court's interpretation and reasoning: The Court emphasized that during the assessment year in question, ITC availed was provisional. The denial of ITC on the ground that the supplier did not remit tax is consistent with the statutory framework. The Court noted that the petitioner's argument that no case was made out for invoking Section 74 was untenable because the ITC was provisional and subject to reversal.
Key evidence and findings: The petitioner admitted that the supplier collected tax but failed to remit it. The Court relied on statutory provisions rather than factual disputes.
Application of law to facts: The Court applied the statutory provisions to hold that the denial of ITC was legally valid since the supplier's failure to remit tax triggers reversal of ITC.
Treatment of competing arguments: The petitioner argued that since tax was collected from them, ITC should not be denied. The Court rejected this, relying on the settled principle that ITC is provisional and contingent on supplier's compliance.
Conclusion: The denial of ITC was upheld as per the statutory provisions governing provisional credit and its reversal.
Issue 3: Procedural validity of assessment and notices
Legal framework: Procedural fairness and service of notices are essential for valid assessments. The petitioner raised non-service of ASMT 10 and DRC 01A notices as a procedural infirmity.
Court's interpretation and reasoning: The Court noted the petitioner's contention but declined to delve into this aspect, indicating no interference on procedural grounds.
Application of law to facts: Although procedural compliance is important, the Court chose not to examine this issue in the present writ petition.
Treatment of competing arguments: The respondent submitted that principles of natural justice were not violated, and the petitioner had adequate opportunity to be heard.
Conclusion: The Court did not find procedural infirmities sufficient to warrant interference.
Issue 4: Availability of alternate remedy under Section 107 of the TNGST Act, 2017Legal framework:
Section 107 provides for statutory appeals against orders passed under the GST enactments.
Court's interpretation and reasoning: The Court observed that the petitioner had an alternate statutory remedy by way of appeal before the Appellate Authority under Section 107. It emphasized that writ jurisdiction should not be exercised where alternate remedies exist unless exceptional circumstances arise.
Application of law to facts: The Court granted liberty to the petitioner to file statutory appeal within 30 days, subject to compliance with procedural requirements.
Treatment of competing arguments: The respondent urged dismissal on this ground, which the Court accepted.
Conclusion: The Court dismissed the writ petition but allowed the petitioner to pursue statutory appeal.
Issue 5: Compliance with principles of natural justice
The respondent contended that there was no violation of natural justice warranting judicial interference. The Court found no evidence or submissions indicating breach of natural justice in the assessment process.
Therefore, no relief was granted on this ground.
3. SIGNIFICANT HOLDINGS
"The impugned order of assessment invoking Section 74 of the Act itself is without jurisdiction on the absence of a finding that the evasion of taxes was due to or by reason of fraud, misstatement or suppression of fact."
"During the period in dispute i.e., 2017-18, the Input Tax Credit availed by the recipients was provisional."
"The credit of input tax availed by a registered person in respect of such supplies, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest."
"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 cast under Section 70 of the KVAT Act, 2003... the genuineness of the transaction has to be proved."
Core principles established include:
Final determinations:
Challenge to assessment order - denial of Input Tax Credit - It is specific case of the petitioner that Input Tax Credit has been denied as the supplier has collected the tax from the petitioner and failed to remit the same to the credit of the Government - invocation of extended period of limitation u/s 74 of the respective GST enactments - HELD THAT:- The argument of the petitioner that there has no case made out for invoking extended period of limitation under Section 74 of the respective GST enactments cannot be countenanced as Input Tax Credit, that was availed, was provisional. The law is settled on this aspect.
In fact, the Hon'ble Supreme Court in the State of Karnataka vs. M/s.Ecom Gill Coffee Trading Private Limited [2023 (3) TMI 533 - SUPREME COURT] has held 'the genuineness of the transaction has to be proved as the burden to prove the genuineness of transaction as per section 70 of the KVAT Act, 2003 would be upon the purchasing dealer.'
Conclusion - i) The writ petition challenging the assessment order under Section 74 was dismissed for lack of merit. ii) The denial of Input Tax Credit was upheld as per statutory provisions governing provisional credit and reversal.
There is no merits in the present Writ Petition and this Writ Petition is liable to be dismissed.
Challenge to assessment order - denial of Input Tax Credit - It is specific case of the petitioner that Input Tax Credit has been denied as the supplier has collected the tax from the petitioner and failed to remit the same to the credit of the Government - invocation of extended period of limitation u/s 74 of the respective GST enactments - HELD THAT:- The argument of the petitioner that there has no case made out for invoking extended period of limitation under Section 74 of the respective GST enactments cannot be countenanced as Input Tax Credit, that was availed, was provisional. The law is settled on this aspect.
In fact, the Hon'ble Supreme Court in the State of Karnataka vs. M/s.Ecom Gill Coffee Trading Private Limited [2023 (3) TMI 533 - SUPREME COURT] has held 'the genuineness of the transaction has to be proved as the burden to prove the genuineness of transaction as per section 70 of the KVAT Act, 2003 would be upon the purchasing dealer.'
Conclusion - i) The writ petition challenging the assessment order under Section 74 was dismissed for lack of merit. ii) The denial of Input Tax Credit was upheld as per statutory provisions governing provisional credit and reversal.
There is no merits in the present Writ Petition and this Writ Petition is liable to be dismissed.
- Whether the bail granted to the respondent under Section 132 of the Central Goods and Services Tax Act, 2017, by the learned Chief Metropolitan Magistrate at the initial stage of investigation, was erroneous and liable to be cancelled.
- Whether the involvement of the respondent in other pending investigations and proposals for prosecution by different Commissionerates of Central Tax impacts the bail order.
- Whether the respondent's deposition of amounts with the department and non-filing of prosecution complaint justify continuation of bail.
- Whether any supervening circumstances have arisen post-grant of bail warranting its cancellation.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of Bail Granted at Initial Stage of Investigation
The legal framework governing bail in economic offences under the CGST Act, particularly Section 132, is supplemented by the general principles under Section 482 CrPC, which allows the High Court to exercise inherent powers to prevent abuse of process or to secure the ends of justice. The Court considered precedents including the Apex Court's decision in Pradeep v. CCE (GST), wherein bail relief was granted upon deposit of 10% of the disputed liability.
The Court noted that the learned CMM had granted bail after considering the totality of facts, including the respondent's bona fide conduct demonstrated by depositing Rs. 1 crore initially and agreeing to deposit an additional Rs. 3 crores. The bail order included conditions to safeguard investigation integrity.
Key evidence included the respondent's financial deposits totaling Rs. 4 crores, verified property attachments worth Rs. 40.76 crores, and the absence of any complaint filed despite the investigation commencing in 2019. The Court applied the principle that in the absence of a complaint and with a protracted investigation, default bail would be the respondent's entitlement if in custody.
Competing arguments included the petitioner's contention that bail was premature and that the respondent's involvement in other investigations should preclude bail. The Court rejected these, noting no objection was raised at the time of bail and no misuse of liberty post-bail was alleged.
The conclusion was that the bail granted was not erroneous and did not warrant cancellation.
Issue 2: Impact of Other Investigations and Prosecution Proposals
The petitioner contended that the respondent's involvement in other cases, including a matter booked by the Ghaziabad Commissionerate and a prosecution proposal by the Gurugram Commissionerate, should influence bail status.
The Court observed that the impugned bail order did not record any such objections from the petitioner's counsel at the time. Further, no prosecution complaints had been filed in these matters, and no supervening circumstances were demonstrated to have arisen after bail was granted.
The Court held that mere existence of other investigations or proposals without formal prosecution or material adverse developments does not justify revocation of bail.
Issue 3: Adequacy of Deposits and Undertakings by Respondent
The respondent had deposited Rs. 4 crores with the department, exceeding the 10% threshold of disputed liability as per the precedent. The Court found this significant in demonstrating bona fides and willingness to cooperate.
The respondent's undertaking to join investigation, cooperate fully, and abstain from tampering with evidence or intimidating witnesses was accepted as a binding condition.
The Court applied the principle that such undertakings and financial deposits serve as adequate safeguards for the investigation process and public interest.
Issue 4: Presence or Absence of Supervening Circumstances
The petitioner failed to demonstrate any new facts or circumstances arising after the bail order that would warrant cancellation. The Court emphasized that bail is not to be cancelled lightly without cogent reasons.
The absence of any complaint filing, no misuse of liberty by the respondent, and compliance with bail conditions weighed against cancellation.
3. SIGNIFICANT HOLDINGS
"Undisputedly, no complaint has been filed against the respondent. Despite the fact that the investigation was taken up by the Department way back in the year 2019, no criminal complaint has been filed till date. Thus, even otherwise, had the respondent been in custody, he would have been entitled for default bail on the department not completing the investigation."
"The respondent has already deposited a sum of Rs. 4 crores with the department pursuant to the order granting bail, which is more than 10% of the disputed liability."
"No reason to cancel the bail granted to the respondent. Other conditions imposed in the impugned order shall remain applicable on the respondent."
Core principles established include that bail in economic offences under the CGST Act can be granted at the initial stage of investigation where the accused demonstrates bona fide conduct, including substantial deposits towards disputed liability, and in the absence of formal prosecution complaints. The Court reaffirmed that mere pendency of other investigations or prosecution proposals without formal complaint or adverse developments does not justify bail cancellation. Undertakings by the accused to cooperate and not interfere with investigation are critical safeguards.
Final determinations were that the bail order dated 17.12.2019 was validly passed, no supervening circumstances existed to warrant cancellation, and the petition challenging bail was dismissed with all conditions of bail continuing to apply.
Grant of bail at the initial stage of investigation - involvement of the respondent in other pending investigations and proposals for prosecution by different Commissionerates of Central Tax impacts the bail order or not - HELD THAT:- Undisputedly, no complaint has been filed against the respondent. Despite the fact that the investigation was taken up by the Department way back in the year 2019, no criminal complaint has been filed till date. Thus, even otherwise, had the respondent been in custody, he would have been entitled for default bail on the department not completing the investigation. It is not alleged anywhere that the respondent, pursuant to being admitted to bail, had misused the liberty.
It is the petitioner department’s own position that the respondent has deposited with the department a sum of Rs. 1 crore in cash on 11.12.2019 Rs. 2.5 crore in cash on 23.12.2019, and Rs. 0.50 crore in cash on 24.12.2019. That being said, the respondent has already deposited a sum of Rs. 4 crores with the department pursuant to the order granting bail, which is more than 10% of the disputed liability. The same has been recorded in the order passed by this Court on 18.12.2024.
This Court finds no reason to cancel the bail granted to the respondent - Petition dismissed.
Grant of bail at the initial stage of investigation - involvement of the respondent in other pending investigations and proposals for prosecution by different Commissionerates of Central Tax impacts the bail order or not - HELD THAT:- Undisputedly, no complaint has been filed against the respondent. Despite the fact that the investigation was taken up by the Department way back in the year 2019, no criminal complaint has been filed till date. Thus, even otherwise, had the respondent been in custody, he would have been entitled for default bail on the department not completing the investigation. It is not alleged anywhere that the respondent, pursuant to being admitted to bail, had misused the liberty.
It is the petitioner department’s own position that the respondent has deposited with the department a sum of Rs. 1 crore in cash on 11.12.2019 Rs. 2.5 crore in cash on 23.12.2019, and Rs. 0.50 crore in cash on 24.12.2019. That being said, the respondent has already deposited a sum of Rs. 4 crores with the department pursuant to the order granting bail, which is more than 10% of the disputed liability. The same has been recorded in the order passed by this Court on 18.12.2024.
This Court finds no reason to cancel the bail granted to the respondent - Petition dismissed.
Seeking release of freezed personal bank accounts of petitioner - contention of the petitioner is that the petitioner's personal account cannot be frozen when the liability is fixed on the club - HELD THAT:- This Court is inclined to allow the writ petition. The impugned order is quashed to the extent the liability is fixed on the petitioner. Consequently, the 2nd respondent bank is directed to lift the attachment of petitioner's personal account No. 612101502039.
Petition allowed.
Seeking release of freezed personal bank accounts of petitioner - contention of the petitioner is that the petitioner's personal account cannot be frozen when the liability is fixed on the club - HELD THAT:- This Court is inclined to allow the writ petition. The impugned order is quashed to the extent the liability is fixed on the petitioner. Consequently, the 2nd respondent bank is directed to lift the attachment of petitioner's personal account No. 612101502039.
Petition allowed.
Duplication of a pre-deposit imposed twice on the same entity - HELD THAT:- Considering the fact that there is duplication, the Petitioner is permitted to file two appeals challenging the orders dated 28th January 2025 and 1st February 2025, before the Appellate Authority under Section 107 of the Central Goods and Service Tax Act, 2017. However, insofar as the prescribed pre-deposit is concerned, the said amount shall be paid only in respect of the total amount as mentioned in the Order-in-Original dated 28th January, 2025 i.e. Rs. 81,41,737/- which is a sum of two amounts i.e. Rs. 64,31,703/- and Rs. 17,10,034/-. No pre-deposit would be required to be made in respect of the Order-in-Original dated 01st February, 2025.
Let the said appeals be filed by 15th July, 2025 with one pre-deposit amount in the above terms. The appeals shall not be dismissed on the ground of limitation or lack of pre-deposit and shall be adjudicated on merits.
Petition disposed off.
Duplication of a pre-deposit imposed twice on the same entity - HELD THAT:- Considering the fact that there is duplication, the Petitioner is permitted to file two appeals challenging the orders dated 28th January 2025 and 1st February 2025, before the Appellate Authority under Section 107 of the Central Goods and Service Tax Act, 2017. However, insofar as the prescribed pre-deposit is concerned, the said amount shall be paid only in respect of the total amount as mentioned in the Order-in-Original dated 28th January, 2025 i.e. Rs. 81,41,737/- which is a sum of two amounts i.e. Rs. 64,31,703/- and Rs. 17,10,034/-. No pre-deposit would be required to be made in respect of the Order-in-Original dated 01st February, 2025.
Let the said appeals be filed by 15th July, 2025 with one pre-deposit amount in the above terms. The appeals shall not be dismissed on the ground of limitation or lack of pre-deposit and shall be adjudicated on merits.
Petition disposed off.
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
Validity of Notifications No. 56/2023-Central Tax and No. 56/2023-State Tax under Section 168A of the GST Act
Relevant legal framework and precedents: Section 168A of the GST Act mandates that any extension of the time limit for adjudication of show cause notices must be made on the prior recommendation of the GST Council. The impugned notifications purportedly extend such deadlines.
Several High Courts have taken divergent views on the validity of these notifications. The Allahabad High Court upheld Notification No. 9/2023 (Central Tax), the Patna High Court upheld Notification No. 56/2023 (Central Tax), while the Guwahati High Court quashed Notification No. 56/2023 (Central Tax). The Telangana High Court expressed reservations regarding the validity of Notification No. 56/2023 (Central Tax), and this issue is currently pending before the Supreme Court in SLP No. 4240/2025.
Court's interpretation and reasoning: The Court acknowledged the conflicting judicial opinions and noted that the matter is sub judice before the Supreme Court. It recognized that the notifications were challenged on the ground that the proper procedure under Section 168A was not followed, specifically that the extension was granted without prior GST Council recommendation and ratification was given only after issuance.
Treatment of competing arguments: The Court refrained from expressing an opinion on the validity of the notifications, deferring to the Supreme Court's forthcoming decision. It noted the judicial discipline involved in not pre-empting the apex court's ruling.
Conclusions: The validity of the impugned notifications remains an open question, pending the Supreme Court's adjudication. The Court disposed of connected petitions with the condition that the outcome of the Supreme Court's decision would be binding.
Extension of Time Limits for Adjudication under Section 73 of the GST Act
Relevant legal framework: Section 73 of the GST Act deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized. The limitation period for adjudication under this section is subject to extension by notifications issued under Section 168A.
Key evidence and findings: The impugned notifications extended the limitation period for adjudication for the financial year 2019-2020. The Court noted the ongoing litigation on whether such extensions were validly granted.
Application of law to facts: The Court observed that the extension of limitation period is contingent on the validity of the impugned notifications, which is pending before the Supreme Court. Therefore, the Court refrained from deciding on the extension issue independently.
Conclusions: The question of whether the time limit for adjudication could be extended via these notifications remains undecided pending the apex court's ruling.
Procedural Fairness and Opportunity to be Heard in Adjudication Proceedings
Relevant legal framework: Principles of natural justice require that a party must be given a fair opportunity to respond to show cause notices and to be heard before adverse orders are passed.
Key evidence and findings: The petitioner had applied for cancellation of GST registration, which was effective from 29th June, 2023. Due to cancellation, the petitioner lost access to the GST portal, rendering it unable to file replies or attend personal hearings in response to the show cause notice dated 20th May, 2024. Consequently, the adjudicating authority passed the impugned order ex-parte on 24th August, 2024, demanding Rs. 27,37,619/- including tax, interest, and penalty.
Court's interpretation and reasoning: The Court held that the petitioner was deprived of a proper opportunity to defend itself due to lack of access to the GST portal. This denial of access violated the principles of natural justice.
Application of law to facts: The Court set aside the impugned order and directed the adjudicating authority to provide the petitioner an opportunity to file a reply and attend a personal hearing. It ordered that access to the GST portal be restored if not already provided, and that the petitioner's reply and submissions be duly considered before passing a fresh order.
Treatment of competing arguments: While the respondent authorities justified the demand and penalty, the Court emphasized the procedural lapse in denying access and opportunity to the petitioner, which outweighed other considerations at this stage.
Conclusions: The petitioner must be afforded a fair hearing, and the matter must be reconsidered on merits after allowing the petitioner to participate fully in the proceedings.
Relief and Interim Measures Pending Final Adjudication
Relevant legal framework: The Court has inherent powers under Articles 226 and 227 of the Constitution to grant interim relief and ensure fair procedure.
Court's reasoning: Given the pendency of the Supreme Court's decision on the validity of the notifications and the procedural lapses in the adjudication, the Court categorized the pending cases and proposed appropriate reliefs. It allowed petitioners to pursue appellate remedies and file replies without prejudice to the ultimate validity of the notifications.
Conclusions: Interim reliefs were granted to ensure that petitioners are not prejudiced by procedural defaults or unresolved legal questions. The Court's directions preserve all rights and remedies of the parties.
3. SIGNIFICANT HOLDINGS
"In view of the fact that the Petitioner was not able to access the GST Portal due to the cancellation of GST Registration, the Petitioner deserves to be provided with a proper opportunity to file a reply and attend a personal hearing. Accordingly, the impugned order is set aside and the matter is relegated to the Adjudicating Authority to be heard on merits."
"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."
"All the rights and remedies of the parties are left open. Access to the GST Portal, if not already available, shall be ensured to be provided to the Petitioner to enable filing of reply and access to the notices and related documents."
"The issue in respect of the validity of the impugned notifications is left open and the order of 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' and of this Court in W.P.(C) 9214/2024 titled 'Engineers India Limited v. Union of India & Ors'."
Core principles established include the necessity of adherence to procedural fairness in tax adjudication, the requirement of prior GST Council recommendation for extending limitation periods under Section 168A, and judicial restraint in adjudicating validity of notifications pending apex court decisions.
Final determinations are that the impugned order demanding tax and penalty is set aside for lack of opportunity to the petitioner, the petitioner is entitled to file replies and attend hearings, and the ultimate question of validity of the notifications remains reserved for the Supreme Court's decision.
Challenge to SCN and consequent order - vires of N/N. 56/2023-Central Tax dated 28th December, 2023 and N/N. 56/2023-State Tax dated 11th July, 2024 - Petitioner had no access to the GST Portal due to cancellation of the GST registration - no reply to the SCN could be filed - Violation of principles of natural justice - HELD THAT:- In view of the fact that the Petitioner was not able to access the GST Portal due to the cancellation of GST Registration, the Petitioner deserves to be provided with a proper opportunity to file a reply and attend a personal hearing. Accordingly, the impugned order is set aside and the matter is relegated to the Adjudicating Authority to be heard on merits.
Petition disposed off.
Challenge to SCN and consequent order - vires of N/N. 56/2023-Central Tax dated 28th December, 2023 and N/N. 56/2023-State Tax dated 11th July, 2024 - Petitioner had no access to the GST Portal due to cancellation of the GST registration - no reply to the SCN could be filed - Violation of principles of natural justice - HELD THAT:- In view of the fact that the Petitioner was not able to access the GST Portal due to the cancellation of GST Registration, the Petitioner deserves to be provided with a proper opportunity to file a reply and attend a personal hearing. Accordingly, the impugned order is set aside and the matter is relegated to the Adjudicating Authority to be heard on merits.
Petition disposed off.
Retrospective cancellation of GST Registration of the Petitioner - basis for the cancellation of the GST Registration of the Petitioner is a suspicious transaction with one M/s Vardhman Trading Company - HELD THAT:- Petitioner submits that the revocation application filed by the Petitioner be decided at the earliest. Ld. Counsel for the Respondent has no objection to this.
It is accordingly directed that the pending application for seeking revocation of the impugned order be decided within one month from the date of this order. The said decision shall be communicated to the Petitioner.
Petition disposed off.
Retrospective cancellation of GST Registration of the Petitioner - basis for the cancellation of the GST Registration of the Petitioner is a suspicious transaction with one M/s Vardhman Trading Company - HELD THAT:- Petitioner submits that the revocation application filed by the Petitioner be decided at the earliest. Ld. Counsel for the Respondent has no objection to this.
It is accordingly directed that the pending application for seeking revocation of the impugned order be decided within one month from the date of this order. The said decision shall be communicated to the Petitioner.
Petition disposed off.
The core legal questions considered by the Court are:
- Whether mango pulp is correctly classifiable under Entry No. 30A of Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, attracting GST at the concessional rate of 5% (2.5% CGST + 2.5% SGST), as contended by the petitioner.
- Whether the Circular No. 179/11/2022-GST dated 03.08.2022, particularly paragraph 4, which clarifies that mango pulp falls under a separate category attracting a higher GST rate of 12%, is ultra vires the CGST Act and the relevant Notifications.
- The validity and applicability of the GST Council's decisions and subsequent amendments to the GST rate notifications concerning classification and tax rates on mango pulp.
- Whether retrospective application of the higher GST rate on mango pulp from 01.07.2017 to 18.07.2022 is valid.
- Whether the petitioner is liable to pay GST at the rate of 12% or the reduced rate of 5% on mango pulp for the period prior to 18.07.2022.
- Whether the show cause notices issued by the revenue authorities for recovery of differential GST on mango pulp are sustainable.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of Mango Pulp under GST Notifications and Applicable Tax Rate
Relevant Legal Framework and Precedents:
The GST rate notifications issued under Sections 9 and 11 of the CGST Act prescribe tax rates based on the Harmonized System of Nomenclature (HSN) codes as notified by the World Customs Organization. Chapter 8 of HSN covers edible fruits including mangoes under heading 0804, which includes fresh and dried mangoes. Notifications No. 1/2017 and No. 2/2017 respectively list taxable and exempt goods, with fresh mangoes exempted and dried mangoes initially taxed at 12%. The GST Council's 22nd meeting reduced the rate on sliced and dried mangoes to 5%, reflected in Entry No. 30A. The 47th GST Council meeting clarified a third category of mango products, including mango pulp, attracting 12% GST under Entry No. 16.
Court's Interpretation and Reasoning:
The Court examined the HSN classification and the GST Council's decisions. It noted that the General Chapter Note of HSN 0804 includes fruits that may be pulped. However, the GST Council's 47th meeting explicitly recognized mango pulp as distinct from "mango sliced, dried" and confirmed it attracts GST at 12%. The Court held that the Notifications and Circulars reflect this classification and rate structure. The petitioner's contention that mango pulp falls under Entry 30A (5%) was found untenable in light of the Council's clarification.
Key Evidence and Findings:
The Court relied on the text of Notifications, the GST Council meeting minutes, and Circular No. 179/11/2022-GST. The Circular explicitly states mango pulp attracts 12% GST. The petitioner's prior practice of paying 5% GST was based on an earlier understanding, which was superseded by the Council's clarification.
Application of Law to Facts:
Applying the GST law and the Notifications, the Court concluded mango pulp is taxable at 12% GST from 01.07.2017, not at the concessional 5% rate applicable only to "mango sliced, dried".
Treatment of Competing Arguments:
The petitioner argued that only two categories of mangoes exist under HSN 0804 (fresh and dried) and that mango pulp is a form of sliced mango, hence taxable at 5%. The Court rejected this, emphasizing the GST Council's explicit clarification creating a third category. The respondent's position that mango pulp attracts 12% GST was upheld.
Conclusions:
Mango pulp is classifiable under the category attracting 12% GST under Entry No. 16 of Schedule II of Notification No. 1/2017-Central Tax (Rate) effective from 01.07.2017.
Issue 2: Validity of Circular No. 179/11/2022-GST and Retrospective Application of GST Rate
Relevant Legal Framework and Precedents:
Section 168 of the CGST Act empowers the CBIC to issue circulars for clarification. The GST Council's recommendations and Notifications govern tax rates. The Court referred to its earlier decision in Vimal Agro Product Pvt. Ltd. (2024) where similar issues were adjudicated.
Court's Interpretation and Reasoning:
The Court held that the Circular does not amend the rate but clarifies the GST Council's intent. The Circular's retrospective application aligns with the original Notification No. 1/2017, which was clarificatory in nature. The Court observed that Section 9 of the CGST Act does not permit amendment of rates by the CBIC, but clarifications consistent with Council's decisions are valid.
Key Evidence and Findings:
The Circular's paragraph 4 explicitly clarifies the classification and tax rates. The GST Council's 47th meeting minutes support the retrospective clarification. The petitioner's reliance on earlier communications without GST Council approval was insufficient.
Application of Law to Facts:
The Circular's retrospective clarification is valid and binding. The petitioner's challenge to paragraph 4 of the Circular as ultra vires and arbitrary was rejected.
Treatment of Competing Arguments:
The petitioner contended the Circular was arbitrary and violated Articles 14 and 19(1)(g) of the Constitution. The Court found no arbitrariness or violation, as the Circular merely reflects the GST Council's considered decision. The petitioner's claim of retrospective amendment was dismissed as the Circular is clarificatory, not amending.
Conclusions:
The Circular is valid, clarifies the GST rate at 12% on mango pulp retrospectively from 01.07.2017, and is not ultra vires the CGST Act.
Issue 3: Liability for GST Payment and Validity of Show Cause Notices
Relevant Legal Framework and Precedents:
Section 74 of the CGST Act empowers authorities to issue show cause notices for recovery of unpaid tax. The Court referenced the Vimal Agro decision, which addressed the tax liability on mango pulp.
Court's Interpretation and Reasoning:
The Court held that the petitioner is liable to pay GST at 12% on mango pulp from 01.07.2017 to 18.07.2022. The show cause notices issued for recovery of differential GST at 12% (instead of 5%) were justified. However, the Court quashed the notices to the extent they sought recovery beyond the 12% rate or for any other period.
Key Evidence and Findings:
The Court relied on the GST Council's clarifications, Notifications, and the Circular. The petitioner's payment of 5% GST was found to be underpayment. Exports assessed at 5% IGST were noted but did not affect domestic tax liability.
Application of Law to Facts:
The petitioner must pay GST at 12% on mango pulp for the relevant period. The show cause notices are sustainable but were quashed to the extent inconsistent with the Court's findings.
Treatment of Competing Arguments:
The petitioner sought to restrict tax liability to 5% or at most 6%. The respondents sought 12% or even 18%. The Court rejected both extremes, fixing liability at 12% as per the Notifications and Council's decisions.
Conclusions:
The petitioner is liable to pay GST at 12% on mango pulp from 01.07.2017 to 18.07.2022. Show cause notices are valid but limited to this rate and period.
3. SIGNIFICANT HOLDINGS
The Court's important legal reasoning includes the following verbatim extracts from the Vimal Agro decision, which the Court applied:
"[43] The petitioner is, therefore, liable to pay GST at the rate of 12% as per Entry no. 16 from 01.07.2017 and not 5% as per Entry No.30A, which provides for 'mangoes sliced, dried' only. The contention of the petitioners that there was an amendment to the rate Notification with effect from 18th July 2022 is not tenable. As such the Notification is only clarificatory and would apply with effect from 1st July 2017 as per Notification No.1/2017."
"[45] In view of the above discussion, as 'mango pulp' would fall under the third category of 'mangoes (other than mango sliced, dried)' would be liable to levy GST at the rate of 12% as per Entry No.16 which was amended so as to clarify the intention of council to continue to levy GST at 12% on 'mangoes (other than mango sliced, dried)' which would include 'mango pulp' from 1st July 2017."
Core principles established:
Final determinations on each issue:
Classification of mango pulp - classifiable under Entry No. 30A of Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, attracting GST at the concessional rate of 5% or not - validity of Circular No. 179/11/2022-GST dated 03.08.2022 - HELD THAT:- In Vimal Agro [2024 (5) TMI 266 - GUJARAT HIGH COURT], this Court has held that 'as “mango pulp” would fall under the third category of “mangoes (other than mango sliced, dried)” would be liable to levy at the rate of 12% as per Entry No. 16 which was amended so as to clarify the intention of council to continue to levy GST at 12% on “mangoes (other than mango sliced, dried)” which would include “mango pulp” from 1st July 2017.'
The controversy in the present petitions is identical to the issues which were decided in Vimal Agro and therefore the aforesaid decision in Vimal Agro will be squarely applicable to the present petitions. Accordingly, it is clarified that the petitioners would be liable to pay GST on the product “Mango pulp” at the rate of 12% from 1st July, 2017 and not at the rate of 5% (as claimed by the petitioners) or 18% (as claimed by the Respondents) for the period 01.07.2017 to 18.07.2022.
Conclusion - i) Mango pulp is taxable at 12% GST from 01.07.2017. ii) The impugned Circular No. 179/11/2022-GST is valid and not ultra vires. iii) The petitioner's challenge to the Circular and classification is rejected. iv) The petitioner is liable to pay GST at 12% for mango pulp for the period 01.07.2017 to 18.07.2022. v) The show cause notices issued for recovery of differential GST are valid but limited to the 12% rate and relevant period.
Petition allowed in part.
Classification of mango pulp - classifiable under Entry No. 30A of Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017, attracting GST at the concessional rate of 5% or not - validity of Circular No. 179/11/2022-GST dated 03.08.2022 - HELD THAT:- In Vimal Agro [2024 (5) TMI 266 - GUJARAT HIGH COURT], this Court has held that 'as “mango pulp” would fall under the third category of “mangoes (other than mango sliced, dried)” would be liable to levy at the rate of 12% as per Entry No. 16 which was amended so as to clarify the intention of council to continue to levy GST at 12% on “mangoes (other than mango sliced, dried)” which would include “mango pulp” from 1st July 2017.'
The controversy in the present petitions is identical to the issues which were decided in Vimal Agro and therefore the aforesaid decision in Vimal Agro will be squarely applicable to the present petitions. Accordingly, it is clarified that the petitioners would be liable to pay GST on the product “Mango pulp” at the rate of 12% from 1st July, 2017 and not at the rate of 5% (as claimed by the petitioners) or 18% (as claimed by the Respondents) for the period 01.07.2017 to 18.07.2022.
Conclusion - i) Mango pulp is taxable at 12% GST from 01.07.2017. ii) The impugned Circular No. 179/11/2022-GST is valid and not ultra vires. iii) The petitioner's challenge to the Circular and classification is rejected. iv) The petitioner is liable to pay GST at 12% for mango pulp for the period 01.07.2017 to 18.07.2022. v) The show cause notices issued for recovery of differential GST are valid but limited to the 12% rate and relevant period.
Petition allowed in part.
The core legal questions considered by the Court are:
- Whether the Revenue Authority's insistence on conducting a personal hearing prior to the submission of the reply by the petitioner complies with the procedural scheme laid down under the relevant GST provisions, particularly Sections 73, 74, and 75 of the GST Act.
- Whether the petitioner was entitled to seek and be granted an adjournment of the personal hearing date to a time after submission of the reply, and whether the Revenue Authority's refusal or failure to grant such adjournment was justified.
- Whether the assessment order confirming the demand of Rs. 71,57,938/- with interest for the difference in declared outward supplies and E-way bills value was valid, given the procedural irregularities in conducting the personal hearing.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Legality of Conducting Personal Hearing Before Submission of Reply
Relevant Legal Framework and Precedents: The Court examined Sections 73, 74, and 75 of the GST Act, focusing particularly on Section 75 which governs the procedure for assessment where tax has escaped assessment. Sub-sections (4) and (5) of Section 75 explicitly provide for the grant of opportunity of hearing upon written request and the power of the proper officer to grant adjournments if sufficient cause is shown.
Established legal principles mandate that statutory procedures must be strictly followed ("If the statute stipulates a matter to be performed in a particular manner, the same shall be performed in that manner only"), a position supported by a series of authoritative judgments of the Apex Court.
Court's Interpretation and Reasoning: The Court held that fixing a date for personal hearing before the expiry of the last date for submission of the reply is procedurally flawed and contrary to the statutory scheme. The hearing is intended to be an opportunity to discuss the reply and submissions made by the assessee; thus, conducting it prior to receiving the reply defeats the purpose.
Key Evidence and Findings: The petitioner's request for adjournment was premised on the need to collate information for the relevant financial year 2020-2021 before submitting a comprehensive reply. The Revenue Authority's insistence on an earlier hearing date was found to be unreasonable and not supported by any justifiable reasons.
Application of Law to Facts: Given the statutory mandate under Section 75(4) and (5), the petitioner's right to submit a reply and seek adjournment before the personal hearing was to be respected. The Revenue Authority's approach was inconsistent with the procedural safeguards envisaged under the GST Act.
Treatment of Competing Arguments: While the Revenue Authority may have sought to expedite proceedings, the Court emphasized that procedural fairness and adherence to statutory provisions cannot be sacrificed for expediency. No valid justification was provided for denying the adjournment or for scheduling the hearing prematurely.
Conclusion: The Court concluded that the Revenue Authority's approach was "akin to putting the cart before the horse" and was "contrary to the scheme of the Act."
Issue 2: Validity of the Assessment Order Confirming Demand
Relevant Legal Framework: The assessment under GST for tax escaped is governed by the provisions of Sections 73 and 74, with procedural safeguards under Section 75. The assessment order must be passed following due procedure, including proper opportunity of hearing and consideration of the reply of the assessee.
Court's Interpretation and Reasoning: Since the personal hearing was conducted in breach of the procedural scheme, the subsequent assessment order confirming the demand was vitiated. The absence of a proper hearing after receipt of the reply undermines the validity of the order.
Key Evidence and Findings: The assessment order dated 28.11.2024 confirming the demand of Rs. 71,57,938/- was based on the alleged difference in declared outward supplies and E-way bills value. However, the procedural irregularity in conducting the hearing prior to the reply was a critical defect.
Application of Law to Facts: The Court applied the principle that non-compliance with mandatory procedural requirements renders the assessment order liable to be set aside.
Treatment of Competing Arguments: The Revenue Authority's interest in timely assessment was acknowledged but held subordinate to the requirement of procedural fairness. No substantive justification was offered for the procedural breach.
Conclusion: The Court set aside the assessment order and remitted the matter back to the competent authority to proceed afresh from the stage of issuance of the show-cause notice dated 28.11.2024.
3. SIGNIFICANT HOLDINGS
- "The approach of the Authorities on insistence of having a personal hearing prior to submitting a reply is contrary to the scheme of the Act."
- "If the statute stipulates a matter to be performed in a particular manner, the same shall be performed in that manner only."
- The Court emphasized the procedural provisions of Section 75(4) and (5):
"75. (4) An opportunity of hearing shall be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person.
(5) The proper officer shall, if sufficient cause is shown by the person chargeable with tax, grant time to the said person and adjourn the hearing for reasons to be recorded in writing:
Provided that no such adjournment shall be granted for more than three times to a person during the proceedings."
- The assessment order confirming the demand without adhering to the procedural safeguards was set aside.
- The matter was remitted back to the Revenue Authority to proceed from the stage of the show-cause notice dated 28.11.2024, ensuring compliance with statutory procedure including proper opportunity to submit reply and personal hearing thereafter.
Seeking the details and explanation pertaining to the difference in the value of outward supplies declared in GSTR 1 and value of the E–way Bills raised in the financial year 2020-2021 - HELD THAT:- The scheme of Section 73, 74 and 75 enables the assessee to seek for adjournment not in excess of three times and it is pertinent to note that sub-section 5 succeeds sub-section 4, which enables the assessee to seek for a personal hearing. Section 75 relates to the procedural aspect that is required to be followed by the Authorities in the matter of determination of assessment, more particularly, of tax that has escaped assessment - If the statute stipulates a matter to be performed in a particular manner, the same shall be performed in that manner only. Law in this regard is no more res integra and is well-settled by catena of judgments of the Apex Court.
Conclusion - In the case on hand, the order does not disclose any justifiable reasons for rejecting the application for request for adjournment and that apart, the approach itself appears to be incorrect and contrary to the scheme of Section 75, more particularly, sub-section 4 and 5 of Section 75.
In that view of the matter, the order of assessment is set-aside. The matter is remitted back to the competent authority to proceed from the stage of the 28.11.2024 notice - petition disposed off by way of remand.
Seeking the details and explanation pertaining to the difference in the value of outward supplies declared in GSTR 1 and value of the E–way Bills raised in the financial year 2020-2021 - HELD THAT:- The scheme of Section 73, 74 and 75 enables the assessee to seek for adjournment not in excess of three times and it is pertinent to note that sub-section 5 succeeds sub-section 4, which enables the assessee to seek for a personal hearing. Section 75 relates to the procedural aspect that is required to be followed by the Authorities in the matter of determination of assessment, more particularly, of tax that has escaped assessment - If the statute stipulates a matter to be performed in a particular manner, the same shall be performed in that manner only. Law in this regard is no more res integra and is well-settled by catena of judgments of the Apex Court.
Conclusion - In the case on hand, the order does not disclose any justifiable reasons for rejecting the application for request for adjournment and that apart, the approach itself appears to be incorrect and contrary to the scheme of Section 75, more particularly, sub-section 4 and 5 of Section 75.
In that view of the matter, the order of assessment is set-aside. The matter is remitted back to the competent authority to proceed from the stage of the 28.11.2024 notice - petition disposed off by way of remand.
The core legal questions considered by the Authority for Advance Ruling (AAR) relate to the classification and exemption of Goods and Services Tax (GST) on various services provided by the applicant, Venkateshwara Hatcheries Pvt. Ltd. (VHPL), under agreements with Venkateshwara Research and Breeding Farm Ltd. (VRBFL) and Venco Research and Breeding Farm Ltd. (Venco). The specific issues are:
Issue-wise Detailed Analysis
Issue 1: Classification of Commission under Selling Arrangement under SAC 9986
Legal Framework and Precedents: SAC 9986 covers support services to agriculture, including animal husbandry services (998612) and other support services (998619). The exemption under entry 54 of Notification No. 12/2017-Central Tax (Rate) applies to services by commission agents for sale or purchase of agricultural produce. The term "agriculture" includes rearing of all life forms of animals except horses, and "agricultural produce" is defined to include products out of cultivation and rearing of animals, without further processing altering essential characteristics.
The Income Tax Act and Rent Agriculture Act definitions support poultry as part of agriculture. Past rulings (e.g., Madras High Court in Commissioner of Income Tax v. K.E. Sundara Mudaliar) include poultry under animal husbandry. The applicant also referred to an advance ruling from Tamil Nadu AAR on commission agents for turmeric classified under SAC 9986.
Court's Interpretation and Reasoning: The AAR examined the nature of services rendered by VHPL, which include marketing, promotion, customer acquisition, order procurement, invoicing, payment collection, and post-sale services on behalf of VRBFL and Venco. The applicant claimed VHPL acts as a commission agent for sale of birds (poultry), which they argued are agricultural produce.
The AAR noted that while the applicant's services resemble those of a commission agent, the chicks sold are not agricultural produce per se but livestock sold for breeding purposes. The chicks are sold to poultry farmers who rear them further for food production. Hence, the chicks are livestock rather than agricultural produce in the context of the exemption.
The definition of "agent" under Section 2(5) of CGST Act includes commission agents. However, the AAR concluded that the services relate to wholesale trade of livestock rather than support services to agriculture or sale of agricultural produce.
Key Evidence and Findings: Agreements between VHPL and VRBFL/Venco, invoices, service descriptions, and statutory definitions were considered. The applicant's long-standing role as commission agent was acknowledged, but the nature of the goods (livestock) was determinative.
Application of Law to Facts: Since the chicks are livestock sold for breeding, not agricultural produce, the commission services are classified under wholesale trade (SAC 996111) rather than agricultural support services (SAC 9986).
Treatment of Competing Arguments: The applicant's argument on poultry as agricultural produce was weighed against the statutory definition and the commercial reality of the transaction. The AAR favored the latter.
Conclusion: Commission charged under the selling arrangement should not be classified under SAC 9986.
Issue 2: Exemption of Commission @10% under Entry 54 of Notification No. 12/2017-Central Tax (Rate)
Legal Framework: Entry 54 exempts services by commission agents in relation to sale or purchase of agricultural produce under SAC 9986.
Reasoning: Since the commission services do not qualify under SAC 9986 as established above, the exemption under entry 54 does not apply.
Conclusion: Commission @10% received by VHPL is not exempt from GST under entry 54.
Issue 3: Exemption of Veterinary Services @3% under Entry 46 of Notification No. 12/2017-Central Tax (Rate)
Legal Framework: Entry 46 exempts services by a veterinary clinic in relation to healthcare of animals or birds under SAC 99835.
Reasoning: VHPL's veterinary doctors provide clinical, diagnostic, preventive, and advisory services including vaccination recommendations, disease diagnosis, post-mortem examinations, and nutritional advice. The doctors are specialized and employed by VHPL, and veterinary services are rendered at multiple locations including farms and hatcheries.
The AAR interpreted "veterinary clinic" in its ordinary meaning as a healthcare establishment providing professional veterinary services. VHPL's services fit within this definition.
Key Evidence: Veterinary doctors' qualifications, services rendered, and invoices were considered.
Application of Law: The services are directly related to healthcare of birds and animals and fall under SAC 99835.
Competing Arguments: None significant against exemption.
Conclusion: Veterinary services provided by VHPL are exempt from GST under entry 46.
Issue 4: Classification of Laboratory Testing and Analysis Services under SAC 9986
Legal Framework: SAC 998346 covers technical testing and analysis services, including microbiology, biochemistry, and bacteriology testing. SAC 9986 covers support services to agriculture including animal husbandry.
Reasoning: VHPL provides laboratory services including post-mortem examinations, histopathology, bacterial and virus isolation, serological tests, feed and water analysis. These are scientific and technical testing services.
The AAR found these services are technical laboratory services rather than agricultural extension services or support services to agriculture.
Conclusion: Laboratory testing and analysis services should be classified under SAC 998346, not under SAC 9986.
Issue 5: Exemption of Laboratory Testing and Analysis Services @7% under Entry 54 as Agricultural Extension Services
Legal Framework: Entry 54 exempts agricultural extension services defined as application of scientific research and knowledge to agricultural practices through farmer education or training.
Reasoning: VHPL's laboratory services are scientific testing services and do not constitute farmer education or training. They do not fall within the definition of agricultural extension services.
Further, the exemption under entry 54 applies only to services classified under SAC 9986, whereas these services fall under SAC 998346.
Conclusion: Laboratory testing and analysis services are not exempt under entry 54 as agricultural extension services.
Significant Holdings
1. "The chicks in this case would not fall under the definition of an agricultural produce as it is not a produce out of rearing of livestock for the purpose of food, fibre, fuel, raw material or other similar product but are reared for sale to other poultry farmers, who will do the further rearing of these chicks for the purpose of food etc."
2. "The services provided by the applicant in the form of services of selling and incidental services are akin to services provided by a commission agent... Such services are not for sale of any agricultural produce but in fact such services are for sale of livestock themselves for the purpose of breeding."
3. "The veterinary services provided by the applicant such as guidance for preventive medication, suggesting line of treatment recommending feed formulations etc., fall within the ambit of veterinary services provided to livestock... Such services are therefore covered under the exemption provided by a veterinary clinic to livestock."
4. "The services provided by the applicant are more akin to technical testing and analysis services provided by them from their laboratory. Therefore, the said services are appropriately classifiable under heading 998346... the benefit of exemption under S.No.54 of the Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017, which is available only to services classified under Heading 9986 would not be available to the applicant."
5. Final determinations on each issue:
Exemption from GST as per Entry 54 (g) of the exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 - Commission received under “Selling arrangement” clause - services rendered by clinic in relation to health care services under the Entry No. 46 of the exemption Notification No. 12 of 2017 Central Tax (Rate) dated 28th June 2017 - Veterinary Services - Entry 54(a) of the exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 - Laboratory testing and analysis services.
Commission charged by VHPL under the selling arrangement for promoting, marketing, and selling birds of VRBFL and Venco should be classified under Service Accounting Code (SAC) 9986 (Support services to agriculture, hunting, forestry, fishing, mining and utilities) or not - HELD THAT:- The applicant is providing services of marketing and selling of chicks, carrying out sales promotion, identification of new customers, etc., in addition to procurement of orders, preparation of invoices, collecting advances, collecting payment and other incidental activities. It is relevant to understand that the applicant is acting as a commission agent for Venkateshwara Research and Breeding Farm Ltd. They are basically engaged in sale of ‘chicks’ which are sold to other poultry farmers who breed these chicks into hens or roosters. These hens and roosters are then sold by these poultry farm owners for food, meat, eggs etc. It is seen from the applicant’s submission that the existing broiler breeders who are engaged in commercial day-old chick gets pitched by the applicant for backward integration, i.e. purchasing parent hicks of new breed from group companies and then producing day old commercial chicks at their own farms. It includes factoring and analyzing the size of business of target customers, the customer’s hatchery farms, background checks etc., for acquiring and pitching these prospective clients. Heading 9986 under Notification 11/2017-Central Tax (Rate) dated 28.6.2017 covers support services to Agriculture, which includes animal husbandry.
The services provided by the applicant in the instant case is not sale or support services for any agricultural produce but a sale in the general wholesale trade. Therefore, the said services are appropriately classifiable under Heading 996111 - the provisions of Sl.no.54 of Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017 would not be applicable to the said services provided by the applicant.
Veterinary services provided by the applicant - HELD THAT:- The said services would be appropriately classified under Heading 998352 of the Tariff. The explanatory notes also provide that the said services includes animal and veterinary hospital and non-hospital medical, surgical and dental services delivered to livestock. The services are aimed at curing, restoring and/or maintaining the health of the animal; hospital, laboratory and technical services for livestock; provision of dietary recommendations for livestock -The word Clinic has not been defined under the CGST Act, 2017. However, as per general parlance, a clinic is a health care center or establishment or hospital department where outpatients are given medical treatment or advice, especially of a specialist nature. It is seen from the details provided by the applicant that, they employ specialized veterinary doctors at various locations to provide services to their clients. Such services includes diagnostic, preventive healthcare and nutrition advice to the live stock. Such services are therefore covered under the exemption provided by a veterinary clinic to livestock. Therefore, the applicant is entitled to avail the benefit of Sr.No.46 of the Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017.
Laboratory analysis and testing services - HELD THAT:- The services provided by the applicant are more akin to technical testing and analysis services provided by them from their laboratory. Therefore, the said services are appropriately classifiable under heading 998346. Since the services are appropriately classifiable under Heading 998346, the benefit of exemption under S.No.54 of the Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017, which is available only to services classified under Heading 9986 would not be available to the applicant.
Conclusion - i) Commission charged by VHPL under the selling arrangement for promoting, marketing and selling of birds of VRBF and Venco not to be classified under Service Accounting Code 9986. ii) Commission @ 10% of the sale value of birds of VRBFL and Venco received by VHPL under the Selling arrangement for promoting, marketing and selling of birds and handling the sale administration not exempt as per entry number 54 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017. iii) Charges received @3% of the sale value of birds of VRBFL and Venco for the Veterinary services provided by VHPL (SAC 99835) would be exempt from levy of GST as per entry number 46 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017 as Veterinary service. iv) Laboratory testing and analysis undertaken by VHPL to carry out various laboratory analysis and tests in respect of the birds including feed, water etc. in relation to the brooding, growing and laying of birds, not classified under Service Accounting Code 9986. but classified under SAC 998346. v) Charges received @ 7% of the sale value of birds of VRBFL and Venco for the Laboratory testing and analysis services provided by VHPL not exempt from levy of GST as per entry number 54 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017 as agricultural extension services.
Exemption from GST as per Entry 54 (g) of the exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 - Commission received under “Selling arrangement” clause - services rendered by clinic in relation to health care services under the Entry No. 46 of the exemption Notification No. 12 of 2017 Central Tax (Rate) dated 28th June 2017 - Veterinary Services - Entry 54(a) of the exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 - Laboratory testing and analysis services.
Commission charged by VHPL under the selling arrangement for promoting, marketing, and selling birds of VRBFL and Venco should be classified under Service Accounting Code (SAC) 9986 (Support services to agriculture, hunting, forestry, fishing, mining and utilities) or not - HELD THAT:- The applicant is providing services of marketing and selling of chicks, carrying out sales promotion, identification of new customers, etc., in addition to procurement of orders, preparation of invoices, collecting advances, collecting payment and other incidental activities. It is relevant to understand that the applicant is acting as a commission agent for Venkateshwara Research and Breeding Farm Ltd. They are basically engaged in sale of ‘chicks’ which are sold to other poultry farmers who breed these chicks into hens or roosters. These hens and roosters are then sold by these poultry farm owners for food, meat, eggs etc. It is seen from the applicant’s submission that the existing broiler breeders who are engaged in commercial day-old chick gets pitched by the applicant for backward integration, i.e. purchasing parent hicks of new breed from group companies and then producing day old commercial chicks at their own farms. It includes factoring and analyzing the size of business of target customers, the customer’s hatchery farms, background checks etc., for acquiring and pitching these prospective clients. Heading 9986 under Notification 11/2017-Central Tax (Rate) dated 28.6.2017 covers support services to Agriculture, which includes animal husbandry.
The services provided by the applicant in the instant case is not sale or support services for any agricultural produce but a sale in the general wholesale trade. Therefore, the said services are appropriately classifiable under Heading 996111 - the provisions of Sl.no.54 of Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017 would not be applicable to the said services provided by the applicant.
Veterinary services provided by the applicant - HELD THAT:- The said services would be appropriately classified under Heading 998352 of the Tariff. The explanatory notes also provide that the said services includes animal and veterinary hospital and non-hospital medical, surgical and dental services delivered to livestock. The services are aimed at curing, restoring and/or maintaining the health of the animal; hospital, laboratory and technical services for livestock; provision of dietary recommendations for livestock -The word Clinic has not been defined under the CGST Act, 2017. However, as per general parlance, a clinic is a health care center or establishment or hospital department where outpatients are given medical treatment or advice, especially of a specialist nature. It is seen from the details provided by the applicant that, they employ specialized veterinary doctors at various locations to provide services to their clients. Such services includes diagnostic, preventive healthcare and nutrition advice to the live stock. Such services are therefore covered under the exemption provided by a veterinary clinic to livestock. Therefore, the applicant is entitled to avail the benefit of Sr.No.46 of the Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017.
Laboratory analysis and testing services - HELD THAT:- The services provided by the applicant are more akin to technical testing and analysis services provided by them from their laboratory. Therefore, the said services are appropriately classifiable under heading 998346. Since the services are appropriately classifiable under Heading 998346, the benefit of exemption under S.No.54 of the Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017, which is available only to services classified under Heading 9986 would not be available to the applicant.
Conclusion - i) Commission charged by VHPL under the selling arrangement for promoting, marketing and selling of birds of VRBF and Venco not to be classified under Service Accounting Code 9986. ii) Commission @ 10% of the sale value of birds of VRBFL and Venco received by VHPL under the Selling arrangement for promoting, marketing and selling of birds and handling the sale administration not exempt as per entry number 54 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017. iii) Charges received @3% of the sale value of birds of VRBFL and Venco for the Veterinary services provided by VHPL (SAC 99835) would be exempt from levy of GST as per entry number 46 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017 as Veterinary service. iv) Laboratory testing and analysis undertaken by VHPL to carry out various laboratory analysis and tests in respect of the birds including feed, water etc. in relation to the brooding, growing and laying of birds, not classified under Service Accounting Code 9986. but classified under SAC 998346. v) Charges received @ 7% of the sale value of birds of VRBFL and Venco for the Laboratory testing and analysis services provided by VHPL not exempt from levy of GST as per entry number 54 of notification number 12/2017-Central Tax (Rate) dated 28 June 2017 as agricultural extension services.
Issue-wise Detailed Analysis:
Issue 1: Validity and Limitation of Notice under Section 148 for AY 2014-2015
The legal framework governing the issuance of notices for reassessment or assessment following a search is primarily Sections 148, 149, and 153A of the Income Tax Act, 1961. Section 148 empowers the Assessing Officer to issue a notice for reassessment if there is reason to believe that income has escaped assessment. Section 153A mandates assessment or reassessment of all relevant assessment years when a search is conducted under Section 132.
Section 153A(1)(b) provides that the Assessing Officer can issue notices for assessment or reassessment for each assessment year falling within six assessment years preceding the assessment year relevant to the previous year in which the search is conducted. Explanation 1 to Section 153A defines "relevant assessment years" to include those preceding the six-year period but not exceeding ten years, subject to certain conditions.
The Finance Act, 2021, amended Section 149, which prescribes the limitation period for issuance of notices under Section 148. The first proviso to Section 149 restricts issuance of notices beyond the limitation period as it stood before the amendment for assessment years beginning on or before 1st April 2021.
The petitioner contended that the notice issued for AY 2014-2015 is barred by limitation because the extended timelines under Section 149 cannot be applied retrospectively to assessment years prior to 1st April 2021. Therefore, the Assessing Officer could only validly issue a notice under Section 148 for AY 2015-2016 and not for AY 2014-2015.
The Court acknowledged this contention as raising a jurisdictional issue concerning limitation and the applicability of the amended Section 149. The petitioner argued that the issuance of the notice for AY 2014-2015 was a colourable exercise of power and without jurisdiction.
Issue 2: Interpretation of Sections 153A and 149 in Context of Search and Limitation
The Court examined the interplay between Sections 153A and 149. Section 153A allows reassessment for multiple years following a search, but the limitation period under Section 149 governs the time within which notices can be issued. The first proviso to Section 149, introduced by the Finance Act, 2021, restricts the retrospective application of extended limitation periods for assessment years beginning on or before 1st April 2021.
The petitioner's argument highlighted that the notice under Section 148 for AY 2014-2015 was issued beyond the permissible limitation period as per the pre-amendment provisions, and thus the extended limitation period under the amended Section 149 could not be invoked. This raised the question of whether the Assessing Officer's jurisdiction was validly exercised.
The Court noted that this issue was substantial and required detailed consideration, particularly because it involved the interpretation of statutory provisions and their temporal applicability.
Issue 3: Jurisdictional Competence and Colourable Exercise of Power
The petitioner contended that issuing the notice under Section 148 for AY 2014-2015 was a colourable exercise of power, implying that the Assessing Officer acted beyond the scope of lawful authority. This was premised on the contention that the notice was barred by limitation and thus invalid.
The Court recognized that limitation is a jurisdictional bar and that issuing a notice beyond the limitation period would render the action without jurisdiction. The Court found that the petitioner had made out a prima facie case on this jurisdictional issue.
The respondent sought time to file an affidavit-in-opposition to address these contentions.
Application of Law to Facts and Treatment of Competing Arguments
The Court considered the petitioner's submission that the notice dated 27th March 2025 for AY 2014-2015 was issued beyond the limitation period prescribed by the pre-amendment Section 149 and was therefore without jurisdiction. The petitioner relied on the statutory language of the first proviso to Section 149 and the explanation to Section 153A to support this position.
The respondent did not advance substantive counterarguments at the stage of the order but sought time to respond. The Court, therefore, directed the filing of affidavits and replies to enable a full hearing of the issues.
Given the prima facie case and the serious jurisdictional question raised, the Court stayed the operation of the notice under Section 148 for AY 2014-2015 until disposal of the writ petition or further orders.
Conclusions:
The Court found that the issuance of the notice under Section 148 for AY 2014-2015 raised a substantial jurisdictional issue concerning limitation and the applicability of the amended Section 149. The petitioner's contention that the notice was issued beyond the permissible time and hence was a colourable exercise of power was prima facie plausible.
The Court granted liberty to the respondent to file an affidavit-in-opposition and stayed the notice pending final disposal, thereby preserving the petitioner's rights pending adjudication of the substantive issues.
Significant Holdings:
"Having regard to the prima facie case made out and the jurisdictional issue raised by the petitioner, inter alia, including the issue of limitation, I am inclined
Jurisdiction of the Assessing Officer to issue a notice under Section 148 on the basis of a search conducted u/s 132 - period of limitation - colourable exercise of power - terms of the provisions contained in Section 153A(1)(b) - HELD THAT:- Writ petition should be heard.
Let affidavit-in-opposition to the present writ petition be filed within a period of six weeks from date. Reply thereto, if any be filed within four weeks thereafter.
Considering the prima facie case made out and the jurisdictional issue raised by the petitioner, inter alia, including the issue of limitation, we are inclined to stay the aforesaid notice issued under Section 148 of the said Act dated 27th March, 2025 for the assessment year 2014-2015 till the disposal of the writ petition or until further order, whichever is earlier.
Jurisdiction of the Assessing Officer to issue a notice under Section 148 on the basis of a search conducted u/s 132 - period of limitation - colourable exercise of power - terms of the provisions contained in Section 153A(1)(b) - HELD THAT:- Writ petition should be heard.
Let affidavit-in-opposition to the present writ petition be filed within a period of six weeks from date. Reply thereto, if any be filed within four weeks thereafter.
Considering the prima facie case made out and the jurisdictional issue raised by the petitioner, inter alia, including the issue of limitation, we are inclined to stay the aforesaid notice issued under Section 148 of the said Act dated 27th March, 2025 for the assessment year 2014-2015 till the disposal of the writ petition or until further order, whichever is earlier.
The core legal questions considered by the Court were:
(a) Whether the Commissioner of Income Tax (Appeals) erred in holding that the assessee Trust was not engaged in business activity under Section 2(15) of the Income Tax Act, 1961 (IT Act);
(b) Whether the provisions of Section 13(2) of the IT Act were applicable despite the trustees being beneficiaries of the Trust;
(c) Whether the exemption under Section 11 of the IT Act was rightly allowed to the assessee Trust despite the receipt of substantial transfer fees and the trustees being elected members who owned houses.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a): Whether the assessee Trust was engaged in business activity under Section 2(15) of the IT Act
The legal framework under Section 2(15) defines "business" and excludes certain activities from being treated as business, particularly in the context of charitable trusts. The proviso to Section 2(15) excludes transactions between members of a mutual association from being treated as business.
The Assessing Officer (AO) contended that the Trust was engaged in commercial activity by constructing houses and selling them to members, collecting transfer fees, and thus carrying on business. The AO relied on the facts that the Trust collected Rs. 1.15 crores as transfer fees during the relevant assessment year and had collected Rs. 6.35 crores till date, indicating commercial dealings.
The CIT(A) examined the factual matrix and found no sale of houses by the Trust to members. Instead, the CIT(A) concluded that membership transfers were governed by the Trust Deed and eligibility criteria, and the Trust was not a party to any sale or purchase transaction between members. The CIT(A) held that the proviso to Section 2(15) applied, excluding such inter se transactions from business activity.
The ITAT upheld the CIT(A)'s findings, agreeing that the Trust's activities did not amount to business under Section 2(15). The Court noted that these findings were factually based and supported by the documentary evidence, including the Trust Deed and financial records.
Competing arguments from the Revenue that the collection of transfer fees and the nature of the transactions amounted to business were rejected on the basis that the Trust did not itself engage in sales, and the transfer fees were between members, not a commercial consideration paid to the Trust.
Conclusion: The Court concurred with the ITAT that the Trust was not engaged in business activity under Section 2(15), as the transactions were inter se members and not commercial sales by the Trust.
Issue (b): Applicability of Section 13(2) when trustees were beneficiaries
Section 13(2) of the IT Act prohibits exemption to trusts where any part of income or property is used for the benefit of trustees or their relatives, which would amount to violation of charitable status.
The AO found that since trustees were elected members and owners of houses, the Trust's activities violated Section 13(2). This was premised on the assumption that the trustees benefitted from the Trust's income or property.
The CIT(A) rejected this contention, emphasizing that trustees being members and owners did not ipso facto mean that the Trust's income or property was applied for their individual benefit contrary to the provisions. The Trust's objects and Deed governed membership and benefits, and the trustees did not derive any undue advantage from the Trust's income.
The ITAT agreed with the CIT(A), holding that mere trusteeship combined with membership and ownership did not attract Section 13(2) violation, especially where the Trust's activities were charitable and not commercial.
The Court found that the Revenue's argument failed to establish any misuse of income or property to the trustees' benefit in contravention of Section 13(2).
Conclusion: The Court upheld the finding that Section 13(2) was not applicable, as trustees' status as members and owners did not constitute prohibited benefit from the Trust's income or property.
Issue (c): Allowance of exemption under Section 11 despite receipt of transfer fees and trustees being elected members
Section 11 of the IT Act provides exemption to income of trusts applied for charitable purposes. The AO denied exemption based on the Trust's receipt of Rs. 1.15 crores as transfer fees and the trustees' ownership status.
The CIT(A) and ITAT found that the transfer fees were paid inter se members and not to the Trust as commercial consideration. The Trust's income was applied for charitable purposes consistent with its objects. The trustees' ownership did not amount to personal benefit from the Trust's income.
The Court emphasized that the exemption under Section 11 depends on the nature of the Trust's activities and application of income, not merely on the receipt of transfer fees or trustees' membership. Since the Trust was not engaged in business and did not violate Section 13(2), exemption was rightly allowed.
The Revenue's contention that the transfer fees represented commercial income was rejected as the Trust was not a party to such transactions and did not profit commercially from them.
Conclusion: The Court affirmed the allowance of exemption under Section 11, holding that the Trust's income was applied for charitable purposes and the transfer fees did not constitute commercial income of the Trust.
3. SIGNIFICANT HOLDINGS
The Court held that:
"The ITAT is the last fact finding authority which has come to the conclusion that the Assessee Trust is not carrying on any commercial activity and, therefore, is entitled to the exemption under Section 11 of the IT Act."
"The findings of the ITAT are purely based on the facts of the case, which facts were also analyzed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust."
"We find that the decision of the ITAT does not give rise to any Substantial Question of Law, much less, the Questions of Law as projected by the Revenue."
The Court established the core principle that factual findings by the ITAT on the nature of the Trust's activities, membership transactions, and application of income for charitable purposes are binding unless there is a substantial question of law.
It was determined that inter se transactions between members governed by the Trust Deed do not constitute business under Section 2(15), and trustees being beneficiaries does not automatically attract Section 13(2) violation.
The final determination was to dismiss the Revenue's appeal, affirming the CIT(A) and ITAT's orders allowing exemption under Section 11 and rejecting the application of Sections 2(15) proviso and 13(2) in the facts of the case.
Exemption u/s 11 - Charitable activity or business activity - whether CIT(A) Mumbai erred in accepting that assessee is not involved in business activity as per the provisions of Section 2(15)? -CIT(A) also found that admittedly the Assessee Trust is not a party to any transaction between two inter se members and, therefore, the proviso to Section 2(15) of the IT Act was also not attracted - ITAT confirmed CIT(A) order - HELD THAT:- We find that the entire case has been decided purely on facts. The ITAT is the last fact finding authority which has came to the conclusion that the Assessee Trust is not carrying on any commercial activity and, therefore, is entitled to the exemption under Section 11. This finding of the ITAT is purely based on the facts of the case, and which facts were also analyzed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust.
In these circumstances, and finding that the decision of the ITAT is purely based on facts, we are of the opinion that the Order of the ITAT does not give rise to any Substantial Question of Law.
Exemption u/s 11 - Charitable activity or business activity - whether CIT(A) Mumbai erred in accepting that assessee is not involved in business activity as per the provisions of Section 2(15)? -CIT(A) also found that admittedly the Assessee Trust is not a party to any transaction between two inter se members and, therefore, the proviso to Section 2(15) of the IT Act was also not attracted - ITAT confirmed CIT(A) order - HELD THAT:- We find that the entire case has been decided purely on facts. The ITAT is the last fact finding authority which has came to the conclusion that the Assessee Trust is not carrying on any commercial activity and, therefore, is entitled to the exemption under Section 11. This finding of the ITAT is purely based on the facts of the case, and which facts were also analyzed by the CIT(A) before he partly allowed the Appeal of the Assessee Trust.
In these circumstances, and finding that the decision of the ITAT is purely based on facts, we are of the opinion that the Order of the ITAT does not give rise to any Substantial Question of Law.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of the final assessment order in the absence of issuance of draft assessment order under section 144B(1)(xvi) of the Act
The legal framework governing this issue is section 144B of the Income Tax Act, which incorporates the Faceless Assessment Scheme. Specifically, section 144B(1)(xvi) mandates issuance of a draft assessment order to the assessee before passing the final assessment order. The purpose of this provision is to ensure transparency and provide the assessee an opportunity to object to the proposed findings.
The Petitioner contended that the final assessment order dated 30th September 2021 was passed without issuance of any draft assessment order, rendering the order without jurisdiction and violative of the statutory scheme. Reliance was placed on the precedent of this Court in Rinku R. Rai v. ITO, which emphasized the mandatory nature of issuing a draft order under the Faceless Assessment Scheme and held non-compliance as a jurisdictional defect.
The Respondents did not dispute the absence of a draft order but argued implicitly that the final order was valid. The Court, however, noted that the non-issuance of the draft order is a clear violation of the statutory mandate and constitutes a jurisdictional defect. The Court underscored that compliance with procedural safeguards under section 144B is essential for the validity of the assessment order.
Applying the law to the facts, the Court concluded that the impugned order suffered from a fundamental procedural irregularity by bypassing the issuance of the draft order, thereby vitiating the assessment process.
Issue 2: Violation of principles of natural justice by granting only one day to respond to the show cause notice
The principles of natural justice require that an assessee be given a reasonable opportunity to present its case before an adverse order is passed. The Petitioner submitted that it was granted only one day (till 23:59 hours of 29th September 2021) to respond to the show cause notice dated 28th September 2021, which was insufficient and unfair.
The Respondents conceded that only one day was given but did not justify the brevity of the time period. The Court observed that such a truncated time frame does not meet the standards of fairness and natural justice. The Court emphasized that adequate time is necessary to enable the assessee to prepare and submit a meaningful response to the proposed variations.
Further, the Petitioner did file a reply within the stipulated time, but the assessing officer proceeded to pass the final assessment order without considering the same. This omission compounded the violation of natural justice.
The Court held that granting only one day to respond was arbitrary and amounted to denial of a fair hearing. This procedural lapse warranted setting aside the assessment order.
Issue 3: Non-consideration of the Petitioner's reply to the show cause notice
The Petitioner's reply to the show cause notice was filed on 29th September 2021. Despite this, the final assessment order dated 30th September 2021 stated that the Petitioner had not responded to the show cause notice. The Petitioner contended that this was a manifest error and that its submissions were not considered by the assessing officer.
The Court found that the assessing officer's failure to consider the Petitioner's reply before passing the final order was a breach of the procedural requirements and principles of natural justice. The Court relied on the judgement of the Gujarat High Court in Chatursinh Javanji Chavda v. ACIT, which held that non-consideration of the assessee's reply to a show cause notice is impermissible.
Applying the law to the facts, the Court concluded that the impugned order was passed without due consideration of the Petitioner's submissions, thereby rendering the order unsustainable.
Issue 4: Jurisdictional defect and the remedy
Given the violations of the statutory scheme under section 144B and principles of natural justice, the Court found the final assessment order to be without jurisdiction. The Court declined to examine the merits of the additions made under section 69B of the Act, stating that the procedural infirmities warranted setting aside the order.
The Court directed that the matter be remanded to the assessing officer for a fresh de novo assessment. The assessing officer was instructed to provide the Petitioner with a proper opportunity of hearing, including issuance of a draft assessment order and reasonable time for response. The fresh assessment was to be completed within 12 weeks from the date of uploading the order.
The Court also directed the Petitioner to communicate the order to the jurisdictional assessing officer within seven days.
3. SIGNIFICANT HOLDINGS
The Court held:
"The issuance of a draft assessment order is mandatory in terms of the Faceless Assessment Scheme as incorporated in section 144B of the Act and the non-issuance of the draft assessment order is a jurisdictional defect."
"It is apparent that the Respondents have acted in violation of the principles of natural justice by granting insufficient time of just 1 day to the Petitioner to respond to the show cause notice proposing variations."
"The assessing officer's failure to consider the Petitioner's reply to the show cause notice before passing the final order is a breach of procedural requirements and principles of natural justice."
Core principles established include the mandatory nature of procedural safeguards under the Faceless Assessment Scheme, the requirement of reasonable opportunity to respond to show cause notices, and the necessity for the assessing officer to consider the assessee's submissions before passing the final order.
Final determinations on each issue are:
Validity of reassessment proceedings - show cause notices granted just one days time to the Petitioner to furnish its response - HELD THAT:- It is apparent that the Respondents have acted in violation of the principles of natural justice by granting insufficient time of just 1 day to the Petitioner to respond to the show cause notice proposing variations.
Thus, we deem it appropriate to set aside the assessment order. We, accordingly, hereby set aside the assessment order dated 30th September 2021 and remand the matter back to Respondent No. 1 to pass a fresh de novo order after providing an opportunity of hearing to the Petitioner. Such exercise shall be completed within 12 weeks from the date of uploading of this order.
Validity of reassessment proceedings - show cause notices granted just one days time to the Petitioner to furnish its response - HELD THAT:- It is apparent that the Respondents have acted in violation of the principles of natural justice by granting insufficient time of just 1 day to the Petitioner to respond to the show cause notice proposing variations.
Thus, we deem it appropriate to set aside the assessment order. We, accordingly, hereby set aside the assessment order dated 30th September 2021 and remand the matter back to Respondent No. 1 to pass a fresh de novo order after providing an opportunity of hearing to the Petitioner. Such exercise shall be completed within 12 weeks from the date of uploading of this order.
The Court considered the following core legal questions arising from the appeal filed by the revenue under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (Tribunal) for the assessment year 2013-14:
(i) Whether the Tribunal erred in law by deleting the addition of Rs. 75,00,000/- made under Section 68 of the Income Tax Act, despite the assessee's failure to prove the creditworthiness of the lender or genuineness of the transactionRs.
(ii) Whether the Tribunal was justified in not restoring the matter to the Assessing Officer's file with directions to afford the assessee an opportunity for cross-examination, given that the addition was based on a cash trail prepared by the Investigation Wing and not merely on third-party statementsRs.
(iii) Whether the reopening of the assessment was rightly quashed by the Tribunal on the ground that reopening cannot be based on borrowed satisfaction of the Assessing Officer, when the Assessing Officer had reopened the assessment relying on specific information from the Investigation Wing, verified through the department's e-filing databaseRs.
(iv) Whether the Tribunal was justified in deleting the addition under Section 68 without setting aside the order for cross-examination, in light of the Apex Court's decision in the Pirai Choodi caseRs.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (iii): Validity of Reopening Assessment
Relevant Legal Framework and Precedents: The reopening of assessment under Sections 147 and 148 of the Income Tax Act requires the Assessing Officer to have a "reason to believe" that income has escaped assessment. The Supreme Court in Income-tax Officer vs. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) held that the reasons for forming such belief must have a rational connection with the belief and be based on relevant material. The belief must be held in good faith and not be a mere pretence. Mere vague, indefinite, or remote information cannot justify reopening.
Court's Interpretation and Reasoning: The Court examined the reopening notice and the reasons recorded by the Assessing Officer, which were based on an investigation into a proprietorship concern (M/s. D.P. Trading) run by Mahesh Sharma, alleged to have provided accommodation entries to various persons. The Department's database indicated that the assessee had transacted Rs. 75,00,000/- through concerns linked to Mahesh Sharma.
However, the Court noted that the reopening order failed to establish a direct and live link between the assessee and Mahesh Sharma or D.P. Trading. The assessment order contained a tabular representation of multiple transaction layers, with the assessee appearing only at the fifth layer via bank transfer, while the initial layers involved cash transactions linked to Mahesh Sharma's concern. This gap in tracing the money trail to the assessee undermined the rationale for reopening.
The Court emphasized that the Assessing Officer did not provide the assessee with statements or material supporting the reopening, including Mahesh Sharma's statement, which did not name the assessee as a beneficiary. The Assessing Officer's refusal to furnish such material or allow cross-examination was also noted.
Key Evidence and Findings: The investigation report and departmental database formed the basis of reopening. However, the absence of any direct evidence or statement implicating the assessee weakened the Department's case. The assessee's request for details to verify transactions was ignored.
Application of Law to Facts: Applying the principle from Lakhmani Mewal Das, the Court found that the Assessing Officer's reasons lacked a rational nexus to form a bona fide belief of escapement of income. The material was insufficient, vague, and did not justify reopening.
Treatment of Competing Arguments: The Department argued that the statement of Mahesh Sharma was only collateral evidence and not the basis for reopening, relying instead on the cash trail and database information. The Court rejected this, holding that without a direct link or tangible material, reopening was unjustified.
Conclusions: The reopening was quashed as illegal and without jurisdiction, since the Assessing Officer failed to establish a valid reason to believe escapement of income with relevant and sufficient material.
Issue (i) and (iv): Deletion of Addition under Section 68 and Cross-Examination Opportunity
Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, requiring the assessee to prove the creditworthiness of the lender and genuineness of the transaction. The Apex Court in the Pirai Choodi case emphasized the necessity of affording an opportunity of cross-examination when adverse findings are based on third-party statements or investigation reports.
Court's Interpretation and Reasoning: The Tribunal deleted the addition of Rs. 75,00,000/- under Section 68, holding that the assessee failed to prove the genuineness of the transaction and creditworthiness of the lender. However, the Tribunal did not restore the matter for cross-examination despite the revenue's contention that the addition was based on a cash trail prepared by the Investigation Wing, not solely on third-party statements.
The Court noted that the Assessing Officer did not provide the assessee with the statements or evidence relied upon, nor allowed cross-examination of Mahesh Sharma, whose statement was a key piece of collateral evidence. The assessee's right to cross-examine was thus denied.
Key Evidence and Findings: The cash trail prepared by the Investigation Wing and the third-party statement of Mahesh Sharma were central to the Assessing Officer's case. However, the absence of direct evidence linking the assessee and the failure to provide opportunity for cross-examination were significant.
Application of Law to Facts: The Court found that the deletion of addition was justified on the basis of lack of proof by the revenue. However, the issue of cross-examination was also relevant, as the assessee was denied a fair opportunity to challenge the evidence.
Treatment of Competing Arguments: The revenue argued that cross-examination was unnecessary as the statement was collateral and the cash trail was sufficient. The Court rejected this, emphasizing the principles of natural justice and the need for cross-examination when adverse findings are based on investigation reports.
Conclusions: The deletion of addition was upheld, but the Court acknowledged the importance of cross-examination rights. However, since the reopening itself was quashed, the issue of cross-examination became moot.
Issue (ii): Restoration for Cross-Examination
Relevant Legal Framework and Precedents: Principles of natural justice require that an assessee be given an opportunity to cross-examine witnesses or examine evidence relied upon to make adverse findings. The Apex Court has consistently held that denial of such opportunity vitiates the assessment.
Court's Interpretation and Reasoning: The Tribunal declined to restore the matter for cross-examination despite the revenue's contention. The Court observed that since the reopening itself was invalid, restoration for cross-examination was unnecessary.
Key Evidence and Findings: The assessee's request for details to verify the transactions and cross-examine Mahesh Sharma was denied by the Assessing Officer, who considered the statement collateral.
Application of Law to Facts: Given the invalid reopening, the Court found no need to remand for cross-examination. The procedural lapse was subsumed in the invalidity of the reopening.
Treatment of Competing Arguments: The revenue's insistence on cross-examination was noted, but the Court prioritized the legality of reopening over procedural issues.
Conclusions: Restoration for cross-examination was not warranted as the reopening was quashed.
3. SIGNIFICANT HOLDINGS
"The reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief... it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."
"In the absence of any tangible material or a live link between Mahesh Sharma and the assessee, the reopening of assessment of the assessee has to be held bad in law."
"The Assessing Officer declined to provide the statement of Mahesh Sharma nor to provide an opportunity to the assessee to cross-examine Mahesh Sharma, which is a violation of principles of natural justice."
"The addition of Rs. 75,00,000/- made under Section 68 of the Income Tax Act was rightly deleted by the Tribunal due to failure of the revenue to prove the creditworthiness of the lender or genuineness of the transaction."
"There is no question of law, much less substantial questions of law, arising for consideration in this appeal."
The Court dismissed the appeal filed by the revenue, upholding the Tribunal's order quashing the reopening and deleting the addition under Section 68.
Reopening of assessment - Addition u/s. 68 - neither creditworthiness of lender and/or genuineness of transaction was proved by Assessee - ITAT deleted addition - HELD THAT:-Department has taken a stand that it did not act on the statement of Mahesh Sharma and that it was only one of the circumstantial evidence and citing such reason the AO declined to provide the statement of Mahesh Sharma nor to provide an opportunity to the assessee to cross-examine Mahesh Sharma. Thus, in the absence of any tangible material or a live link between Mahesh Sharma and the assessee, the reopening of assessment of the assessee has to be held bad in law.
The decision in the case of M/s. Coal Sale Co. Ltd. [2022 (7) TMI 1503 - CALCUTTA HIGH COURT] will also come to the aid of the assessee wherein it was held that the assessee therein was found to have transacted with a company through banking channel and faulted Assessing Officer for reopening the assessment what is based on a statement of a third party which was a general statement and the Assessing Officer assumed that the assessee is a beneficiary of the account. It was held that without any other material the conclusion drawn by the Assessing Officer merely on receipt of the information does not muster the requirement of law to validly form the reason to believe escapement of income. With the said reasoning, the appeal filed by the revenue was dismissed.
In the instant case, the Tribunal has analyzed the factual position and has pointed out the errors committed by the Assessing Officer while reopening the assessment.
Reopening of assessment - Addition u/s. 68 - neither creditworthiness of lender and/or genuineness of transaction was proved by Assessee - ITAT deleted addition - HELD THAT:-Department has taken a stand that it did not act on the statement of Mahesh Sharma and that it was only one of the circumstantial evidence and citing such reason the AO declined to provide the statement of Mahesh Sharma nor to provide an opportunity to the assessee to cross-examine Mahesh Sharma. Thus, in the absence of any tangible material or a live link between Mahesh Sharma and the assessee, the reopening of assessment of the assessee has to be held bad in law.
The decision in the case of M/s. Coal Sale Co. Ltd. [2022 (7) TMI 1503 - CALCUTTA HIGH COURT] will also come to the aid of the assessee wherein it was held that the assessee therein was found to have transacted with a company through banking channel and faulted Assessing Officer for reopening the assessment what is based on a statement of a third party which was a general statement and the Assessing Officer assumed that the assessee is a beneficiary of the account. It was held that without any other material the conclusion drawn by the Assessing Officer merely on receipt of the information does not muster the requirement of law to validly form the reason to believe escapement of income. With the said reasoning, the appeal filed by the revenue was dismissed.
In the instant case, the Tribunal has analyzed the factual position and has pointed out the errors committed by the Assessing Officer while reopening the assessment.
Issues (a) to (j) revolve around the correctness of the Tribunal's deletion of transfer pricing adjustments related to the sale and transfer of power/electricity by the CPP to the assessee. These include whether the Tribunal erred in not accepting the TPO's conclusion that the transaction was not at arm's length, the adequacy of adjustments made for costs related to transmission and distribution, the applicability of electricity board tariff rates, the rationale for selecting the tested party in transfer pricing analysis, and the distinction between generation and distribution tariffs.
Issues (k) to (n) concern the tax treatment of various receipts and benefits: (k) relates to additional depreciation under Section 32(1)(iia); (l) and (n) concern the characterization of industrial promotion assistance and capital receipts for computation of book profits under Section 115JB; and (m) addresses whether interest subsidy from the State Government is capital or revenue in nature.
Regarding issues (a) to (j), the Court relied heavily on precedent, particularly the decision in the case of PCIT vs. Star Paper Mills Ltd., which itself followed the Supreme Court's ruling in CIT vs. Jindal Steel & Power Ltd. These authorities establish the principles for determining arm's length price in transactions involving captive power plants and related entities. The Court noted that the Tribunal's findings in the assessee's favor for earlier assessment years on identical issues had not been challenged by the revenue, thereby lending further weight to the Tribunal's approach.
The Court emphasized that the Tribunal correctly appreciated the TPO's analysis but ultimately found the adjustments unjustified based on the factual matrix and the applicable legal standards. It was noted that the electricity board tariff rates, which the assessee relied upon, were appropriate benchmarks for ALP determination, provided proper adjustments were made for transmission and distribution costs. The Court upheld the Tribunal's rejection of the AO/TPO's downward adjustments related to the captive power generating unit's profits, recognizing that the tariff order rates for independent power generating units were not directly applicable to the CPP's transactions.
Further, the Court agreed with the Tribunal's reasoning that market value determination is not relevant for ALP under transfer pricing provisions, which focus on the price that would have been charged between independent enterprises under comparable circumstances. The Tribunal's selection of the least complex entity as the tested party was also affirmed as a sound methodological choice consistent with transfer pricing principles. The Court rejected the revenue's contention that the manufacturer (the CPP) should be compensated based on distribution rates, underscoring the fundamental distinction between generation and distribution tariffs and the real cost differences involved.
In respect of issues (k) to (n), the Court found that the relevant questions had been conclusively decided in favor of the assessee in prior decisions of the same Court and the Tribunal, with no successful appeals by the revenue challenging those findings. Specifically, additional depreciation under Section 32(1)(iia) was held to be allowable as per established precedents. Industrial promotion assistance was classified as capital receipt, consistent with the Court's earlier ruling in PCIT vs. Budge Budge Refineries Ltd. The exclusion of capital receipts for computation of book profits under Section 115JB was also confirmed, following the decision in PCIT vs. Ankit Metal & Power Ltd.
The only substantial question of law reserved for further consideration was issue (m), concerning the characterization of interest subsidy from the State Government. The Tribunal had held the interest subsidy to be capital in nature, contrary to the assessment order treating it as revenue receipt. This question had been admitted for consideration in multiple related appeals and was directed to be heard alongside those matters, indicating its complexity and significance.
In conclusion, the Court upheld the Tribunal's deletion of transfer pricing adjustments related to the captive power plant transactions, affirming the methodology and reasoning adopted by the Tribunal and rejecting the revenue's technical and factual contentions. It also affirmed the favorable tax treatment accorded to the assessee regarding additional depreciation, industrial promotion assistance, and capital receipts, based on binding precedents and the finality of earlier unchallenged orders. The only issue left unresolved relates to the nature of the interest subsidy, which remains pending adjudication in connected appeals.
The Court's reasoning preserves the principle that transfer pricing adjustments must be grounded in sound economic and legal analysis consistent with arm's length standards, and that tax benefits and receipts must be classified in accordance with established legal principles and judicial precedents. The decision underscores the importance of consistency in judicial treatment across assessment years and the binding effect of prior adjudications on identical issues.
Adjustment for transaction in respect of transfer of power/electricity - HELD THAT:- The issue is squarely covered by the decision of this Court in PCIT vs. Star Paper Mills Ltd. [2025 (2) TMI 766 - CALCUTTA HIGH COURT] wherein the Court followed the decision of Jindal Steel & Power Ltd. [2023 (12) TMI 417 - SUPREME COURT] as decided against the appellant/Department.
Additional depreciation u/s 32 (1) (iia) - HELD THAT:- The said issue is covered by the decisions of this Court in Ramkrishna Forging Ltd. [2022 (7) TMI 1312 - CALCUTTA HIGH COURT] and PCIT vs. Deepak Industries Ltd. [2023 (5) TMI 1411 - CALCUTTA HIGH COURT] and also the decision in CIT vs. Century Enka Ltd. [2023 (3) TMI 675 - CALCUTTA HIGH COURT] That apart, the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 to 2014-15. However, the Department has not filed any appeal against the said order and the order has attained the finality. In the light of the above, the substantial question of law (k) is decided against the appellant/revenue.
Nature of receipt - whether the industrial promotion assistance is capital receipt? - HELD THAT:- This issue is covered in favour of the assessee in the light of the decision of this Court in PCIT vs. Budge Budge Refineries Ltd. [2022 (2) TMI 533 - CALCUTTA HIGH COURT]. That apart, the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 and 2012-13 and the Department did not prefer any appeal before this Court and the order passed by the Tribunal on the very same issue with regard to the aforementioned assessment years has attained finality.
MAT computation - whether capital receipt to be excluded for computation of book profit under Section 115JB? - This issue is covered in favour of the assessee in the light of the decision of this Court in Ankit Metal & Power Ltd. [2019 (7) TMI 878 - CALCUTTA HIGH COURT] That apart, for the assessment year 2013-14 the very same issue was decided by the learned Tribunal in favour of the assessee by the learned Tribunal. Therefore, substantial question of law (n) is answered against the revenue.
Nature of receipt - interest subsidy from the State Government - capital or revenue receipt - HELD THAT:- This issue had arisen for consideration in the assessee’s own case for the assessment years 2008-09 and 2009-10 as well as 2010-11 and those orders were challenged by the Department before this Court [2020 (3) TMI 1431 - CALCUTTA HIGH COURT] and [2019 (9) TMI 1688 - CALCUTTA HIGH COURT] respectively and the said substantial question of law has been admitted for consideration. That apart, the very same substantial question of law was raised by the Department in ITAT/226/2023 and ITAT/227/2023 for the assessment years 2013-14 and 2014-15 respectively and these appeals have been admitted on the said substantial question of law. Hence, this appeal is admitted only on the following substantial question of law.
“m) Whether on the facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal was justified in law by holding the Interest Subsidy from the State Government to be capital in nature as against revenue receipt as treated in the assessment order?”
List this appeal after twelve weeks.
Adjustment for transaction in respect of transfer of power/electricity - HELD THAT:- The issue is squarely covered by the decision of this Court in PCIT vs. Star Paper Mills Ltd. [2025 (2) TMI 766 - CALCUTTA HIGH COURT] wherein the Court followed the decision of Jindal Steel & Power Ltd. [2023 (12) TMI 417 - SUPREME COURT] as decided against the appellant/Department.
Additional depreciation u/s 32 (1) (iia) - HELD THAT:- The said issue is covered by the decisions of this Court in Ramkrishna Forging Ltd. [2022 (7) TMI 1312 - CALCUTTA HIGH COURT] and PCIT vs. Deepak Industries Ltd. [2023 (5) TMI 1411 - CALCUTTA HIGH COURT] and also the decision in CIT vs. Century Enka Ltd. [2023 (3) TMI 675 - CALCUTTA HIGH COURT] That apart, the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 to 2014-15. However, the Department has not filed any appeal against the said order and the order has attained the finality. In the light of the above, the substantial question of law (k) is decided against the appellant/revenue.
Nature of receipt - whether the industrial promotion assistance is capital receipt? - HELD THAT:- This issue is covered in favour of the assessee in the light of the decision of this Court in PCIT vs. Budge Budge Refineries Ltd. [2022 (2) TMI 533 - CALCUTTA HIGH COURT]. That apart, the very same issue was decided in favour of the assessee by the learned Tribunal for the assessment years 2011-12 and 2012-13 and the Department did not prefer any appeal before this Court and the order passed by the Tribunal on the very same issue with regard to the aforementioned assessment years has attained finality.
MAT computation - whether capital receipt to be excluded for computation of book profit under Section 115JB? - This issue is covered in favour of the assessee in the light of the decision of this Court in Ankit Metal & Power Ltd. [2019 (7) TMI 878 - CALCUTTA HIGH COURT] That apart, for the assessment year 2013-14 the very same issue was decided by the learned Tribunal in favour of the assessee by the learned Tribunal. Therefore, substantial question of law (n) is answered against the revenue.
Nature of receipt - interest subsidy from the State Government - capital or revenue receipt - HELD THAT:- This issue had arisen for consideration in the assessee’s own case for the assessment years 2008-09 and 2009-10 as well as 2010-11 and those orders were challenged by the Department before this Court [2020 (3) TMI 1431 - CALCUTTA HIGH COURT] and [2019 (9) TMI 1688 - CALCUTTA HIGH COURT] respectively and the said substantial question of law has been admitted for consideration. That apart, the very same substantial question of law was raised by the Department in ITAT/226/2023 and ITAT/227/2023 for the assessment years 2013-14 and 2014-15 respectively and these appeals have been admitted on the said substantial question of law. Hence, this appeal is admitted only on the following substantial question of law.
“m) Whether on the facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal was justified in law by holding the Interest Subsidy from the State Government to be capital in nature as against revenue receipt as treated in the assessment order?”
List this appeal after twelve weeks.
1. Whether the impugned orders dated 19.01.2021 transferring the income tax case files of the petitioners under Section 127 of the Income Tax Act, 1961 (IT Act) were validly passed, particularly in light of procedural requirements such as providing reasons and opportunity of hearing.
2. Whether the transfer of jurisdiction from the respective jurisdictional Assessing Officers to the Assistant Commissioner of Income Tax, Central Circle - 1(3), Chennai, was justified on the grounds of coordinated investigation following search and seizure operations.
3. Whether the absence of agreement between the heads of the transferor and transferee Assessing Officers violated the statutory requirements under Section 127(2) of the IT Act.
4. Whether the issuance of notices under Section 142(1) of the IT Act post-transfer was valid, especially considering the pendency of writ petitions challenging the transfer orders.
5. Whether mala fide intentions or arbitrariness by the tax authorities, particularly the Assistant Commissioner of Income Tax (6th respondent), could be inferred from the timing and circumstances of the transfer and subsequent proceedings.
6. The implications of the petitioners' status as a Trust and a Body of Individuals under the IT Act, and the relevance of their distinct Permanent Account Numbers (PANs) to the transfer and investigation.
7. The applicability and interpretation of procedural safeguards under Section 127 of the IT Act, including the necessity of recording reasons, providing opportunity of hearing, and the effect of sub-section (3) exempting transfers within the same city from such requirements.
Issue-wise Detailed Analysis:
1. Validity of Transfer Orders under Section 127 of the IT Act
The legal framework under Section 127 mandates that a Principal Director General, Director General, Chief Commissioner, Commissioner, or their equivalents may transfer cases between Assessing Officers after giving the assessee a reasonable opportunity of being heard "wherever it is possible to do so" and after recording reasons. Sub-section (2) requires agreement between the heads of the transferor and transferee Assessing Officers if they are not subordinate to the same authority; failing which, the Board or an authorized officer must pass the order. Sub-section (3) exempts transfers within the same city from the requirement of opportunity of hearing.
The petitioners challenged the transfer orders on grounds that they were passed without reasons, without prior notice or opportunity of hearing, and without agreement between the heads of the concerned Assessing Officers. They argued that the orders were arbitrary, mala fide, and violated Article 14 of the Constitution.
The respondents contended that the transfer was necessitated by the need for coordinated investigation following search and seizure operations at premises linked to the petitioners' key office bearers. They submitted that the transfer was within the same city (Chennai), thus exempting the requirement of opportunity of hearing under Section 127(3). Further, the transfer was carried out pursuant to a direction from the Director General of Income Tax (Investigations), and no assessment was pending against the DMK Party at the time.
The Court examined precedents emphasizing that reasons for transfer must be specific, based on material facts, and communicated to the assessee to enable judicial review. It noted decisions holding that administrative orders without reasons or without opportunity of hearing, where mandated, violate principles of natural justice and are liable to be quashed. However, the Court also acknowledged the statutory provision exempting intra-city transfers from the hearing requirement.
The Court found that although the transfer was within the same city, the impugned orders lacked recorded reasons communicated to the petitioners, and no agreement between the heads of the transferor and transferee Assessing Officers was discernible from the records. The Court observed that the Director General of Income Tax (Investigations) had directed the Commissioner of Income Tax (Exemptions) to transfer the cases, but the statutory requirement of agreement or authorization by the Board or authorized officer was not clearly established.
Therefore, while the procedural requirement of hearing was not mandatory due to the intra-city transfer, the absence of recorded reasons and clarity on agreement or authorization rendered the transfer orders legally vulnerable.
2. Justification for Coordinated Investigation and Nexus Between Petitioners
The respondents justified the transfer on the basis that the General Secretary of the DMK Party and Permanent Trustee of the DMK Charitable Trust, Mr. D. Duraimurugan, was subject to search and seizure operations, and assessment orders had been passed against him and his Trust. The coordinated investigation was deemed necessary to investigate the source and application of seized cash and related financial matters.
The petitioners argued that mere association with a person searched does not justify transfer of their cases without cogent reasons. They contended that the DMK Charitable Trust and DMK Party are distinct entities with separate PANs and legal identities, and the transfer was a pretext to harass them politically, especially given the timing before elections.
The Court analyzed the nature of the petitioners' entities: the Charitable Trust registered as a "Trust" and the DMK Party registered as a "Body of Individuals" (BOI). The Court noted that the PAN numbers reflected these statuses and that political parties enjoy specific exemptions under Section 13A of the IT Act. The Court acknowledged that while the entities are distinct, the overlapping membership and association with Mr. Duraimurugan could provide a nexus for coordinated investigation.
However, the Court emphasized that the reasons for transfer must be based on material facts demonstrating why coordinated investigation was necessary, which was not sufficiently articulated in the impugned orders. The Court also noted that the search operations had occurred over two years prior, and separate assessment orders had already been passed against Mr. Duraimurugan and his Trust, raising questions about the necessity and timing of the transfer.
3. Procedural Safeguards and Natural Justice
The petitioners contended that the transfer orders violated principles of natural justice as they were passed without notice, without reasons, and without opportunity to be heard. They relied on precedents establishing that such procedural safeguards are mandatory for quasi-judicial orders and that failure to comply renders the orders arbitrary and liable to be quashed.
The respondents countered that the intra-city transfer exempted the requirement of hearing under Section 127(3). They also argued that the transfer did not prejudice the petitioners' rights, as assessments would still be conducted with all procedural safeguards, including faceless assessment rights.
The Court held that while the requirement of hearing is not mandatory in intra-city transfers, the requirement to record and communicate reasons remains mandatory. The Court found that the impugned orders failed to record reasons adequately and did not communicate them to the petitioners, thereby violating statutory mandates and principles of natural justice.
4. Allegations of Mala Fide and Political Motivation
The petitioners alleged mala fide conduct by the Assistant Commissioner of Income Tax (6th respondent), asserting that the transfer and subsequent notices were politically motivated to tarnish their image during election periods. They sought to arraign the officer as a private party due to alleged malice.
The respondents objected to such personal allegations, submitting that the officer acted in his official capacity and that no substance supported the mala fide claim.
The Court declined to entertain personal allegations against the officer, emphasizing that he was performing official duties. It held that such allegations were unnecessary for deciding the legal issues and ordered deletion of the officer as a party in the writ petition.
5. Validity of Notices Issued Post-Transfer
The petitioners challenged notices issued under Section 142(1) of the IT Act after the transfer, contending that these were invalid due to the pendency of writ petitions and the alleged invalidity of the transfer orders.
The respondents submitted that the notices were routine and related to assessment proceedings, and the transfer did not affect the validity of such notices. They highlighted that the transfer did not necessitate re-issuance of notices already issued.
The Court observed that since the transfer orders were quashed and remitted for fresh consideration, the validity of subsequent notices would depend on the outcome of fresh orders. The Court did not pass any specific order on the notices but stayed assessment proceedings pending fresh orders.
6. Interpretation of Section 127 and Related Provisions
The Court examined the legislative history and judicial precedents interpreting Section 127 of the IT Act. It noted that:
The Court found that the impugned transfer orders failed to comply fully with these requirements, especially regarding recording and communication of reasons and clarity on agreement or authorization.
7. Status of Petitioners and PAN Details
The Court analyzed the PAN numbers of the petitioners, noting that the DMK Charitable Trust is registered as a "Trust" (indicated by 'T' in PAN), and the DMK Party is registered as a "Body of Individuals" (indicated by 'B' in PAN). It explained the significance of these classifications under the IT Act and their relevance to tax exemptions and assessment procedures.
The Court noted the dual identity of the Trust and Party and the possible rationale under Section 13A of the IT Act, which grants tax exemptions to political parties, necessitating separate registration and assessment.
Conclusions:
The Court quashed the impugned transfer orders dated 19.01.2021 and the subsequent notices dated 26.02.2021 and 04.03.2021. It remitted the matter to the Commissioner of Income Tax (Exemptions) for fresh consideration and passing of orders on merits and in accordance with law within three months. The Court emphasized that the petitioners must be given an opportunity of being heard in the fresh proceedings, particularly to safeguard their rights under faceless assessment provisions.
Significant Holdings:
"The requirement of recording reasons under Section 127(1) is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee."
"Nothing in sub-section (1) or sub-section (2) shall be deemed to require any such opportunity to be given where the transfer is from any Assessing Officer or Assessing Officers ... and the offices of all such officers are situated in the same city, locality or place."
"While the requirement of hearing is not mandatory in intra-city transfers, the requirement to record and communicate reasons remains mandatory."
"Administrative authority is not at liberty to pass orders without any reasons and reason must be recorded in it. Further, reason has to be explicit and should articulate as to how the matter was properly considered by the administrative authority."
"The absence of agreement cannot tantamount to agreement as visualised under Section 127(2)(a) of the Act which contemplates a positive state of mind of the two jurisdictional Commissioners of Income Tax which is conspicuously absent."
"Transfer of jurisdiction by itself does not cause any prejudice to any assessee, provided all procedural safeguards including opportunity of being heard are maintained."
The Court's final determination was that the impugned transfer orders lacked compliance with mandatory statutory requirements, particularly the recording and communication of reasons and clarity on agreement between authorities. The transfer was therefore quashed and remitted for fresh consideration with due adherence to procedural safeguards. Allegations of mala fide conduct were rejected as unsubstantiated and irrelevant to the legal issues.
Transfer u/s 127 - transfer of jurisdiction from the respective jurisdictional Assessing Officers to the Assistant Commissioner of Income Tax, Central Circle - 1(3), Chennai - HELD THAT:- Cumulative reading of Section 127(1) and Section 127(2) of the IT Act and Section 127(3) of the IT Act indicates that there ought to have been an Agreement since the 4th Respondent in these Writ Petitions and the 5th respondent the Income Tax Officer (Exemption), Ward 1 Chennai and the Deputy Commissioner of Income Tax (Exemptions), Chennai are not subordinate to the 3rd respondent Commissioner of Income Tax (Exemptions) in all the Writ Petitions.
Further, the aforesaid search operations would have thrown informations, and have also initiating proceedings under Section 153C of the Income Tax Act on the respective petitioners as the other persons. Whether the above exercise was made or not is not discernible from the records that were produced for my perusal before this Court.
If indeed the search operations had revealed that incomes amounts were being intermingled and there were compelling reasons, transfer can be justified for the purpose of Section 153C of the IT Act.
Considering the fact that the search operations were conducted at the premises of Mr.D.Duraimurugan (the General Secretary of the petitioner who is the Permanent Trustee of the petitioner and at the premises of the Trust run by him on 30.03.2019 & 01.04.2019 and considering the fact that more than five years have lapsed and considering the fact that separate Assessment Orders have also been passed pursuant to the aforesaid search operations against Mr.D.Duraimurugan and the Trust run by him, the necessity for transfer may be revisited.
Orders impugned as well as the Notifications dated 26.02.2021 & 04.03.2021 are hereby quashed and these cases are remitted back to the 3rd respondent viz., the Commissioner of Income Tax (Exemptions), Chennai for passing fresh orders on merits and in accordance with law, within a period of three months from the date of receipt of a copy of this order.
Respective petitioners may be given an opportunity of being heard to explain the case as the respective petitioners are likely to loose out the benefit of faceless assessment under Section 144B of the IT Act.
Transfer u/s 127 - transfer of jurisdiction from the respective jurisdictional Assessing Officers to the Assistant Commissioner of Income Tax, Central Circle - 1(3), Chennai - HELD THAT:- Cumulative reading of Section 127(1) and Section 127(2) of the IT Act and Section 127(3) of the IT Act indicates that there ought to have been an Agreement since the 4th Respondent in these Writ Petitions and the 5th respondent the Income Tax Officer (Exemption), Ward 1 Chennai and the Deputy Commissioner of Income Tax (Exemptions), Chennai are not subordinate to the 3rd respondent Commissioner of Income Tax (Exemptions) in all the Writ Petitions.
Further, the aforesaid search operations would have thrown informations, and have also initiating proceedings under Section 153C of the Income Tax Act on the respective petitioners as the other persons. Whether the above exercise was made or not is not discernible from the records that were produced for my perusal before this Court.
If indeed the search operations had revealed that incomes amounts were being intermingled and there were compelling reasons, transfer can be justified for the purpose of Section 153C of the IT Act.
Considering the fact that the search operations were conducted at the premises of Mr.D.Duraimurugan (the General Secretary of the petitioner who is the Permanent Trustee of the petitioner and at the premises of the Trust run by him on 30.03.2019 & 01.04.2019 and considering the fact that more than five years have lapsed and considering the fact that separate Assessment Orders have also been passed pursuant to the aforesaid search operations against Mr.D.Duraimurugan and the Trust run by him, the necessity for transfer may be revisited.
Orders impugned as well as the Notifications dated 26.02.2021 & 04.03.2021 are hereby quashed and these cases are remitted back to the 3rd respondent viz., the Commissioner of Income Tax (Exemptions), Chennai for passing fresh orders on merits and in accordance with law, within a period of three months from the date of receipt of a copy of this order.
Respective petitioners may be given an opportunity of being heard to explain the case as the respective petitioners are likely to loose out the benefit of faceless assessment under Section 144B of the IT Act.
PCIT order u/s 264 setting aside the impugned Assessment Order deleting addition of unexplained money u/s 69A - as submitted that the grievance raised in this petition would not survive as the Assessment Order is already quashed and set aside.
Petitioner submitted that PCIT, instead of setting aside and remanding the Assessment Order, ought to have allowed the Revision Application filed by the petitioner by only setting aside the Assessment Order as the entire Assessment Order was based on incorrect facts and premises contrary to the show-cause notice issued by the Assessing Officer.
HELD THAT:- As the fact remains that the show-cause notice issued by the Assessing Officer is required to be adjudicated and therefore, without entering into the merits of the matter, the petition is disposed in view of the order dated 17th April, 2025 passed by the Principal Commissioner of Income Tax under Section 264 of the Act. Notice is discharged.
PCIT order u/s 264 setting aside the impugned Assessment Order deleting addition of unexplained money u/s 69A - as submitted that the grievance raised in this petition would not survive as the Assessment Order is already quashed and set aside.
Petitioner submitted that PCIT, instead of setting aside and remanding the Assessment Order, ought to have allowed the Revision Application filed by the petitioner by only setting aside the Assessment Order as the entire Assessment Order was based on incorrect facts and premises contrary to the show-cause notice issued by the Assessing Officer.
HELD THAT:- As the fact remains that the show-cause notice issued by the Assessing Officer is required to be adjudicated and therefore, without entering into the merits of the matter, the petition is disposed in view of the order dated 17th April, 2025 passed by the Principal Commissioner of Income Tax under Section 264 of the Act. Notice is discharged.
The core legal questions considered by the Court were:
i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the order passed under Section 263 of the Income Tax Act, 1961 (the Act) on the ground that the Principal Commissioner of Income Tax (PCIT) had no jurisdiction to invoke Section 263 when the assessee had been granted a certificate under the Direct Tax Dispute Resolution Scheme, 2016 (DTDRS);
ii) Whether the ITAT's quashing of the Section 263 order was perverse given that Section 208 of the DTDRS expressly excluded search cases from eligibility, and the assessee had allegedly concealed the fact of a search having been conducted;
iii) Whether the ITAT's quashing of the Section 263 order was perverse where the order was initiated on the basis that the penalty order was erroneous and prejudicial to the interests of the revenue;
iv) Whether the ITAT was justified in quashing the Section 263 order without applying the legal principles established by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT, which held that an order that is erroneous due to incorrect assumption of fact or law, or passed without application of mind or in violation of natural justice, can be set aside under Section 263.
2. ISSUE-WISE DETAILED ANALYSIS
Issue i) Jurisdiction of PCIT under Section 263 post issuance of DTDRS certificate
The relevant legal framework includes Section 263 of the Income Tax Act, which empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The DTDRS, introduced under the Finance Act, 2016, provides an amnesty scheme allowing taxpayers to settle disputes and obtain immunity from penalty and prosecution under certain conditions. Section 204(3) of the DTDRS states that the order passed under the scheme is conclusive and the matter covered shall not be reopened under the Act.
The Court noted that the respondent had obtained a certificate under the DTDRS, which granted immunity from penalty proceedings relating to the disputed tax for the relevant assessment year. The certificate explicitly provided immunity from instituting any penalty proceedings under the Income Tax Act.
The Court reasoned that once immunity is granted under the DTDRS, the jurisdiction of the PCIT to invoke Section 263 to revise the penalty order is effectively barred. The immunity is general and not limited to any specific penalty provision, thus covering penalty proceedings under both Sections 271AAB and 271AB.
Therefore, the ITAT was justified in quashing the Section 263 order on the ground that the PCIT had no jurisdiction to revise the assessment once the DTDRS certificate was granted.
Issue ii) Eligibility under DTDRS and concealment of search
Section 208 of the DTDRS excludes cases where assessments are finalized under Sections 153A or 153C of the Act, which typically relate to search and seizure cases, from availing the scheme. The revenue contended that the respondent was ineligible as a search was conducted on the Nuwal Group, of which the respondent was a member, and that the respondent had concealed this fact while applying under the scheme.
The respondent's counsel argued that the assessment was finalized under Section 143(3) read with Section 153B, not under Sections 153A or 153C, and thus the bar under Section 208 did not apply. The Court observed that the department had not challenged the certificate issued under the DTDRS before the tribunal or in the present appeal, and the certificate had attained finality.
The Court found the revenue's challenge to the certificate to be a "fallacy" in the absence of any prior challenge. It was an arguable question whether the respondent was eligible under the scheme, but since no challenge was made to the certificate, it remained valid and binding.
Thus, the Court upheld the immunity granted under the DTDRS certificate despite the search having been conducted, as the assessment was not finalized under the excluded sections.
Issue iii) Validity of Section 263 order initiated on penalty grounds
The revisional order under Section 263 was passed on the basis of an audit objection that the penalty should have been imposed under Section 271AB instead of Section 271AAB, and directed a de novo penalty order. The revenue argued that the penalty order was erroneous and prejudicial to the revenue's interest, justifying revision.
The Court held that since the respondent had immunity from penalty proceedings under the DTDRS certificate, the question of whether penalty was imposed under the correct provision was immaterial. The immunity covered all penalty proceedings, and therefore the revisional order directing a de novo penalty order could not be sustained.
The Court concluded that the substantial questions of law framed did not arise from the tribunal's order, as the immunity under the DTDRS was determinative.
Issue iv) Application of principles from Malabar Industrial Co. Ltd. case
The Supreme Court in Malabar Industrial Co. Ltd. v. CIT held that an order could be revised under Section 263 if it was erroneous due to incorrect assumption of fact or law, or passed without application of mind or in violation of natural justice.
The revenue contended that the ITAT erred in quashing the Section 263 order without appreciating this precedent. However, the Court observed that the immunity granted under the DTDRS rendered the question of error in the penalty order academic, as the immunity barred reopening of penalty proceedings altogether.
Therefore, the Court found no error in the ITAT's approach in quashing the Section 263 order, as the immunity was a conclusive bar to revision irrespective of the correctness of the original penalty order.
3. SIGNIFICANT HOLDINGS
The Court held:
"Once there is immunity granted to the respondent against penalty proceedings, the fact as to whether the penalty should have been imposed under Section 271AAB or under Section 271AB of the Act, would make no difference. The immunity is general against the penalty proceedings and not with regard to a particular provision."
"Under Section 204(3) of scheme the order passed under Section 204(1) is conclusive and matter covered by such order shall not be reopened in any proceedings under the Act."
"The revisional order passed under Section 263 directing a de novo penalty order cannot be sustained in view of the immunity granted to the respondent."
Core principles established include:
Final determinations:
Penalty proceedings u/s 271AAB - Revision proceedings u/s 263 - petitioner applied under the amnesty scheme and was issued certificate under the Direct Tax Dispute Resolution Scheme, 2016 - Tribunal quashing the order passed u/s 263 - HELD THAT:- Under Section 204(3) of scheme the order passed under Section 204(1) is conclusive and matter covered by such order shall not be reopened in any proceedings under the Act.
Once there is immunity granted to the respondent against penalty proceedings, the fact as to whether the penalty should have been imposed under Section 271AAB or under Section 271AB of the Act, would make no difference. The immunity is general against the penalty proceedings and not with regard to a particular provision.
The revision on the basis of the audit objection for passing a de novo order as the penalty should have been imposed under Section 271AB cannot be sustained in view of the immunity granted to the respondent. Revenue appeal is dismissed.
Penalty proceedings u/s 271AAB - Revision proceedings u/s 263 - petitioner applied under the amnesty scheme and was issued certificate under the Direct Tax Dispute Resolution Scheme, 2016 - Tribunal quashing the order passed u/s 263 - HELD THAT:- Under Section 204(3) of scheme the order passed under Section 204(1) is conclusive and matter covered by such order shall not be reopened in any proceedings under the Act.
Once there is immunity granted to the respondent against penalty proceedings, the fact as to whether the penalty should have been imposed under Section 271AAB or under Section 271AB of the Act, would make no difference. The immunity is general against the penalty proceedings and not with regard to a particular provision.
The revision on the basis of the audit objection for passing a de novo order as the penalty should have been imposed under Section 271AB cannot be sustained in view of the immunity granted to the respondent. Revenue appeal is dismissed.
The core legal questions considered by the Tribunal in these appeals are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Entitlement to Deduction under Section 80P(2)(a)(i) for Interest Income from District Co-operative Bank
Relevant Legal Framework and Precedents: Section 80P of the Income Tax Act provides deductions to co-operative societies on income derived from their principal business activities. Subsection (2)(a)(i) specifically deals with deductions on income from the business of banking or providing credit facilities to members. The interpretation of this provision, particularly the scope of eligible interest income, has been judicially examined.
The Tribunal relied heavily on the decision of the Hon'ble Jurisdictional High Court in a precedent case involving a similar co-operative society, where it was held that interest income earned from a District Co-operative Bank or State Co-operative Bank is eligible for deduction under section 80P(2)(d), rather than under section 80P(2)(a)(i). The Court clarified that the interest income from such banks constitutes "income from other sources" and is deductible only if it arises from investments in co-operative societies registered under the Kerala Co-operative Societies Act.
Court's Interpretation and Reasoning: The Tribunal affirmed the High Court's view that the assessee must establish that the interest income is earned from a co-operative society registered under the relevant Act to qualify for deduction under section 80P. Interest income from District Co-operative Banks qualifies under clause (d) of subsection (2), which covers interest or dividend derived from investments in other co-operative societies. The Tribunal rejected the assessee's broader claim under subsection (2)(a)(i) for interest income from the District Co-operative Bank, aligning with the High Court's interpretation.
Key Evidence and Findings: The assessee's returns showed interest income from the District Co-operative Bank. The Assessing Officer disallowed the deduction under section 80P(2)(a)(i), assessing the income accordingly. The CIT(A) upheld this disallowance. The Tribunal, while acknowledging the disallowance under subsection (2)(a)(i), recognized the entitlement to deduction under subsection (2)(d) for interest income from registered co-operative banks.
Application of Law to Facts: Applying the High Court's ruling, the Tribunal held that the interest income from the District Co-operative Bank is deductible under section 80P(2)(d) and not under 80P(2)(a)(i). The Assessing Officer's order was modified accordingly to reflect this correct legal position.
Treatment of Competing Arguments: The Revenue's argument that the interest income did not qualify for deduction was rejected based on binding judicial precedent. The assessee's contention for full deduction under subsection (2)(a)(i) was also rejected, but the Tribunal granted deduction under subsection (2)(d), thus partially allowing the claim.
Conclusion: The assessee is entitled to claim deduction under section 80P(2)(d) on interest income from District Co-operative Banks, but not under section 80P(2)(a)(i).
Issue 2: Deduction on Interest Income from Treasury and Scheduled Banks
Relevant Legal Framework and Precedents: The question whether interest income earned from deposits in Treasury or Scheduled Banks qualifies for deduction under section 80P has been addressed by the Hon'ble Jurisdictional High Court in a subsequent ruling. The Court examined whether such interest income loses its character as profits attributable to the principal business of the co-operative society.
Court's Interpretation and Reasoning: The High Court held that depositing surplus profits in permitted banks or financial institutions and earning interest does not change the nature of such income. The interest earned on these deposits is an enhancement of profits from the principal business activity of providing credit facilities to members. The Court emphasized that the prudence of depositing surplus profits should not be discouraged by denying deductions under the Income Tax Act.
Key Evidence and Findings: The assessee had deposited surplus profits in Treasury and Scheduled Banks, earning interest income. The Assessing Officer disallowed the deduction on this interest income. The Tribunal, following the High Court's reasoning, held that such interest income is eligible for deduction under section 80P.
Application of Law to Facts: The Tribunal applied the High Court's decision to the facts of the case, recognizing that the interest income from Treasury and Scheduled Banks forms part of the profits attributable to the principal business and is therefore deductible under section 80P.
Treatment of Competing Arguments: The Revenue argued that interest income from Treasury and Scheduled Banks was not related to the principal business and hence not eligible for deduction. The Tribunal rejected this argument, following binding precedent that the character of income does not change due to prudent financial management.
Conclusion: Interest income earned from deposits in Treasury and Scheduled Banks is eligible for deduction under section 80P as it constitutes profits attributable to the principal business of the co-operative society.
Issue 3: Overall Entitlement to Deduction under Section 80P and Assessment Validity
Relevant Legal Framework and Precedents: The overall entitlement to deduction under section 80P involves examining the nature of income and the relationship of such income to the principal business activity of the co-operative society. The Tribunal relied on authoritative decisions of the Hon'ble Jurisdictional High Court to determine the correct application of section 80P.
Court's Interpretation and Reasoning: The Tribunal concluded that the assessee's claim for deduction under section 80P was valid and the Assessing Officer's disallowance was not sustainable in law. The Tribunal emphasized that the interest income earned, whether from co-operative banks or prudent deposits in Treasury and Scheduled Banks, is integrally connected to the business of providing credit facilities to members.
Key Evidence and Findings: The assessments were made disallowing deductions under section 80P, resulting in taxable income being assessed. The Tribunal found that the Assessing Officer and CIT(A) erred in law by not following binding judicial precedents.
Application of Law to Facts: The Tribunal applied the legal principles established by the High Court to the facts, setting aside the disallowance and allowing the deduction under section 80P.
Treatment of Competing Arguments: The Tribunal gave due consideration to the Revenue's arguments but found them contrary to settled law and judicial pronouncements.
Conclusion: The disallowance of deduction under section 80P was held to be bad in law and liable to be set aside. The appeals were allowed accordingly.
3. SIGNIFICANT HOLDINGS
The Tribunal's key legal holdings include the following:
"Section 80P deals with Co-operative Societies' computation of income. As already noted, it has four sections and several subsections and clauses. The Parliament has considered the various situations in which the exigible income and the deductable income of the assessee is considered while computing the income of the assessee. For getting deduction, in our considered view, the assessee must also establish that the interest income earned by the assessee is from a Co-operative Society. As a matter of fact, in the case on hand, there is no dispute that it is not from a Co-operative Society registered under Kerala Co-operative Societies Act. The interest income earned from District Co-operative Bank/State Co-operative Bank, in the facts and circumstances of the case, do come within Section 80P(2)(d). Therefore, the income constitutes income from other sources and the only eligible deduction is covered by Section 80P(2)(d) viz. Interest or dividend derived by the assessee from its investments with any other Co-operative Society."
"The question that arises therefore is whether, merely because the assessee chooses to deposit its surplus profit in a permitted bank or financial institution, and earns interest on such deposits, such interest would cease to form part of its profits and gains attributable to its business of providing credit facilities to its membersRs. In our view that question must be answered in the negative, since we cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee."
Core principles established include:
Final determinations on each issue were that the assessee's deduction under section 80P was rightly allowed in respect of interest income from District Co-operative Banks under subsection (2)(d) and interest income from Treasury and Scheduled Banks under subsection (2)(a)(i) as profits attributable to the principal business. The disallowance by the Assessing Officer and CIT(A) was set aside, and the appeals were allowed accordingly.
Disallowance of deduction u/s 80P - interest income received from the District Co-operative bank - HELD THAT:- We notice that the instant issue related to interest income received from the District Co-operative bank stands adjudicated in the case of PCIT v. Peroorkada Service Coop. Bank Ltd. [2021 (12) TMI 1084 - KERALA HIGH COURT] as held that the interest income earned by the assessee does not come within the ambit of Section 80P(2)(a)(i) and permissible deduction of interest income is limited to Co-operative Societies/Banks registered under Kerala Co-operative Societies Act under clause (d) of the Act.
Interest income received from Treasury, Scheduled Banks, etc., This issue is no longer res integra, as it is covered by the judgment ofSahyadri Co-operative Credit Society Ltd. [2024 (9) TMI 1278 - KERALA HIGH COURT] as held it cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount (the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi- State Co-operative Societies Act, or permitted by Section 64 of the said Act.
Disallowance of deduction u/s 80P - interest income received from the District Co-operative bank - HELD THAT:- We notice that the instant issue related to interest income received from the District Co-operative bank stands adjudicated in the case of PCIT v. Peroorkada Service Coop. Bank Ltd. [2021 (12) TMI 1084 - KERALA HIGH COURT] as held that the interest income earned by the assessee does not come within the ambit of Section 80P(2)(a)(i) and permissible deduction of interest income is limited to Co-operative Societies/Banks registered under Kerala Co-operative Societies Act under clause (d) of the Act.
Interest income received from Treasury, Scheduled Banks, etc., This issue is no longer res integra, as it is covered by the judgment ofSahyadri Co-operative Credit Society Ltd. [2024 (9) TMI 1278 - KERALA HIGH COURT] as held it cannot accept the contention of the Revenue that the interest earned on those deposits loses its character as profits/gains attributable to the main business of the assessee. It is not as though the assessee in the instant case had used the surplus amount (the profit earned by it] for an investment or activity that was unrelated to its main business, and earned additional income by way of interest or gain through such activity. The assessee had only deposited the profit earned by it in the manner mandated under Section 63 of the Multi- State Co-operative Societies Act, or permitted by Section 64 of the said Act.
The core legal questions considered in this appeal are:
- Whether the delay of 102 days in filing the appeal before the Tribunal should be condoned on the grounds of reasonable cause.
- Whether the addition of Rs. 7,03,290/- to the income of the assessee on account of unexplained investment in immovable property is justified.
- Whether the assessee has satisfactorily explained the source of investment amounting to Rs. 6,92,000/- received as a loan from a third party and Rs. 2,50,000/- from the father-in-law, despite the time gap between receipt of loan and purchase of property.
2. ISSUE-WISE DETAILED ANALYSIS
Condonation of Delay in Filing Appeal
The Tribunal noted a delay of 102 days in filing the appeal. The legal framework governing condonation of delay requires the appellant to demonstrate "reasonable cause" for the delay. The Court observed that the assessee attributed reasonable cause during the hearing. Consequently, the delay was condoned, allowing the appeal to be heard on merits.
Legality of Addition of Rs. 7,03,290/- to Assessee's Income
Relevant Legal Framework and Precedents: Under the Income Tax Act, when the Assessing Officer (AO) is not satisfied with the source of investment, particularly in cases of property acquisition, additions can be made to the income of the assessee under section 147, subject to the principles of natural justice and evidentiary standards. The burden lies on the assessee to establish the source of funds beyond reasonable doubt.
Court's Interpretation and Reasoning: The AO initiated reassessment proceedings under section 147 after receiving information regarding the purchase of immovable property with a consideration of Rs. 69,00,000/- plus Rs. 3,43,000/-, where the assessee's share was Rs. 9,53,290/-. The AO accepted Rs. 2,50,000/- from the father-in-law as a legitimate source. However, the AO disbelieved the explanation regarding Rs. 6,92,000/- loan received from the friend of the husband, Shri Kapil Dev, primarily due to the 14-month time gap between receipt of the loan amount (31.12.2010) and investment in property (23.02.2012), and absence of documentary evidence corroborating the intermediate transactions.
The assessee's affidavit stated that the loan amount was used to purchase four buffaloes and mustard, which were subsequently sold to finance the property purchase. The AO rejected this explanation for lack of evidence, leading to the addition of Rs. 7,03,290/- to the income, which was upheld by the Commissioner of Income Tax (Appeals).
Key Evidence and Findings: The assessee produced the lender, Shri Kapil Dev, whose statement confirmed the loan of Rs. 6,92,000/- on 31.12.2010. The assessee also submitted an affidavit explaining the utilization of funds in agricultural commodities and livestock, which were sold prior to the property purchase. No documentary evidence or witnesses were provided to substantiate this intermediate transaction.
Application of Law to Facts: The Tribunal carefully considered the evidence, including the statement of the lender and the affidavit. It found the explanation plausible and genuine, noting that the source of funds was satisfactorily explained. The Tribunal emphasized that the time gap alone, without evidence of illegality or concealment, does not justify addition if the source is otherwise established.
Treatment of Competing Arguments: The Revenue relied on the absence of documentary proof and the time gap to sustain the addition. The assessee argued that the affidavit and lender's statement sufficiently established the source and use of funds. The Tribunal accepted the assessee's explanation, finding no reason to doubt the genuineness of the transactions.
Conclusions: The Tribunal set aside the orders of the lower authorities and deleted the addition of Rs. 7,03,290/-, deciding the issue in favor of the assessee.
3. SIGNIFICANT HOLDINGS
The Tribunal held:
"In the absence of any documentary evidence, the assessee filed an affidavit stating therein that she had received Rs. 6,92,000/- on 31.12.2010 and invested the such money to purchase of four buffaloes and mustard and sold out the said buffaloes and mustard before purchase of agricultural land on 23.2.2012, which in my considered view seems to be genuine one and moreover, the source of cash transactions has been established and fully explained, thus the addition of Rs. 7,03,290/- deserve to be deleted."
Core principles established include:
Final determinations:
Unexplained investment in property - Assessee submitted purchased 4 buffaloes and mustard out of loan receipt and the same was sold for purchase of property next year - HELD THAT:- Payment has been paid by husband from amount taken from his friend from withdrawal of his bank account with SBI, and another payment has been paid by her father in law.
The assessee produced friend before the AO and his statement was recorded wherein, it has been stated that he had given Rs. 6,92,000/- on 31.12.2010 to his friend after withdrawing the same from his SBI bank account and Rs. 11,290/- is paid by the assessee herself out of her previous savings.
The assessee had received the said amount of Rs. 6,92,000/- on 31.12.2010 but she had invested the said amount on 23.02.2012 after about 14 months time gap. In the absence of any documentary evidence, the assessee filed an affidavit stating therein that she had received Rs. 6,92,000/- on 31.12.2010 and invested the such money to purchase of four buffaloes and mustard and sold out the said buffaloes and mustard before purchase of agricultural land on 23.2.2012, which in considered view seems to be genuine one and moreover, the source of cash transactions has been established and fully explained, thus the addition deserve to be deleted. Assessee’s appeal is allowed.
Unexplained investment in property - Assessee submitted purchased 4 buffaloes and mustard out of loan receipt and the same was sold for purchase of property next year - HELD THAT:- Payment has been paid by husband from amount taken from his friend from withdrawal of his bank account with SBI, and another payment has been paid by her father in law.
The assessee produced friend before the AO and his statement was recorded wherein, it has been stated that he had given Rs. 6,92,000/- on 31.12.2010 to his friend after withdrawing the same from his SBI bank account and Rs. 11,290/- is paid by the assessee herself out of her previous savings.
The assessee had received the said amount of Rs. 6,92,000/- on 31.12.2010 but she had invested the said amount on 23.02.2012 after about 14 months time gap. In the absence of any documentary evidence, the assessee filed an affidavit stating therein that she had received Rs. 6,92,000/- on 31.12.2010 and invested the such money to purchase of four buffaloes and mustard and sold out the said buffaloes and mustard before purchase of agricultural land on 23.2.2012, which in considered view seems to be genuine one and moreover, the source of cash transactions has been established and fully explained, thus the addition deserve to be deleted. Assessee’s appeal is allowed.
Issue-wise Detailed Analysis:
1. Entitlement to Set-Off of PE Business Loss Against Interest Income Under DTAA and Domestic Law
The assessee, a non-resident banking company headquartered in UAE, operates two Indian branches constituting a PE. It earned interest income of Rs. 138.48 crores on ECB loans granted directly by the head office to Indian customers. The assessee declared this interest income under the head "income from other sources" and claimed a concessional tax rate of 5% under Article 11(2)(a) of the India-UAE DTAA. Concurrently, the PE in India suffered business losses of Rs. 75.32 crores, which the assessee sought to set off against the interest income.
The Assessing Officer (AO) disallowed the set-off, holding that Article 11(2) mandates taxation on the "gross amount" of interest income at a concessional rate, precluding any deduction or loss set-off. Reliance was placed on CBDT Circular No. 333/1982 and judicial precedents, including the Calcutta High Court decision in CIT vs. Davy Ashmore India Ltd., emphasizing treaty interpretation per Article 31(1) of the Vienna Convention on the Law of Treaties. The AO reasoned that "gross" means without any deduction, including losses.
The Dispute Resolution Panel (DRP) concurred, noting that the treaty does not provide for inter-head adjustments and that once the interest income is claimed under "income from other sources," the business losses of the PE (covered under Article 7(3)) cannot be set off. The DRP further observed that the interest income, being business income from banking operations, should be taxed at the domestic base rate of 40%, but since the assessee claimed treaty benefit, the interest income must be taxed at 5% on a gross basis without deductions.
The assessee contended that "gross" refers only to the amount before expenses, not losses, and emphasized that losses are distinct from expenses. It relied on section 90(2) of the Income Tax Act, which permits choosing between treaty provisions and domestic law, and cited a coordinate bench decision allowing hybrid computation approaches. The assessee also pointed to the return of income, which permits intra-head loss adjustments under Schedule CYLA.
The Tribunal analyzed Article 11(2) of the India-UAE DTAA, which provides that interest income may be taxed in the source country according to its domestic laws but capped at a maximum rate if the recipient is beneficial owner. It held that the first step is to compute income under domestic law, including application of loss set-offs under section 71 of the Income Tax Act, before applying the treaty's concessional rate. Article 25(1) of the treaty preserves domestic laws unless expressly overridden.
Regarding the meaning of "gross," the Tribunal noted the absence of a definition in the treaty or Act but referred to the OECD Commentary, which interprets "gross amount" as the amount before expenses, not losses. Since the assessee did not claim any expense deduction, the income was correctly computed. Thus, the Tribunal concluded that set-off of PE business losses against interest income is permissible under domestic law and treaty provisions.
2. Applicability of Section 115A(1)(a)(iiaa) and Section 194LC to Interest Income on ECB Loans
The assessee alternatively claimed concessional tax rate of 5% under section 115A(1)(a)(iiaa) read with section 194LC, which applies to interest income on ECB loans approved by the Central Government. The DRP rejected this claim, stating that since the loan agreements were not specifically approved by the Central Government, the concessional rate was inapplicable and the interest income should be taxed at 20% under section 115A(1)(a)(ii).
The Tribunal examined a CBDT press release dated 21.09.2012, which clarified that case-by-case approval by the Central Government is dispensed with if the borrowing complies with RBI's ECB regulations. The press release aimed to reduce compliance burden by granting blanket approval for loans adhering to ECB regulations. Since there was no allegation of non-compliance with RBI guidelines, the Tribunal held that the interest income qualifies for the concessional 5% tax rate under section 115A(1)(a)(iiaa) with applicable surcharge and cess.
3. Adjustment of Refund Without Issuance of Notice
The assessee raised a grievance regarding adjustment of a refund amount of Rs. 17,37,439/- without issuance of a notice of demand under sections 156 or 245 of the Income Tax Act. The Tribunal directed the AO to verify the claim and decide the matter in accordance with law after providing the assessee a reasonable opportunity of being heard.
4. Prematurity of Penalty Proceedings Under Section 271A
The assessee challenged the initiation of penalty proceedings under section 271A of the Act as premature. The Tribunal dismissed this ground, holding that the challenge was premature at this stage of proceedings.
Significant Holdings:
"As per section 11(2) of India-UAE treaty, firstly, computation of income and its taxability has to be determined in terms with the domestic law, i.e., the Income Tax Act. Therefore, full effect to the computation provisions contained under the Income Tax Act including Chapter VI and VIA have to be given."
"Article 25(1) of the Treaty provides that laws in force in either of the contracting States shall continue to govern the taxation of income and capital in the respective contracting States, except where express provisions to the contrary are made in the agreement."
"Denying the benefit of set off on the ground that Article 11(2)(a) provides for 'gross' interest is not correct since, the term 'gross' here means interest without claiming deduction towards any expenditure."
"In the first stage, the total income of the assessee has to be computed in terms with the provisions of the Act and after set off of loss as provided u/s. 71 of the Act, the applicable rate of tax as per Article 11(2)(a) can be applied to bring to tax the interest income."
"Case to case approval of loan agreement by the Central Government has been dispensed with and the only condition imposed is that the ECB loans must be in consonance with the ECB regulations framed by RBI."
"Interest income would be covered u/s. 115A(1)(a)(iiaa) of the Act, hence, subject to concessional rate of tax at 5% with applicable cess and surcharge."
The Tribunal's final determinations were:
Set off of loss of PE against the interest income - AO was of the view that once the interest income is taxable on gross basis in terms with Article 11(2) of the Treaty, no further deduction, including, set off of loss against such income, is impermissible - HELD THAT:- Article 25(1) of the Treaty provides that laws inforce in either of the contracting States shall continue to govern the taxation of income and capital in the respective contracting States, except, where express provisions to the contrary are made in the agreement. Article 11(2) of the Treaty itself provides for computation and taxability of income in terms with the provisions of the domestic law. Therefore, it cannot be said that the assessee cannot adopt hybrid approach and claim inter-head set off of loss. Thus, in our view, a reading of Article 11(2) along with the provisions of the Act makes it abundantly clear that the assessee can claim set off of current year business loss of PE against the interest income, since, the treaty itself provides for taxability of income in terms with the domestic law provisions.
Denying the benefit of set off on the ground that Article 11(2)(a) provides for “gross” interest is not correct since, the term “gross” here means interest without claiming deduction towards any expenditure. As discussed earlier, Chapter IV of the Act provides for computation of income under various heads. In so far as computation of income under the head “income from other sources” is concerned, Section 57 of the Act enlists the deductions to be made for computing the income. It is a fact on record that assessee has not claimed any deduction of expenses.
Hence, the income computed by the assessee does not violate the conditions of Article 11(2)(a) of the Treaty. Thus, according to our understanding of the relevant provisions, in the first stage, the total income of the assessee has to be computed in terms with the provisions of the Act and after set off of loss as provided u/s. 71 of the Act, the applicable rate of tax as per Article 11(2)(a) can be applied to bring to tax the interest income. Thus, we hold that assessee’s claim of set off of loss of PE against the interest income is allowable.
Alternative claim of the assessee u/s. 115A(1)(a)(iiaa) - DRP has rejected such claim of assessee on the ground that the condition of approval of the loan agreement by the Central Government as provided under Section 194LC has not been satisfied - HELD THAT:-Case to case approval of loan agreement by the Central Government has been dispensed with and the only condition imposed is that the ECB loans must be in consonance with the ECB regulations framed by RBI. There is no allegation by the Departmental Authorities that the ECB loans are in violation of RBI guidelines. That being the case, in our considered opinion, the interest income would be covered u/s. 115A(1)(a)(iiaa) of the Act, hence, subject to concessional rate of tax at 5% with applicable cess and surcharge.
Set off of loss of PE against the interest income - AO was of the view that once the interest income is taxable on gross basis in terms with Article 11(2) of the Treaty, no further deduction, including, set off of loss against such income, is impermissible - HELD THAT:- Article 25(1) of the Treaty provides that laws inforce in either of the contracting States shall continue to govern the taxation of income and capital in the respective contracting States, except, where express provisions to the contrary are made in the agreement. Article 11(2) of the Treaty itself provides for computation and taxability of income in terms with the provisions of the domestic law. Therefore, it cannot be said that the assessee cannot adopt hybrid approach and claim inter-head set off of loss. Thus, in our view, a reading of Article 11(2) along with the provisions of the Act makes it abundantly clear that the assessee can claim set off of current year business loss of PE against the interest income, since, the treaty itself provides for taxability of income in terms with the domestic law provisions.
Denying the benefit of set off on the ground that Article 11(2)(a) provides for “gross” interest is not correct since, the term “gross” here means interest without claiming deduction towards any expenditure. As discussed earlier, Chapter IV of the Act provides for computation of income under various heads. In so far as computation of income under the head “income from other sources” is concerned, Section 57 of the Act enlists the deductions to be made for computing the income. It is a fact on record that assessee has not claimed any deduction of expenses.
Hence, the income computed by the assessee does not violate the conditions of Article 11(2)(a) of the Treaty. Thus, according to our understanding of the relevant provisions, in the first stage, the total income of the assessee has to be computed in terms with the provisions of the Act and after set off of loss as provided u/s. 71 of the Act, the applicable rate of tax as per Article 11(2)(a) can be applied to bring to tax the interest income. Thus, we hold that assessee’s claim of set off of loss of PE against the interest income is allowable.
Alternative claim of the assessee u/s. 115A(1)(a)(iiaa) - DRP has rejected such claim of assessee on the ground that the condition of approval of the loan agreement by the Central Government as provided under Section 194LC has not been satisfied - HELD THAT:-Case to case approval of loan agreement by the Central Government has been dispensed with and the only condition imposed is that the ECB loans must be in consonance with the ECB regulations framed by RBI. There is no allegation by the Departmental Authorities that the ECB loans are in violation of RBI guidelines. That being the case, in our considered opinion, the interest income would be covered u/s. 115A(1)(a)(iiaa) of the Act, hence, subject to concessional rate of tax at 5% with applicable cess and surcharge.
- Whether the Assessing Officer (AO) was justified in making an addition of Rs. 1,47,91,020/- towards unexplained income based on cash deposits in the bank account of the assessee who did not file return of income for AY 2018-19Rs.
- Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the addition on the basis of fresh evidence submitted during appellate proceedings, without remanding the matter back to the AO for verification, in contravention of Rule 46A(3) of the Income Tax RulesRs.
- Whether the nature of the bank transactions and the business activity of the assessee as a Customer Service Point (CSP) justifies the deletion of the addition made by the AORs.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Justification of addition of unexplained income by AO based on cash deposits and non-filing of return
Relevant Legal Framework and Precedents: Under the Income Tax Act, the AO has the authority to initiate reassessment proceedings under section 148 if income has escaped assessment. Section 144 empowers the AO to make best judgment assessments where the assessee fails to file return or cooperate. The AO's addition of Rs. 1,47,91,020/- was based on unexplained cash deposits and the assessee's failure to file return within prescribed time under section 139.
Court's Interpretation and Reasoning: The AO relied on bank information obtained under section 133(6) and noted the large cash deposits without explanation or filing of return. The AO treated these deposits as unexplained income and made the addition accordingly.
Key Evidence and Findings: The AO had documentary evidence from the bank and no submissions or explanations from the assessee during assessment proceedings. The assessee did not appear or file return despite notice under section 148.
Application of Law to Facts: The AO's action in making addition under section 144 read with section 147 was prima facie justified given non-filing and unexplained cash credits.
Treatment of Competing Arguments: The revenue relied on the above facts to sustain the addition. The assessee, though absent, later submitted documents during appellate proceedings.
Conclusions: The AO's addition was legally sustainable at the assessment stage based on unexplained cash credits and non-cooperation by the assessee.
Issue 2: Legality of CIT(A)'s admission of fresh evidence and deletion of addition without remand to AO
Relevant Legal Framework and Precedents: Rule 46A(3) of the Income Tax Rules mandates that when fresh evidence is admitted by the appellate authority, the matter should be remanded to the AO for verification and report before deciding the appeal.
Court's Interpretation and Reasoning: The CIT(A) admitted fresh evidence in the form of bank statements, trading accounts, profit and loss accounts, balance sheet, and computations submitted during appellate proceedings. The CIT(A) called for a remand report from the AO to verify the correctness of the additional income determined.
Key Evidence and Findings: The AO submitted a remand report stating that no explanation was received during assessment and the nature and source of credits remained unexplained. However, the CIT(A) noted that the AO did not point out any discrepancies or adverse comments on the assessee's activities in the remand report.
Application of Law to Facts: Although the CIT(A) admitted fresh evidence and called for a remand report, it appears that the CIT(A) did not send back the evidence itself to the AO for verification but relied on the remand report as received. The revenue argued this was contrary to Rule 46A(3).
Treatment of Competing Arguments: The revenue contended that the CIT(A) erred by not remanding the fresh evidence to the AO for verification and deciding appeal solely on appellate record. The CIT(A) and the Tribunal found that the AO's remand report did not contradict the fresh evidence or point out discrepancies.
Conclusions: The Tribunal found no infirmity in CIT(A)'s approach as the AO's remand report did not dispute the fresh evidence. The procedural lapse, if any, did not prejudice the revenue's case.
Issue 3: Nature of bank transactions and business activity as CSP justifying deletion of addition
Relevant Legal Framework and Precedents: The nature of business and explanation of bank transactions are relevant to determine whether cash credits constitute unexplained income. CSPs act as intermediaries or agents providing banking services such as cash deposits, withdrawals, fund transfers, sale of mutual funds and insurance products, often handling numerous small transactions.
Court's Interpretation and Reasoning: The CIT(A) analyzed the bank statement showing numerous debit and credit transactions of varying amounts from Rs. 20 to Rs. 2,38,000 spread over 49 pages with about 70 transactions per page. The CIT(A) explained the role of CSPs as agents bridging banks and customers, handling multiple small transactions as part of their business.
Key Evidence and Findings: The assessee's submissions included bank statements, trading and profit and loss accounts, balance sheets and computations. The AO's remand report did not dispute these documents. The CIT(A) found that the transactions were consistent with CSP activity and that the assessee's income was marginal and below taxable limits.
Application of Law to Facts: The explanation of the business activity and the detailed bank transactions supported the conclusion that the cash credits were legitimate business receipts rather than unexplained income.
Treatment of Competing Arguments: The revenue argued that the large cash deposits were unexplained and the assessee failed to file return or explain during assessment. The CIT(A) and Tribunal gave weight to the nature of CSP business and the detailed evidence submitted during appeal, which was not contradicted by AO's remand report.
Conclusions: The Tribunal upheld the CIT(A)'s finding that the bank transactions were consistent with CSP activity and did not constitute unexplained income, justifying deletion of addition.
3. SIGNIFICANT HOLDINGS
"The main issue in the appeal is pertaining to the credit and debit entries of small amounts in the bank account statement bearing no. 34237976729 in State Bank of India. As verified from the bank account statement, it is noticed that there are 49 pages of transactions and each page contain approximately 70 transactions of both debit and credit with the varying amounts per transactions from Rs. 20/- (minimum amount) to Rs. 2,38,000/- (maximum amount). The appellant stated that he is functioning as CSP. It is important to know the activity of a CSP to understand the nature of entries in the impugned bank account. As per the banking terminology, CSP stands for Customer Service Point. A person appointed as CSP by the bank offers his/her basic services of the bank to customers like account opening, cash deposit, cash withdrawal and fund transfers; also provides services of sale of units of mutual funds, insurance products. CSPs also provides banking services at the door step of the customers. In principle, a CSP acts as an intermediary or agent for banking services. In brief, CSP act as a bridge between the bank and the customers. CSPs are used by the banks to meet the requirements of the customers without establishing the branches at non-feasible areas. RBI statistics shows that there are several lakhs of such CSPs are working now in India."
Core principles established include:
- Mere unexplained cash deposits do not ipso facto constitute income if the nature of business and transactions are satisfactorily explained and supported by evidence.
- Admission of fresh evidence during appellate proceedings requires proper procedure, but if the AO's remand report does not dispute such evidence, the appellate authority may decide the appeal without remanding again.
- The role and functioning of CSPs as agents facilitating multiple small banking transactions must be taken into account in assessing unexplained cash credits.
Final determinations:
- The addition of Rs. 1,47,91,020/- made by the AO towards unexplained income was deleted by the CIT(A) on the basis of fresh evidence and nature of business.
- The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal and confirming that the assessee's bank transactions were consistent with CSP activity and did not represent unexplained income.
Unexplained income - cash deposits in the bank account - HELD THAT:- Assessee deals in CSP [Customer Service Point] and having very marginal income i.e. below the taxable amount so the assessee did not file return of income. During the course of appellate proceedings, the assessee filed submission in the form of bank statement, trading and profit and loss account, balance sheet computation etc.
CIT(A) called for remand report from the AO. CIT(A) directed the AO to verify the bank account submitted detailed report about correctness of additional report towards unexplained income.
AO in its remand report has submitted that in absence of any explanation / submission received from the assessee during assessment proceedings. The nature and source of the credit entries in the bank account of the assessee remained unexplained.
CIT(A) has discussed the remand report in its order and observed that no discrepancy were pointed out by the AO and no comments have been made on the assessee’s activities in the remand report. CIT(A) correctly held CSP act as a bridge between the bank and the customers. CSPs are used by the banks to meet the requirements of the customers without establishing the branches at non-feasible areas. RBI statistics shows that there are several lakhs of such CSPs are working now in India. Decided in favour of assessee.
Unexplained income - cash deposits in the bank account - HELD THAT:- Assessee deals in CSP [Customer Service Point] and having very marginal income i.e. below the taxable amount so the assessee did not file return of income. During the course of appellate proceedings, the assessee filed submission in the form of bank statement, trading and profit and loss account, balance sheet computation etc.
CIT(A) called for remand report from the AO. CIT(A) directed the AO to verify the bank account submitted detailed report about correctness of additional report towards unexplained income.
AO in its remand report has submitted that in absence of any explanation / submission received from the assessee during assessment proceedings. The nature and source of the credit entries in the bank account of the assessee remained unexplained.
CIT(A) has discussed the remand report in its order and observed that no discrepancy were pointed out by the AO and no comments have been made on the assessee’s activities in the remand report. CIT(A) correctly held CSP act as a bridge between the bank and the customers. CSPs are used by the banks to meet the requirements of the customers without establishing the branches at non-feasible areas. RBI statistics shows that there are several lakhs of such CSPs are working now in India. Decided in favour of assessee.
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Competency of Authority to Initiate and Levy Penalty under Section 270A
Legal Framework and Precedents: Section 270A of the Act provides for penalty on underreporting and misreporting of income. The procedural aspects regarding initiation and levy of penalty are governed by the satisfaction of the authority conducting assessment or appellate proceedings. The Tribunal referred to a precedent from the Pune Bench which elaborated that penalty proceedings can be initiated either during assessment or appellate/revision proceedings, but the authority who forms satisfaction regarding concealment or furnishing inaccurate particulars is exclusively competent to initiate and levy penalty. The High Court's ruling emphasized that the same authority must conduct the penalty proceedings and pass the penalty order.
Court's Interpretation and Reasoning: The Tribunal held that since the CIT(A) formed satisfaction and initiated penalty proceedings under section 270A with respect to the underreported income of Rs. 5,06,267/-, only the CIT(A) is competent to levy penalty on that portion of income. The AO's penalty proceedings on other additions remain independent and are not interfered with.
Application of Law to Facts: The CIT(A) initiated penalty proceedings on the underreported income discovered during the survey and declared in the section 148 return. The Tribunal concurred that the penalty levied by the CIT(A) on this income is valid and within jurisdiction.
Conclusion: The penalty under section 270A corresponding to the Rs. 5,06,267/- underreported income can be levied only by the CIT(A), who initiated the penalty proceedings, and not by the AO.
Issue 2: Whether the Facts Constitute Underreporting of Income in Consequence of Misreporting
Legal Framework: Section 270A(2)(a) defines underreporting of income, and section 270A(9)(e) specifically addresses underreporting arising from misreporting, such as failure to record certain business receipts in books of account.
Key Evidence and Findings: The survey under section 133A revealed that the assessee suppressed sales receipts and did not record certain cash receipts from non-checking customers and banquet hall parties in the books of account. The manager of the hotel admitted these omissions during the survey. The additional income of Rs. 5,06,267/- was declared only in the return filed under section 148, not in the original return.
Court's Interpretation and Reasoning: The Tribunal and CIT(A) found that the suppression of business receipts and failure to record them in books clearly constitutes underreporting of income in consequence of misreporting under section 270A(9)(e). The additional income declared in the section 148 return was a direct consequence of the survey findings and admission by the assessee's representative.
Application of Law to Facts: Since the income was suppressed and not disclosed in the original return, and was only disclosed post-survey in the section 148 return, the case squarely falls within the ambit of underreporting due to misreporting.
Conclusion: The facts establish underreporting of income resulting from misreporting, justifying penalty under section 270A(9)(e).
Issue 3: Whether the Return Filed under Section 148 Replaces the Original Return and Precludes Penalty
Legal Framework: Filing a return under section 148 is a statutory response to a notice for reassessment. However, the law contemplates that if the additional income is disclosed only in the section 148 return and was suppressed in the original return, penalty provisions can be invoked.
Arguments and Court's Reasoning: The assessee contended that the revised return under section 148 replaces the original return and since the additional income was accepted, penalty should not be levied. The Tribunal rejected this contention, reasoning that acceptance of additional income in reassessment does not absolve the assessee from penalty liability if the income was initially suppressed or underreported. The statutory scheme under section 270A explicitly contemplates penalty for underreporting even if income is declared later.
Conclusion: The mere filing of a return under section 148 does not preclude levy of penalty under section 270A where income was underreported in the original return.
Issue 4: Applicability of Case Laws Relating to Penalty under Section 271(1)(c) to Penalty under Section 270A
Legal Framework: Section 271(1)(c) and section 270A deal with penalty for concealment or furnishing inaccurate particulars, but section 270A is a newer provision with distinct procedural and substantive features.
Arguments and Court's Reasoning: The assessee relied on decisions under section 271(1)(c) to argue against penalty. The Tribunal clarified that decisions under section 271(1)(c) are not directly applicable to section 270A proceedings, as the latter has specific provisions and definitions regarding underreporting and misreporting. The Tribunal also distinguished other cited decisions where the additional income was disclosed in the original return or regular return, unlike the present case.
Conclusion: Precedents under section 271(1)(c) do not govern penalty under section 270A; hence, reliance on such decisions is misplaced in the present facts.
Issue 5: Justification for Levying Penalty at 200% of Tax Payable on Underreported Income
Legal Framework: Section 270A(9)(e) empowers levy of penalty up to 200% of the tax payable on underreported income arising from misreporting.
Court's Reasoning: Given that the assessee suppressed income and failed to record certain receipts, the penalty at the maximum prescribed rate of 200% of tax payable on the underreported income was justified. The Tribunal found the CIT(A)'s order to be exhaustive and detailed, adequately explaining the basis for penalty and rejecting the assessee's grounds.
Conclusion: The penalty imposed at 200% of tax payable on the underreported income is justified and upheld.
3. SIGNIFICANT HOLDINGS
"The Hon'ble High Court very clearly laid down that the levy of penalty can be two stages i.e. during the course of assessment by the Assessing Officer or during the course of appeal or revision proceedings, where if the authority is satisfied regarding concealment and furnishing of inaccurate particulars, it is then that authority, which is satisfied, has to initiate penalty proceedings and thereafter pass orders in respect of the penalty to be imposed. ... The person who is making the assessment in the hands of a person, is the person authorized to give the satisfaction as to whether the addition made in the hands of the said assessee justifies initiation of penalty proceedings. The exercise of initiation of penalty proceedings is at the stage of assessment by the Assessing Officer or at the stage of an appeal against the quantum appeal, by the CIT(A) or in the revision proceedings. Thereafter, the person who has initiated the penalty proceedings is only the competent person to levy the penalty proceedings and not any other authority."
Core principles established include:
Final determinations on each issue were in favour of the Revenue, with the Tribunal dismissing the assessee's appeal and upholding the penalty of Rs. 3,12,880/- levied under section 270A of the Act for AY 2017-18.
Penalty u/s 270A - assessee failed to record certain cash receipts in its books of account - underreported income in consequence of misreporting - HELD THAT:- CIT(A) in the instant case has initiated penalty proceedings u/s 270A which was determined by him as underreported income in consequence of misreporting. He has given valid reasons for levying of penalty, which in our opinion, is very exhaustive and in detail and does not call for any interference from our side. We therefore, uphold the same. The grounds raised by the assessee are accordingly dismissed.
Penalty u/s 270A - assessee failed to record certain cash receipts in its books of account - underreported income in consequence of misreporting - HELD THAT:- CIT(A) in the instant case has initiated penalty proceedings u/s 270A which was determined by him as underreported income in consequence of misreporting. He has given valid reasons for levying of penalty, which in our opinion, is very exhaustive and in detail and does not call for any interference from our side. We therefore, uphold the same. The grounds raised by the assessee are accordingly dismissed.
- Whether the delay of 58 days in filing the appeal against the order of the Commissioner of Income Tax (Exemption) can be condoned under the principles governing limitation and delay condonation under the Income-tax Act, 1961.
- Whether the rejection of the application for registration under section 12AB of the Income-tax Act, 1961, and the cancellation of provisional registration under section 12A(1)(ac)(iii) by the CIT(Exemption) was legally sustainable.
- Whether the CIT(Exemption) was justified in rejecting the application solely on the ground of non-compliance with notices without considering the merits of the case and the materials already filed by the assessee.
- Whether the matter should be remanded for fresh consideration with directions to the CIT(Exemption) to examine the application on merits and pass a reasoned and speaking order.
2. ISSUE-WISE DETAILED ANALYSIS
Condonation of Delay in Filing Appeal
Relevant Legal Framework and Precedents: The limitation period for filing an appeal under section 253(3) of the Income-tax Act is prescribed, and the Courts have consistently held that a liberal and justice-oriented approach is to be adopted in condoning delay where the delay is not deliberate and does not prejudice the Revenue.
Court's Interpretation and Reasoning: The Tribunal noted that the delay of 58 days was due to the assessee's email account being operated by an accountant who did not regularly check it, resulting in the order coming to the assessee's notice only after a significant time lapse. The delay was not deliberate but a bona fide procedural oversight.
Key Evidence and Findings: An affidavit by the trustee explained the circumstances causing the delay. The Departmental Representative raised no objection to the condonation of delay.
Application of Law to Facts: Applying the principle that delays caused by non-intentional and bona fide reasons should be condoned, and considering the absence of prejudice to the Revenue, the Tribunal condoned the delay.
Treatment of Competing Arguments: The Revenue did not dispute the condonation, reflecting acceptance of the bona fide nature of the delay.
Conclusion: Delay of 58 days in filing the appeal was condoned and the appeal admitted for adjudication on merits.
Validity of Rejection of Application for Registration under Section 12AB and Cancellation of Provisional Registration
Relevant Legal Framework and Precedents: Section 12AB of the Income-tax Act governs registration of charitable or religious trusts, which is critical for availing tax exemptions. Rule 17A(2) of the Income Tax Rules requires furnishing of requisite documents. It is a settled principle that quasi-judicial authorities must pass reasoned and speaking orders after due application of mind, especially in matters affecting substantive rights. Precedents emphasize that rejection solely on procedural grounds without examining merits is impermissible.
Court's Interpretation and Reasoning: The Tribunal observed that the CIT(Exemption) rejected the application and cancelled provisional registration solely on the ground of non-compliance with notices issued for furnishing documents, without considering the documents already on record such as audited financial statements, trust deed, and other supporting materials. There was no examination of the genuineness of the trust's activities or alignment with the objectives under section 2(15) of the Act.
Key Evidence and Findings: The assessee had submitted various documents along with Form 10AB. The impugned order did not discuss or evaluate these materials. The CIT(Exemption) failed to verify the nature and genuineness of activities undertaken by the trust.
Application of Law to Facts: The Tribunal applied the principle that the competent authority must consider the case on merits and not dismiss it solely on procedural defaults, particularly where substantive rights of a charitable trust are involved. The absence of a reasoned order and failure to apply mind to the facts rendered the impugned order unsustainable.
Treatment of Competing Arguments: The Departmental Representative conceded that the matter could be remanded for fresh consideration, indicating acknowledgment of procedural lapses.
Conclusion: The impugned order was set aside, and the matter remanded to the CIT(Exemption) for fresh determination in accordance with law.
Directions on Remand
The Tribunal directed the CIT(Exemption) to:
a. Take into account all documents and materials already filed by the assessee along with Form 10AB;
b. Call for any further clarification or evidence as may be necessary;
c. Pass a reasoned and speaking order after granting the assessee a reasonable and effective opportunity of being heard.
Additionally, the assessee was directed to actively participate in proceedings, respond to notices and furnish documents within prescribed timelines, with a warning that non-compliance may attract adverse inference.
3. SIGNIFICANT HOLDINGS
"It is a settled principle that every quasi-judicial authority is required to pass a reasoned and speaking order after due application of mind to the facts and documents on record. Mechanical rejection, without evaluating the merits of the case or examining the materials already filed, falls short of such requirement."
"Particularly in matters concerning registration under section 12AB, where the consequence affects the substantive rights of a charitable or religious trust, due process mandates that the competent authority consider the case on merits and not dismiss it solely on procedural default."
"Considering the explanation offered, the supporting affidavit, and the totality of circumstances, we are satisfied that the delay was not deliberate or due to inaction on the part of the appellant. It was caused due to a communication gap and subsequent procedural steps undertaken in good faith."
Core principles established include the necessity for reasoned and speaking orders by quasi-judicial authorities, the requirement to consider substantive merits over procedural technicalities in registration matters under section 12AB, and the adoption of a liberal approach in condoning delay where no prejudice is caused to the Revenue.
Final determinations:
- Delay in filing the appeal was condoned.
- The impugned order rejecting registration and cancelling provisional registration was set aside for lack of due consideration of merits.
- The matter was remanded with directions for fresh consideration in accordance with law and procedural fairness.
Rejection of the application for registration u/s 12AB and the cancellation of provisional registration u/s 12A(1)(ac)(iii) - non compliance to CIT(A) notices issued to furnish the necessary documents and information - AR submitted that the assessee is a bona fide trust carrying on activities in accordance with the objectives of the trust and the non-compliance with the notices was not deliberate but occurred due to a genuine oversight as the email communication from the Department remained unnoticed by the accountant.
HELD THAT:- Assessee is a religious trust engaged in some religious / charitable activities and was granted provisional registration under the Act.
CIT(Exemption) recorded that the assessee failed to furnish the requisite documents, but did not discuss or evaluate the materials already available on record. There is no examination of the financial statements, no consideration of the stated objects of the trust, and no effort to verify the nature and genuineness of the activities undertaken by the assessee.
It is a settled principle that every quasi-judicial authority is required to pass a reasoned and speaking order after due application of mind to the facts and documents on record. Mechanical rejection, without evaluating the merits of the case or examining the materials already filed, falls short of such requirement. Particularly in matters concerning registration under section 12AB, where the consequence affects the substantive rights of a charitable or religious trust, due process mandates that the competent authority consider the case on merits and not dismiss it solely on procedural default.
In the present case, the CIT(Exemption) has not discharged this duty. There is no finding on the genuineness of activities, nor any determination of whether the objects of the trust are aligned with the requirements of section 2(15) of the Act.
Thus, we find it appropriate and necessary to remit the matter for a fresh determination. Appeal filed by assessee is allowed for statistical purposes.
Rejection of the application for registration u/s 12AB and the cancellation of provisional registration u/s 12A(1)(ac)(iii) - non compliance to CIT(A) notices issued to furnish the necessary documents and information - AR submitted that the assessee is a bona fide trust carrying on activities in accordance with the objectives of the trust and the non-compliance with the notices was not deliberate but occurred due to a genuine oversight as the email communication from the Department remained unnoticed by the accountant.
HELD THAT:- Assessee is a religious trust engaged in some religious / charitable activities and was granted provisional registration under the Act.
CIT(Exemption) recorded that the assessee failed to furnish the requisite documents, but did not discuss or evaluate the materials already available on record. There is no examination of the financial statements, no consideration of the stated objects of the trust, and no effort to verify the nature and genuineness of the activities undertaken by the assessee.
It is a settled principle that every quasi-judicial authority is required to pass a reasoned and speaking order after due application of mind to the facts and documents on record. Mechanical rejection, without evaluating the merits of the case or examining the materials already filed, falls short of such requirement. Particularly in matters concerning registration under section 12AB, where the consequence affects the substantive rights of a charitable or religious trust, due process mandates that the competent authority consider the case on merits and not dismiss it solely on procedural default.
In the present case, the CIT(Exemption) has not discharged this duty. There is no finding on the genuineness of activities, nor any determination of whether the objects of the trust are aligned with the requirements of section 2(15) of the Act.
Thus, we find it appropriate and necessary to remit the matter for a fresh determination. Appeal filed by assessee is allowed for statistical purposes.
1. Whether the PCIT was justified in issuing a notice and passing an order under section 263 to set aside the assessment completed under section 143(3) read with section 144C(3) for the assessment year 2016-17.
2. Whether the PCIT correctly presumed that the Assessing Officer (AO) allowed a deduction under section 80IA of the Act in respect of the Wind Power Unit without proper verification of facts during assessment proceedings.
3. Whether the assessment order dated 13-02-2020 was erroneous and prejudicial to the interests of the Revenue, particularly concerning the claim of deduction under section 80IA related to the Wind Power Unit at Mahidad.
4. Whether the PCIT was correct in reducing the claim of deduction under section 80IA by Rs. 1,73,58,349/- and setting aside the assessment to that extent.
Issue-wise detailed analysis:
1. Validity of the Section 263 Order Setting Aside the Assessment
Legal Framework and Precedents: Section 263 empowers the PCIT to revise an assessment if it is found to be erroneous and prejudicial to the interests of the Revenue. However, the power must be exercised judiciously and after due consideration of the facts and submissions of the assessee, adhering to principles of natural justice. Precedent from Gujarat Corporation Power Ltd. vs. PCIT (ITA No.976/Ahd/2024) was cited, where the Tribunal held that failure to consider the assessee's submissions while passing a section 263 order renders such order liable to be set aside.
Court's Interpretation and Reasoning: The Tribunal observed that the AO had conducted detailed inquiry into the claim under section 80IA during assessment proceedings, with the assessee filing submissions dated 24.12.2019. However, the PCIT's section 263 order dated 30.03.2022 failed to address or deal with the detailed submissions made by the assessee during the course of 263 proceedings (notably the letter dated 17.03.2022). This omission was held to violate the principles of natural justice.
Key Evidence and Findings: The Tribunal noted that the AO had explicitly considered the claim and related Transfer Pricing Officer (TPO) adjustments in the assessment order. The PCIT's order did not engage with these facts or the legal contentions raised by the assessee.
Application of Law to Facts: Given that the AO had examined the claim and the PCIT failed to consider the assessee's submissions while passing the revision order, the Tribunal held that the section 263 order was unsustainable.
Treatment of Competing Arguments: The PCIT relied on the premise that the AO had not properly verified the claim, but the Tribunal found that the AO had indeed inquired into the matter and the PCIT's failure to consider the assessee's detailed responses was fatal to the revision order.
Conclusion: The section 263 order was set aside for non-compliance with natural justice and lack of proper reasoning.
2. Verification and Allowance of Deduction under Section 80IA for Wind Power Unit
Legal Framework and Precedents: Section 80IA provides deduction for profits derived from infrastructure projects including power generation. The deduction is computed after adjusting for arm's length prices as per transfer pricing provisions. CBDT Circular No. 37/2016 clarifies that disallowance of certain expenses (e.g., O&M charges disallowed by TPO) should not be treated as income and should not reduce the eligible deduction under section 80IA.
Court's Interpretation and Reasoning: The Tribunal analyzed the detailed submissions and figures provided by the assessee. The AO had accepted the TPO's downward adjustment of revenue by Rs. 29.29 crores but had allowed a residual deduction of Rs. 1.73 crores under section 80IA after netting the disallowed O&M charges of Rs. 4.03 crores. The assessee argued that the disallowed O&M charges should not reduce the deduction as per the CBDT Circular.
Key Evidence and Findings: The assessee's detailed breakdown of income, expenses, and adjustments showed that the net reduction in profit eligible for deduction was Rs. 25.25 crores (after adding back disallowed O&M charges). The AO's assessment order reflected this net adjustment, and the residual deduction was correctly allowed.
Application of Law to Facts: The Tribunal found that the AO had properly applied the legal principles and accounted for the TPO's adjustments in computing the deduction under section 80IA. The deduction allowed was consistent with the statutory provisions and CBDT Circular.
Treatment of Competing Arguments: The PCIT contended that the AO had not verified the claim properly, but the Tribunal noted the AO's detailed examination and the assessee's submissions during assessment. The PCIT's contrary view was not supported by any new material or analysis.
Conclusion: The claim under section 80IA was correctly allowed by the AO after proper verification and application of law.
3. Whether the Assessment Order was Erroneous and Prejudicial to Revenue
Legal Framework and Precedents: An assessment order is erroneous and prejudicial if it results in loss to the Revenue due to incorrect application of law or failure to consider material facts.
Court's Interpretation and Reasoning: The Tribunal held that since the AO had examined the claim in detail, considered the TPO's adjustments, and allowed the deduction consistent with law and CBDT Circular, the assessment order was not erroneous or prejudicial.
Key Evidence and Findings: The AO's order detailed the adjustments and deductions allowed, reflecting the net effect of transfer pricing and expense disallowances. The assessee's submissions were also considered during assessment.
Application of Law to Facts: The assessment order was found to be legally sound and factually supported.
Treatment of Competing Arguments: The PCIT's assertion of error was based on a presumption of inadequate verification, which the Tribunal rejected based on the record.
Conclusion: The assessment order was neither erroneous nor prejudicial to the Revenue.
4. Reduction of Deduction under Section 80IA by Rs. 1,73,58,349/-
Legal Framework and Precedents: The amount of deduction under section 80IA must be computed after adjusting for transfer pricing additions and disallowances as per law and CBDT Circulars.
Court's Interpretation and Reasoning: The Tribunal accepted the assessee's calculation showing that after adjusting the TPO's reduction of revenue and disallowance of O&M charges (which should not reduce deduction), the residual deduction was Rs. 1.73 crores. This was consistent with the AO's allowance.
Key Evidence and Findings: The detailed financial data and submissions by the assessee demonstrated the correctness of this residual deduction.
Application of Law to Facts: The deduction was correctly reduced from the claimed Rs. 26.99 crores to Rs. 1.73 crores after lawful adjustments.
Treatment of Competing Arguments: The PCIT's contention that the deduction should be disallowed entirely was not supported by the facts or law.
Conclusion: The reduction of deduction to Rs. 1.73 crores was justified and correctly allowed by the AO.
Significant holdings include the following verbatim excerpt from the Tribunal's reasoning, which encapsulates the core principle regarding natural justice and the exercise of revisionary power under section 263:
"On going through the facts of the instant case, we observe that the PCIT in the 263 order has failed to taken into consideration / dealt with any of the arguments taken / submissions filed by the assessee during the course of 263 proceedings. Therefore, we are of the view that the 263 order and has been passed against the principles of natural justice, wherein none of the arguments / submissions of the assessee were discussed or dealt with in the 263 order."
The Tribunal established the principle that a revisionary order under section 263 must address and consider the assessee's submissions; failure to do so invalidates the order.
Final determinations on each issue are:
1. The section 263 order setting aside the assessment was unsustainable due to non-consideration of the assessee's submissions and violation of natural justice.
2. The AO correctly verified and allowed the residual deduction under section 80IA after lawful adjustments for transfer pricing and disallowed expenses.
3. The assessment order was neither erroneous nor prejudicial to the interests of the Revenue.
4. The reduction of deduction claim under section 80IA to Rs. 1.73 crores was justified and correctly reflected in the assessment.
Accordingly, the appeal was allowed, and the section 263 order was set aside.
Revision u/s 263 - AO has allowed the deduction u/s 80IA in respect of Windmills, without verification of the facts which should have been made during the course of assessment proceedings - HELD THAT:- AO had specifically inquired on this issue and vide submission dated 24.12.2019 the assessee had filed a detailed submission on this aspect before the concerned Tax Officer. Accordingly, evidently, this aspect had been inquired by the AO during the course of assessment proceedings. However, another aspect which we observe is that in the 263 order, the assessee vide letter dated 17.03.2022, gave detailed submissions on this aspect, however, while passing the 263 order, the PCIT did not at all deal with any of the factual and legal contentions put forward by the assessee during the course of 263 proceedings. In our considered view, this approach of Ld. PCIT makes the 263 order liable to be set-aside as having been passed against the principles of natural justice.
Gujarat Corporation Power Ltd. [2024 (11) TMI 1466 - ITAT AHMEDABAD] the ITAT Ahmedabad held that order u/s 263 of the Act is not liable to be sustained since the argument or submission of the assessee were not considered by the Ld. PCIT while passing the 263 order. While passing the order,
The aspect regarding claim of deduction under Section 80-IA of the Act had been duly considered during the course of assessment proceedings coupled with the fact that while passing 263 order, none of the submissions filed by the assessee were discussed or dealt with by Ld. PCIT, we are of the considered view that order passed by Ld. PCIT u/s 263 of the Act is liable to be set-aside. Appeal of the assessee is allowed.
Revision u/s 263 - AO has allowed the deduction u/s 80IA in respect of Windmills, without verification of the facts which should have been made during the course of assessment proceedings - HELD THAT:- AO had specifically inquired on this issue and vide submission dated 24.12.2019 the assessee had filed a detailed submission on this aspect before the concerned Tax Officer. Accordingly, evidently, this aspect had been inquired by the AO during the course of assessment proceedings. However, another aspect which we observe is that in the 263 order, the assessee vide letter dated 17.03.2022, gave detailed submissions on this aspect, however, while passing the 263 order, the PCIT did not at all deal with any of the factual and legal contentions put forward by the assessee during the course of 263 proceedings. In our considered view, this approach of Ld. PCIT makes the 263 order liable to be set-aside as having been passed against the principles of natural justice.
Gujarat Corporation Power Ltd. [2024 (11) TMI 1466 - ITAT AHMEDABAD] the ITAT Ahmedabad held that order u/s 263 of the Act is not liable to be sustained since the argument or submission of the assessee were not considered by the Ld. PCIT while passing the 263 order. While passing the order,
The aspect regarding claim of deduction under Section 80-IA of the Act had been duly considered during the course of assessment proceedings coupled with the fact that while passing 263 order, none of the submissions filed by the assessee were discussed or dealt with by Ld. PCIT, we are of the considered view that order passed by Ld. PCIT u/s 263 of the Act is liable to be set-aside. Appeal of the assessee is allowed.
The core legal questions considered by the Tribunal are:
(a) Whether the reopening of the completed assessment for Assessment Year 2012-13 under Section 147 of the Income-tax Act, 1961, was valid and in accordance with law, given that the Assessing Officer (AO) initiated reassessment proceedings based on the same facts available at the time of the original assessment.
(b) Whether the AO had "reason to believe" that income had escaped assessment within the meaning of Section 147, particularly when the original assessment had already considered the relevant material and facts.
(c) Whether the reopening notice issued after four years from the end of the relevant assessment year complied with the proviso to Section 147 regarding the limitation period and the requirement of prior approval from the Principal Commissioner of Income Tax.
(d) Whether the assessee had failed to disclose fully and truly all material facts necessary for assessment, thus justifying reopening under Section 147.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) & (b): Validity of reopening assessment under Section 147 based on same facts
The legal framework for reopening assessments is governed by Section 147 of the Income-tax Act, which allows the AO to reopen an assessment if there is "reason to believe" that income chargeable to tax has escaped assessment. The Supreme Court in CIT v. Kelvinator of India Ltd. clarified that post-amendment, the AO need only have a "reason to believe" escapement of income, which is a subjective satisfaction supported by tangible material.
In this case, the AO reopened the assessment on the ground that the assessee had claimed various expenses (salary, travelling, rent) despite no sales during the year, and that sundry creditors showed a huge liability inconsistent with the business activity. However, the Tribunal observed that these issues were already examined during the original assessment, which included an ad-hoc disallowance of Rs. 30,00,000/- on account of sundry creditors under Section 41(1).
The Tribunal noted that the AO did not bring any new material evidence that was not available at the time of original assessment. The reopening was based on a mere reconsideration of the balance sheet and facts already on record. The Tribunal emphasized that mere change of opinion or reappreciation of the same material does not constitute "reason to believe" escapement of income justifying reassessment.
Therefore, the reopening was held to be invalid as it lacked fresh tangible material and was based solely on facts considered during the original proceedings.
Issue (c): Compliance with limitation and procedural requirements for reopening
The reopening notice was issued on 19.03.2019, which is more than four years after the end of the relevant assessment year 2012-13. Under the first proviso to Section 147, reopening after four years requires that the AO must have prior approval from the Principal Commissioner of Income Tax and must record the reasons for reopening.
The AO asserted that the notice was issued after satisfying himself and recording reasons, and that the prior approval from the Pr. CIT-1, Mumbai was obtained electronically through the ITBA portal. The Tribunal accepted that procedural requirements regarding approval and recording of reasons were complied with.
However, compliance with procedural formalities alone does not validate reopening if the foundational "reason to believe" is absent or based on the same facts already considered.
Issue (d): Disclosure of material facts by the assessee
The AO alleged failure on the part of the assessee to disclose fully and truly all material facts, citing the large sundry creditors and claimed expenses despite no sales. However, the assessee had submitted detailed information on advances and sundry creditors during the original assessment proceedings, which were examined by the AO who made an ad-hoc disallowance accordingly.
The Tribunal found that the assessee had disclosed all relevant material facts necessary for assessment and that there was no concealment or suppression justifying reopening under Section 147.
3. SIGNIFICANT HOLDINGS
"The reopening of the completed assessment after four years for the reasons mentioned hereinabove is bad in law."
"The AO has reopened the completed assessment for the issues considered by him during the original assessment proceedings without bringing any new material evidence on record."
"It cannot be said that the assessee did not disclose fully and completely all material facts relevant for the assessment."
Core principles established include:
- Reopening under Section 147 requires "reason to believe" escapement of income supported by new tangible material not considered in the original assessment.
- Mere change of opinion or reappreciation of facts already examined does not justify reopening.
- Procedural compliance (recording reasons, prior approval) is necessary but not sufficient; the substantive grounds for reopening must be valid.
- Full disclosure of material facts by the assessee negates the basis for reopening.
The final determination was that the reopening was invalid and the reassessment order was quashed. Consequently, the appeal of the assessee was allowed without adjudicating the merits of the additions made in the reassessment.
Reassessment proceedings - Ad-hoc addition on account of sundry creditors u/s 41(1) - HELD THAT:- A perusal of the reasons mentioned hereinabove clearly shows that the AO has reopened the completed assessment for the issues considered by him during the original assessment proceedings without bringing any new material evidence on record. In fact, the reasons themselves show that after reconsidering the balance sheet of the assessee company, the AO reopened the completed assessment. Therefore, in our considered opinion, it cannot be said that the assessee did not disclose fully and completely all material facts relevant for the assessment.
Considering all the reopening of the completed assessment after four years for the reasons mentioned hereinabove is bad in law, and the assessment order deserves to be quashed. Appeal of the assessee is allowed.
Reassessment proceedings - Ad-hoc addition on account of sundry creditors u/s 41(1) - HELD THAT:- A perusal of the reasons mentioned hereinabove clearly shows that the AO has reopened the completed assessment for the issues considered by him during the original assessment proceedings without bringing any new material evidence on record. In fact, the reasons themselves show that after reconsidering the balance sheet of the assessee company, the AO reopened the completed assessment. Therefore, in our considered opinion, it cannot be said that the assessee did not disclose fully and completely all material facts relevant for the assessment.
Considering all the reopening of the completed assessment after four years for the reasons mentioned hereinabove is bad in law, and the assessment order deserves to be quashed. Appeal of the assessee is allowed.
1. Whether the learned Commissioner of Income Tax (International Taxation) was justified in invoking the revisionary jurisdiction under section 263 of the Act against the Assessing Officer's order, particularly whether the jurisdictional conditions envisaged under section 263 and its explanations were fulfilled.
2. Whether the invocation of section 263 was permissible in the facts, given that the Assessing Officer had conducted detailed enquiries and passed the assessment order accordingly, and whether the revision amounted to impermissible change of opinion or re-investigation.
3. Whether the income from offshore supplies forming part of a turnkey power project contract awarded to the non-resident assessee was taxable in India under the Act and relevant Double Taxation Avoidance Agreement (DTAA) between India and China.
4. Whether the offshore and onshore components of the contract were artificially split to avoid tax, and if so, whether the entire contract should be treated as a single composite contract for tax purposes.
5. Whether the non-resident assessee constituted a Permanent Establishment (PE) in India under Article 5 of the India-China DTAA, and if so, what profit should be attributed to such PE.
6. Whether the provisions of section 44BBB of the Act, which provide a presumptive taxation regime for non-resident foreign companies engaged in turnkey power projects, apply to the assessee's business activities and income.
7. Whether the Assessing Officer's order was based on conjectures and surmises, and whether the principle of natural justice was violated by not considering the assessee's reply before passing the revision order.
8. Whether the binding precedents relied upon by the assessee were applicable in the facts, or whether they were per incuriam and hence not binding.
Issue-wise Detailed Analysis:
1. Validity of invoking section 263 revision jurisdiction
The Tribunal examined the legal framework of section 263 of the Act, which empowers the Commissioner to revise an assessment order if it is "erroneous in so far as it is prejudicial to the interests of the revenue." Explanation 2 appended to section 263 clarifies that an order passed without making inquiries or verification which should have been made, or allowing relief without inquiry, shall be deemed erroneous and prejudicial.
The Tribunal noted that the Assessing Officer's order was passed without calling for relevant details or making necessary verification/inquiry to ascertain the taxability of the income, thereby rendering the order erroneous and prejudicial to the revenue. The Tribunal rejected the assessee's contention that revision under section 263 cannot be invoked on mere change of opinion, explaining that "change of opinion" presupposes an initial opinion formed after due inquiry. Since the AO failed to make any meaningful inquiry, no valid opinion existed, and therefore, the "change of opinion" argument did not survive.
The Tribunal relied on judicial precedents holding that the Assessing Officer is not a passive adjudicator but an investigator who must make inquiries when circumstances warrant. Failure to do so renders the order erroneous. It further held that prejudice to revenue means prejudice to revenue administration, not merely an order unfavorable to the department.
Accordingly, the initiation of revision proceedings under section 263 was held to be legally valid and justified in the facts.
2. Taxability of income from offshore supplies under the Act and DTAA
The assessee, a Chinese resident company, had entered into a composite turnkey power project contract with Power Grid Corporation of India Ltd. The contract encompassed planning, design, engineering, supply, and supervision of erection/installation of optical ground wire (OPGW) cables and associated items.
Subsequently, the single composite contract was split into two agreements: an offshore supplies contract (covering design, engineering, testing, and supply outside India) and an onshore services contract (covering local transportation, insurance, and supervision in India). The assessee claimed that income from offshore supplies was not taxable in India.
The Tribunal analyzed the contractual terms and concluded that the splitting was artificial and intended to avoid tax. The contract clauses made the assessee overall responsible for execution of both contracts, with breach of one contract deemed breach of the other, indicating a single composite contract.
Under the Income-tax Act, sections 5(2) and 9(1)(i) embody the source rule, taxing income accruing or arising in India or through a business connection in India. The Tribunal held that the assessee's activities created a business connection in India, making the offshore income taxable in India under section 9(1)(i), notwithstanding that the supplies were made offshore.
The Tribunal further referred to the Explanation below section 9(2) inserted by Finance Act 2010, which provides that services are taxable where utilized, supporting the view that offshore supplies used in India are taxable.
Thus, the Tribunal rejected the assessee's contention that offshore supplies revenue was not taxable in India.
3. Existence of Permanent Establishment (PE) and business connection
Under Article 5 of the India-China DTAA, a PE is defined as a fixed place of business through which business is wholly or partly carried on, including construction sites or installation projects lasting more than 183 days.
The Tribunal found that the assessee's contractual engagement in India exceeded six months, satisfying the construction PE threshold. It also held that the assessee had a business connection in India, as there existed a real and intimate relation between the non-resident's activities outside India and within India, contributing directly or indirectly to income earning.
The Tribunal relied on judicial precedents and rulings by the Authority for Advance Rulings to emphasize that continuity and a course of dealing are essential to establish business connection. The assessee's turnkey power project contract met these criteria.
4. Attribution of profits to the PE and relevant legal principles
The Tribunal discussed the mechanism for attributing profits to a PE under Article 7 of the DTAA and the Income-tax Act. It distinguished between the "functionally separate entity" approach based on detailed functional analysis (FAR) and the "relevant business activity" approach adopted by India.
India follows the relevant business activity approach, which attributes to the PE the arm's length profit of the business activity as a whole, rather than allocating profits based on functions performed, assets used, or risks assumed. This approach is consistent with the "force of attraction" clause in Indian DTAAs and Rule 10 of the Income-tax Rules, which provides formulary apportionment methods for determining profits attributable to a PE.
The Tribunal noted that the FAR-based approach recommended by the OECD's Authorized OECD Approach (AOA) has not been accepted by India, which has made specific reservations and continues to follow the earlier model.
Accordingly, the profit attribution to the PE must be determined based on the arm's length profit of the turnkey power project business activity as a whole, without resorting to detailed FAR analysis.
5. Applicability of section 44BBB of the Income-tax Act
Section 44BBB provides a presumptive taxation regime for foreign companies engaged in civil construction, erection of plant or machinery, testing or commissioning in connection with a turnkey power project approved by the Central Government. It deems 10% of the amount paid or payable (whether in or out of India) to be the profits and gains chargeable to tax.
The Tribunal held that section 44BBB is a special provision overriding the general provisions of the Act and Rules, including Rule 10. It applies regardless of whether the non-resident has a PE in India or not.
Since the assessee was engaged in a turnkey power project contract, the income from the entire contract, including offshore supplies, falls within the scope of section 44BBB. The tax base includes all amounts paid or payable in or outside India, thereby including offshore receipts.
The Tribunal concluded that the arm's length profit is fixed at 10% of the aggregate receipts under the contract, and the Assessing Officer was correct in applying section 44BBB to determine taxable income as 10% of Rs. 64,37,76,118, i.e., Rs. 6,43,77,612.
6. Treatment of the assessee's reliance on precedents holding offshore supplies non-taxable
The assessee relied on Supreme Court decisions in Hyundai Heavy Industries Co. Ltd. and Ishikawajima Harima Heavy Industries Ltd., which held that offshore supplies revenue could not be held taxable in India.
The Tribunal distinguished those cases on facts, noting that those cases did not involve the interplay of section 44BBB, section 9(1)(i), Rule 10, and Article 7 of the DTAA as in the present case. It observed that the earlier decisions adopted a transactional approach rather than a holistic approach to ascertain taxability, which conflicts with the principle approved by the Supreme Court in Vodafone International Holdings B.V. v. Union of India, requiring a holistic ascertainment of business activities.
The Tribunal further held that precedents may not be binding if rendered per incuriam, i.e., in ignorance or forgetfulness of relevant statutory provisions. It cited judicial authorities emphasizing that perpetuation of an erroneous decision is not desirable and courts have a duty to rectify mistakes.
Accordingly, the Tribunal rejected the assessee's reliance on these precedents and upheld the applicability of section 44BBB and the holistic approach to taxability.
7. Natural justice and procedural fairness
The assessee contended that the learned Commissioner did not consider its reply before passing the revision order, violating natural justice.
The Tribunal did not specifically elaborate on this point in the available text, but the overall reasoning implies that the revision was based on established legal principles and detailed examination of contract documents, suggesting that procedural fairness was observed or that any procedural lapse did not vitiate the order.
8. Conclusion on the Assessing Officer's order and revision direction
The Tribunal held that the Assessing Officer's order was erroneous and prejudicial to the revenue as it failed to make necessary inquiries and did not apply correct legal principles regarding taxability and profit attribution.
The revision under section 263 was valid and justified. However, the Tribunal ultimately allowed the appeal of the assessee on the narrow point that the offshore supplies revenue was not taxable in India, reversing the Commissioner's direction to tax offshore income under section 44BBB.
This conclusion was based on the assessee's submission and evidence that the offshore supplies contract was performed entirely outside India, with onshore services performed by a third party, and the contract documents clearly segregated offshore and onshore activities. The Tribunal found that the CIT's direction to club offshore and onshore revenues and tax the offshore component was unsustainable in light of binding precedents and facts.
Therefore, the Tribunal allowed the appeal, holding that section 44BBB would not apply to offshore supplies revenue not taxable in India, and reversed the CIT's revision direction accordingly.
Significant Holdings:
"The Assessing Officer is not only an adjudicator but also an investigator. He cannot remain passive on the facts of a return which is apparently in order but calls for further enquiry. If there is a failure to make such enquiry, order is erroneous and prejudicial to revenue."
"Change of opinion argument would not survive where no valid opinion was formed by the Assessing Officer due to lack of inquiry."
"The single composite turnkey power project contract artificially split into offshore and onshore contracts is to be treated as one contract for tax purposes to prevent tax avoidance."
"Income from offshore supplies utilized in India forms part of business connection in India and is taxable under section 9(1)(i) of the Income-tax Act."
"India follows the relevant business activity approach for attribution of profits to Permanent Establishment under Article 7 of DTAA, not the functionally separate entity approach based on FAR analysis."
"Section 44BBB is a special provision overriding other provisions and applies to foreign companies engaged in turnkey power projects, deeming 10% of all amounts paid or payable (whether in or out of India) as taxable profits."
"Precedents rendered per incuriam, ignoring relevant statutory provisions, are not binding and courts have a duty to rectify erroneous decisions."
"The holistic approach to ascertain taxability of cross-border business income is mandated, and artificial splitting of contracts to avoid tax is impermissible."
Revision u/s 263 - CIT(IT)’s revision direction holding its “offshore” revenues from sale of equipment from China as taxable in India u/s 44BBE of the Act - HELD THAT:- CIT(IT)’s impugned revision directions firstly clubbing both the assessee’s offshore and onshore revenues and then holding the former head as taxable in India; are not sustainable in light of Hyundai Heavy Industries Co. Ltd. [2007 (5) TMI 196 - SUPREME COURT] and Ishikawajima Harima Heavy Industries Ltd. Vs. Director of Income-tax, ]2007 (1) TMI 91 - SUPREME COURT] wherein their lordships have settled the issue long back that such offshore supply(ies) revenue could not be held as taxable in India.
We thus conclude in light of above assessee’s cogent supportive material involving all the contracts documents as well the foregoing case law that the CIT(IT) has erred in law and on facts in treating the assessee’s offshore supplies revenue as taxable in India after having unilaterally re-drawn the above agreement clauses forming subject matter of our adjudication; are hereby reversed in very terms. That being the case, it is concluded in assessee’s favour and against the department that once it is not assessable even under the normal provisions, section 44BBB would also not apply in it’s case. Assessee’s appeal is allowed.
Revision u/s 263 - CIT(IT)’s revision direction holding its “offshore” revenues from sale of equipment from China as taxable in India u/s 44BBE of the Act - HELD THAT:- CIT(IT)’s impugned revision directions firstly clubbing both the assessee’s offshore and onshore revenues and then holding the former head as taxable in India; are not sustainable in light of Hyundai Heavy Industries Co. Ltd. [2007 (5) TMI 196 - SUPREME COURT] and Ishikawajima Harima Heavy Industries Ltd. Vs. Director of Income-tax, ]2007 (1) TMI 91 - SUPREME COURT] wherein their lordships have settled the issue long back that such offshore supply(ies) revenue could not be held as taxable in India.
We thus conclude in light of above assessee’s cogent supportive material involving all the contracts documents as well the foregoing case law that the CIT(IT) has erred in law and on facts in treating the assessee’s offshore supplies revenue as taxable in India after having unilaterally re-drawn the above agreement clauses forming subject matter of our adjudication; are hereby reversed in very terms. That being the case, it is concluded in assessee’s favour and against the department that once it is not assessable even under the normal provisions, section 44BBB would also not apply in it’s case. Assessee’s appeal is allowed.
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Method of Computation of Interest under Section 244A of the Act
Relevant Legal Framework and Precedents: Section 244A of the Income-Tax Act prescribes payment of interest by the Revenue to the assessee on delayed refunds. However, the statute does not explicitly provide a mechanism for adjustment of amounts already refunded in computing the interest payable. The assessee relied on section 140A read with section 220(2) of the Act, which govern adjustment of payments by the assessee towards interest first and then principal tax, to argue for a similar principle to be applied in refund computations.
Coordinate Bench decisions were cited, notably Union Bank of India vs. ACIT (2016) 72 taxmann.com 348, where it was held that fairness and justice demand that the Revenue apply the same principle in refund adjustments as in tax collections: that is, the refund already granted should first be adjusted against the interest component due to the assessee, and any balance thereafter against the principal amount. The Tribunal emphasized the fundamental principle of fiscal legislation that the state must treat taxpayers with fairness and consistency.
Further reliance was placed on the decision in Tata Sons Pvt. Ltd. vs. DCIT (2023) 157 taxmann.com 329, where the Tribunal held that the AO's method of adjusting refund first against principal was incorrect. The Tribunal directed recalculation of interest under section 244A by first adjusting the refund against the interest component and then the tax component.
Court's Interpretation and Reasoning: The Tribunal observed that the statute is silent on the specific sequence of adjustment of refund amounts for interest computation. In absence of explicit statutory guidance, principles of fairness and consistency with other provisions of the Act must govern. The Tribunal rejected the AO's approach of adjusting refund first against principal, which was inconsistent with the treatment of payments under sections 140A and 220(2).
The Tribunal further noted that the assessee was not claiming interest on interest but only the correct method of adjustment. The Tribunal also referred to the principle that the Revenue should not apply double standards in dealing with taxpayers.
Key Evidence and Findings: The assessee submitted a detailed computation chart showing the difference between the AO's method and the correct method as per the Tribunal's precedents. The Tribunal directed the AO to verify these computations with supporting documents and recompute interest accordingly.
Application of Law to Facts: The Tribunal applied the legal principles from the cited precedents and statutory provisions to the facts that the AO had computed interest incorrectly by adjusting refund amounts first against principal. The Tribunal found merit in the assessee's contention and directed recalculation of interest under section 244A in accordance with law.
Treatment of Competing Arguments: The Revenue relied on the orders of the authorities below and contended that the AO's method was correct. The Tribunal, however, found the Revenue's approach inconsistent with the principles established by earlier decisions and statutory provisions governing adjustment of payments and refunds.
Conclusion: The Tribunal held that the AO's computation method was incorrect and directed recalculation of interest under section 244A by first adjusting refund amounts against the interest component and thereafter against the principal amount.
Issue 2: Entitlement to Additional Interest under Section 244A(1A) of the Act
Relevant Legal Framework and Precedents: Section 244A(1A) provides for additional interest if the refund is not granted within the prescribed time limit. Section 153(5) mandates that the order granting refund should be passed within three months from the date of receipt of the appellate order.
The assessee contended that the AO passed the order granting refund (OGE) beyond the prescribed timeline, resulting in delayed refund and consequent entitlement to additional interest. The Tribunal referred to precedents from the Hon'ble Bombay High Court and other decisions (e.g., CIT v. Pfizer Ltd., City Bank NA v. CIT, CIT v. K.E.C International) that support the grant of interest up to the date of actual receipt of refund by the assessee.
Court's Interpretation and Reasoning: The Tribunal accepted the assessee's submission that the OGE was passed belatedly and that the assessee was entitled to interest under section 244A(1A) for the period of delay. The Tribunal observed that the additional interest would be affected by the recalculation of interest under section 244A and thus directed the AO to recompute additional interest accordingly.
Key Evidence and Findings: The timeline of the appellate order and the date of passing the OGE were examined. The Tribunal noted that the OGE was passed on 6/12/2023 but served online only on 22/06/2024, which delayed the refund process. The delay exceeded the prescribed three-month period under section 153(5).
Application of Law to Facts: Applying the statutory timelines and judicial precedents, the Tribunal found that the assessee was entitled to additional interest for the delay beyond the prescribed period.
Treatment of Competing Arguments: The Revenue did not contest the entitlement to additional interest but relied on the orders below. The Tribunal found that the orders below had not granted the full entitlement and thus directed recomputation.
Conclusion: The Tribunal directed recomputation of additional interest under section 244A(1A) in accordance with law and the corrected interest computation under section 244A.
Issue 3: Consideration of Additional Submissions and Restriction of Interest Claim
The assessee contended that the AO erred in not considering additional submissions filed on 5 December 2024 and in restricting the interest claim to Rs. 16,97,762 instead of Rs. 45,41,792 claimed.
The Tribunal did not explicitly address the procedural aspect of non-consideration of additional submissions but by directing the AO to verify the assessee's computation chart and recompute interest, implicitly mandated consideration of all relevant submissions and documents supporting the claim.
3. SIGNIFICANT HOLDINGS
The Tribunal crystallized the following core principles and final determinations:
Non grant of interest u/s 244A - assessee contented that while passing the OGE, the assessing officer wrongly calculated interest u/s.244A though the entire TDS credit was given - HELD THAT:- The amount of interest u/s.244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and the balance left, if any shall be adjusted towards the tax component. We therefore do not support the computation mechanism adopted by the Ld.AO. The assessee at the time of hearing filed a chart showing the computation difference as per the OGE and as per the assessee, which is enclosed here with Annexure A.
AO is directed to verify the computation of the assessee in the chart having regards to the documents in support and to compute the interest u/s.244A, in accordance with law based on the discussion here in above.
As consequence of the above computation, the additional interest u/s.244A(1A) of the Act will also under go change. AO is directed to compute the interest u/s.244A(1A) of the Act in accordance with law.
Grounds raised by the assessee stands allowed for statistical purposes.
Non grant of interest u/s 244A - assessee contented that while passing the OGE, the assessing officer wrongly calculated interest u/s.244A though the entire TDS credit was given - HELD THAT:- The amount of interest u/s.244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and the balance left, if any shall be adjusted towards the tax component. We therefore do not support the computation mechanism adopted by the Ld.AO. The assessee at the time of hearing filed a chart showing the computation difference as per the OGE and as per the assessee, which is enclosed here with Annexure A.
AO is directed to verify the computation of the assessee in the chart having regards to the documents in support and to compute the interest u/s.244A, in accordance with law based on the discussion here in above.
As consequence of the above computation, the additional interest u/s.244A(1A) of the Act will also under go change. AO is directed to compute the interest u/s.244A(1A) of the Act in accordance with law.
Grounds raised by the assessee stands allowed for statistical purposes.
First, whether the sale of land by the assessee to its wholly owned Indian subsidiary qualifies as a 'transfer' chargeable to tax under section 45 of the Income Tax Act, 1961, or is excluded from the definition of transfer under section 47(iv) of the Act.
Second, the validity of disallowing expenses claimed by the assessee, specifically the cost of stamp duty and interest paid, in computing the capital gains arising from the sale.
Third, the procedural question of whether the assessee can raise for the first time before the Tribunal the claim that the capital gains declared and taxed were not taxable at all due to the provisions of section 47(iv), despite having declared the gains in the original return and not raising this ground before the Assessing Officer (AO) or Commissioner of Income Tax (Appeals) [CIT(A)].
Regarding the first issue, the relevant legal provisions are sections 45 and 47 of the Income Tax Act. Section 45 imposes tax on capital gains arising from the transfer of a capital asset. Section 47 enumerates certain transfers which shall not be regarded as transfers for the purposes of section 45. Clause (iv) of section 47 specifically excludes from the definition of transfer any transfer of a capital asset by a company to its subsidiary company, provided the parent company or its nominees hold the entire share capital of the subsidiary, and the subsidiary is an Indian company.
The assessee sold land held as a capital asset to its wholly owned Indian subsidiary for Rs. 35.58 crores and declared long-term capital gains of approximately Rs. 12.97 crores in its return of income. The AO disallowed certain expenses and recomputed the capital gains at a higher figure. The CIT(A) deleted the additions made by the AO. The Revenue appealed, challenging the deletion of disallowances and the acceptance of the expenses claimed.
During the appellate proceedings, the assessee filed an application under Rule 27 of the ITAT Rules and cross objections contending that the transaction was not taxable at all under section 45 because it fell within the exclusion under section 47(iv). The assessee argued that the capital gains were inadvertently declared and taxed, and the AO was duty-bound to assess the correct income. The AO's report, filed subsequently, agreed with the assessee's contention that the conditions of section 47(iv) were satisfied, and therefore the capital gains were not taxable.
The Tribunal examined the facts and found that the assessee was an Indian company holding 100% share capital of the subsidiary, which was also an Indian company. The sale deed, audited financial statements, and Ministry of Corporate Affairs records confirmed this relationship. The Tribunal held that the transfer was covered by the exemption under section 47(iv), and thus the capital gains were not chargeable to tax under section 45.
The AO objected to the late raising of this claim before the Tribunal, noting it was not raised during assessment or before the CIT(A) and was contrary to the stand taken in the original return. The AO contended that the issue should not be entertained unless allowed under Rule 29 of the ITAT Rules. The Tribunal rejected this objection, holding that the facts concerning the related party nature of the transaction were already on record before the AO and CIT(A), and no new evidence was introduced. Therefore, the claim was not a new fact but a legal issue arising from existing facts, which the Tribunal could consider.
The AO also relied on the Supreme Court decision in Goetze (India) Ltd. v. CIT, which restricts the acceptance of new claims by the AO unless made by filing a revised return within the time allowed. The Tribunal distinguished this principle, citing authoritative Supreme Court rulings including NTPC v. CIT and Wipro Finance Ltd. v. CIT, which clarify that the Tribunal's powers under section 254 are broad and allow entertaining fresh claims or legal issues for the first time before it, even if inconsistent with the original return, provided the facts are on record. The Tribunal therefore allowed the assessee's claim that the capital gains were not taxable.
Regarding the disallowance of expenses claimed as cost of stamp duty and interest, the Tribunal observed that the CIT(A) had deleted the additions made by the AO. Since the cross objection allowing the non-taxability of capital gains was accepted, the Revenue's appeal challenging the deletion of these disallowances became infructuous and was dismissed.
The Tribunal also considered the applicability of CBDT Circular No.14 XL-35 dated 11.04.1955, which directs tax authorities to assist taxpayers in claiming reliefs they are entitled to but may have omitted to claim. The Tribunal held that since the capital gains were inadvertently offered to tax, the AO was obliged to correct the assessment to reflect the correct tax liability. The Tribunal relied on a recent decision of the Delhi High Court which held that the Revenue can tax only income falling within the Act's ambit, and misclassification by the assessee does not make such income taxable.
On the question of refund and interest, the Tribunal noted that the assessee was entitled to refund of the tax paid on the wrongly declared capital gains. However, since the assessee had declared the gains and paid tax thereon, and only belatedly claimed the non-taxability, interest under section 244A was not allowable for the period from 01.04.2016 until the date of determination of refund. The Tribunal directed the AO to give effect to the order expeditiously and pay interest on any delay thereafter, as per Board instructions.
In conclusion, the Tribunal allowed the cross objections filed by the assessee, holding that the sale of the land to its wholly owned Indian subsidiary was not a transfer taxable under section 45 due to the exclusion in section 47(iv). The Tribunal dismissed the Revenue's appeal challenging the deletion of disallowances related to expenses. The Tribunal also condoned the delay in filing the cross objections, finding the explanation bona fide and reasonable.
Key holdings include the following verbatim excerpts:
"The capital gains amounting to Rs. 12,97,20,753/- on the sale of the land... to its 100% subsidiary... was not taxable in view of provisions of section 47(iv) of the Act and was wrongly offered to tax by the assessee..."
"The power of the Tribunal under section 254 of the Income-tax Act... is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal... The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return."
"Officers of the Department must not take advantage of ignorance of an assessee as to his rights... it is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs..."
"The Revenue can seek to levy tax only on income which falls within the ambit of the Act. Merely because the assessee placed the income under a wrong head, cannot possibly make it amenable to imposition of tax."
The Tribunal's final determinations were that the capital gains declared on the sale to the wholly owned subsidiary were not taxable, the Revenue's appeal was dismissed, the cross objections were allowed, and the AO was directed to refund the tax paid on the said gains without interest for the delay period attributable to the assessee's own erroneous declaration.
Limitation on raising new claims before ITAT - Capital gains arising from the sale of a capital asset by a parent company to its 100% Indian subsidiary - according to the AO, the new claim of the assessee is an absolutely new fact presented before the Tribunal, which was neither raised during the assessment proceedings before the AO nor in the appellate proceedings before the Ld. CIT(A).
HELD THAT:- No new evidence or any additional evidence have been filed by the assessee before the Tribunal and therefore Rule-29 of the ITAT Rules, 1963 is not attracted in the case of the assessee. Therefore, we reject the above contention of the Department.
Whether assessee can make a claim for deduction or otherwise, which has not been claimed in the return, only by filing a revised return within the time allowed? - We have carefully considered the above objection of the AO but do not agree with the same. The Hon’ble Apex Court in the case of NTPC [1996 (12) TMI 7 - SUPREME COURT (LB)] has held that the purpose of assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. The Hon’ble Court further observed that it did not see any reason to restrict the power of the Tribunal u/s 254 only to decide the ground which arises from the order of Commissioner of Income Tax (Appeals) and held that both the assessee as well as the Department have a right to file an appeal/cross objections before the Tribunal.
Hon’ble Apex Court in the case of Goetze (India) Ltd. [2006 (3) TMI 75 - SUPREME COURT] also observed that the restriction on the AO to not accept any new claim without filing a revised return is limited to the power of the assessing authority and does not impinge on the power of the Tribunal u/s 254 of the Act to accept any new claim.
We hereby reject this objection of the AO, as the Hon’ble Apex Court in the aforesaid decisions has held that the power of the Tribunal u/s 254 of the Act allows the Tribunal to entertain a fresh claim raised for the first time before the Tribunal and the power of the Tribunal is not curtailed in the manner as contested by the AO.
As discussed above, all the facts relating to the claims made by the assessee that the capital gains offered to tax by the assessee in its return of income filed on 29.09.2016 for AY 2016-17 was not taxable in view of the facts as discussed above was already on records of the AO, which has not been contested by the AO. We, therefore, after careful consideration, accept the grounds of cross objection filed by the assessee in claiming that the capital asset being the land bearing Khasra no.32 situated at Fatehabad, Village-Bundhera, Tehsil District-Agra sold to its 100% subsidiary M/s Bloom Inn Private Ltd. was not taxable in view of provisions of section 47(iv) of the Act and was wrongly offered to tax by the assessee in its return of income filed on 29.09.2016 for AY 2016-17.
We direct the AO to exclude the capital gains in the taxable income of the assessee as offered u/s 45 of the Act assessee in the return of income filed on 26.09.2016 for AY 2016-17 and recompute the total income of the assessee accordingly. We further direct the AO that after excluding the above amount from the taxable income of the assessee to refund the taxes paid by the assessee on the aforesaid capital gains after due verification. The grounds of Cross Objection filed by the assessee are allowed.
Interest on delayed refund - AO referring to the provisions of section 240(b) of the Act stated that no interest u/s 244A will be allowable to the assessee and only the tax paid on capital gains to the assessee will be allowed in case the claim of the assessee is accepted by the Tribunal - HELD THAT:- In view of the provisions of section 244A(2) of the Act, the delay for the determination of this refund to the assessee in this case is attributable to the assessee in as much as that the assessee declared wrongly the capital gains on the transfer of the said land in its return of income filed on 29.09.2016 for AY 2016-17 and filed for correcting the same by way of Rule-27 application under ITAT Rules, 1963 and Cross Objection only on 22.11.2024. Therefore, the assessee will not be entitled for interest u/s 244A of the Act for the period w.e.f. 01.04.2016 to the date of determination of the refund by the AO in passing the appeal effect order pursuant to this order after necessary verification by the AO.
We also direct that the AO shall give the appeal effect within due time as per Board Instructions for giving appeal effect and for any delay, thereafter the assessee will be entitled for interest u/s 244A of the Act on the said refunded tax from the period which is mandated by the Board for giving the appeal effect to this order, till the date on which the refund is granted to the assessee. AR also fairly agreed and submitted that the assessee will not be entitled for any interest u/s 244A of the Act on the above amount.
Limitation on raising new claims before ITAT - Capital gains arising from the sale of a capital asset by a parent company to its 100% Indian subsidiary - according to the AO, the new claim of the assessee is an absolutely new fact presented before the Tribunal, which was neither raised during the assessment proceedings before the AO nor in the appellate proceedings before the Ld. CIT(A).
HELD THAT:- No new evidence or any additional evidence have been filed by the assessee before the Tribunal and therefore Rule-29 of the ITAT Rules, 1963 is not attracted in the case of the assessee. Therefore, we reject the above contention of the Department.
Whether assessee can make a claim for deduction or otherwise, which has not been claimed in the return, only by filing a revised return within the time allowed? - We have carefully considered the above objection of the AO but do not agree with the same. The Hon’ble Apex Court in the case of NTPC [1996 (12) TMI 7 - SUPREME COURT (LB)] has held that the purpose of assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. The Hon’ble Court further observed that it did not see any reason to restrict the power of the Tribunal u/s 254 only to decide the ground which arises from the order of Commissioner of Income Tax (Appeals) and held that both the assessee as well as the Department have a right to file an appeal/cross objections before the Tribunal.
Hon’ble Apex Court in the case of Goetze (India) Ltd. [2006 (3) TMI 75 - SUPREME COURT] also observed that the restriction on the AO to not accept any new claim without filing a revised return is limited to the power of the assessing authority and does not impinge on the power of the Tribunal u/s 254 of the Act to accept any new claim.
We hereby reject this objection of the AO, as the Hon’ble Apex Court in the aforesaid decisions has held that the power of the Tribunal u/s 254 of the Act allows the Tribunal to entertain a fresh claim raised for the first time before the Tribunal and the power of the Tribunal is not curtailed in the manner as contested by the AO.
As discussed above, all the facts relating to the claims made by the assessee that the capital gains offered to tax by the assessee in its return of income filed on 29.09.2016 for AY 2016-17 was not taxable in view of the facts as discussed above was already on records of the AO, which has not been contested by the AO. We, therefore, after careful consideration, accept the grounds of cross objection filed by the assessee in claiming that the capital asset being the land bearing Khasra no.32 situated at Fatehabad, Village-Bundhera, Tehsil District-Agra sold to its 100% subsidiary M/s Bloom Inn Private Ltd. was not taxable in view of provisions of section 47(iv) of the Act and was wrongly offered to tax by the assessee in its return of income filed on 29.09.2016 for AY 2016-17.
We direct the AO to exclude the capital gains in the taxable income of the assessee as offered u/s 45 of the Act assessee in the return of income filed on 26.09.2016 for AY 2016-17 and recompute the total income of the assessee accordingly. We further direct the AO that after excluding the above amount from the taxable income of the assessee to refund the taxes paid by the assessee on the aforesaid capital gains after due verification. The grounds of Cross Objection filed by the assessee are allowed.
Interest on delayed refund - AO referring to the provisions of section 240(b) of the Act stated that no interest u/s 244A will be allowable to the assessee and only the tax paid on capital gains to the assessee will be allowed in case the claim of the assessee is accepted by the Tribunal - HELD THAT:- In view of the provisions of section 244A(2) of the Act, the delay for the determination of this refund to the assessee in this case is attributable to the assessee in as much as that the assessee declared wrongly the capital gains on the transfer of the said land in its return of income filed on 29.09.2016 for AY 2016-17 and filed for correcting the same by way of Rule-27 application under ITAT Rules, 1963 and Cross Objection only on 22.11.2024. Therefore, the assessee will not be entitled for interest u/s 244A of the Act for the period w.e.f. 01.04.2016 to the date of determination of the refund by the AO in passing the appeal effect order pursuant to this order after necessary verification by the AO.
We also direct that the AO shall give the appeal effect within due time as per Board Instructions for giving appeal effect and for any delay, thereafter the assessee will be entitled for interest u/s 244A of the Act on the said refunded tax from the period which is mandated by the Board for giving the appeal effect to this order, till the date on which the refund is granted to the assessee. AR also fairly agreed and submitted that the assessee will not be entitled for any interest u/s 244A of the Act on the above amount.
The core legal questions considered by the Tribunal were:
(a) Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under section 263 of the Income Tax Act, 1961 ("the Act") to set aside the assessment order passed under section 143(3) on the ground that the order was erroneous and prejudicial to the interests of revenue due to failure of the Assessing Officer (AO) to verify and disallow certain amounts.
(b) Specifically, whether the AO erred in not making disallowance under section 14A of the Act in respect of exempt income earned from investments in a joint venture and equity shares, and whether the PCIT was correct in holding that the AO had failed to examine this issue.
(c) Whether the AO erred in not disallowing an amount under section 36(1)(va) of the Act for delayed payment of employees' contribution to provident fund, and whether the PCIT was justified in setting aside the assessment order on this ground.
(d) Whether the AO had indeed made proper verification on the above issues, and if the AO had taken a legally permissible view, whether the revisionary powers under section 263 could be invoked.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Disallowance under Section 14A of the Act
Legal framework and precedents: Section 14A of the Act mandates disallowance of expenditure incurred in relation to income that does not form part of total income, typically exempt income. Rule 8D provides the methodology to compute such disallowance. The Supreme Court and High Courts have held that disallowance under section 14A is warranted where exempt income is earned from investments made out of interest-bearing funds.
Court's interpretation and reasoning: The PCIT contended that the AO failed to verify disallowance under section 14A despite the assessee earning exempt income of Rs. 1,44,42,319/- from an AOP/BOI and holding tax-free investments. The PCIT computed disallowance at 1% of average investment balances.
The Tribunal examined the nature of investments, particularly the investment in "Kalyan Raj Desai JV" and equity shares of "Nature Delight Dairy and Dairy Products P. Ltd." (NDDDPPL). It was found that the amount shown as investment in Kalyan Raj Desai JV was actually the net profit share from the joint venture and not an investment made out of interest-bearing funds. Thus, no disallowance under section 14A was warranted on this account.
Regarding equity shares of NDDDPPL, the Tribunal noted that no dividend income was earned by the assessee from these shares during the year. The Tribunal relied on the Delhi High Court decision which held that disallowance under section 14A should not exceed the exempt income earned. Since no exempt income arose from these shares, no disallowance was called for.
Key evidence and findings: The assessee submitted documentary evidence showing that the amount credited as investment in the joint venture was in fact profit share, and no fresh investment was made. No dividend income was earned from equity shares. The Tribunal found these submissions credible and supported by the record.
Application of law to facts: Since no interest-bearing funds were invested in the joint venture and no exempt dividend income was earned from equity shares, the AO's decision not to disallow any expenditure under section 14A was a legally permissible view.
Treatment of competing arguments: The PCIT argued that disallowance was mandatory due to exempt income and investments. The Tribunal rejected this, emphasizing the factual matrix that no relevant investments existed and no exempt dividend income was earned.
Conclusion: The AO's order was not erroneous or prejudicial to revenue on this issue. Even if remanded, no disallowance would arise, thus no prejudice to revenue.
Issue 2: Disallowance under Section 36(1)(va) of the Act for delayed payment of employees' contribution to Provident Fund
Legal framework and precedents: Section 36(1)(va) mandates disallowance of employer's expenses where employees' contribution to provident fund is not deposited within the prescribed time. The Supreme Court in Checkmate Services Pvt. Ltd. vs. CIT clarified the applicability of this provision. However, prior to this judgment, various High Courts had held that if the employees' contribution was deposited before the due date for filing the return under section 139(1), no disallowance was warranted.
Court's interpretation and reasoning: The PCIT contended that the AO failed to disallow Rs. 4,71,825/- relating to delayed payment of employees' contribution. The Tribunal noted that the assessment order was passed on 19/03/2022, prior to the Supreme Court's judgment in Checkmate Services (pronounced on 12/10/2022). At the time of assessment, the AO followed the then-prevailing judicial view favoring the assessee.
The Tribunal relied on the jurisdictional High Court's decision in CIT (Central) vs. Ghatge Patil Transports Ltd., which held that no disallowance under section 36(1)(va) is called for if the contribution is deposited before the due date of filing the return. The Tribunal also referred to its own decision in M/s. Karan Sanran Associates, which upheld this view in revisionary proceedings under section 263.
Key evidence and findings: The assessee deposited the employees' contribution before the due date of filing the return. The AO took a legally permissible view based on binding judicial precedents at the time of assessment.
Application of law to facts: The AO's decision not to disallow under section 36(1)(va) was consistent with the law as it stood at the time of assessment. The subsequent Supreme Court ruling could not be retrospectively applied to hold the order erroneous.
Treatment of competing arguments: The PCIT relied on the Supreme Court judgment in Checkmate Services for disallowance. The Tribunal rejected this reliance for revisionary proceedings under section 263, as the assessment predated the judgment and the AO followed a permissible judicial view.
Conclusion: The AO's order was neither erroneous nor prejudicial to revenue on this issue. Revision under section 263 was not justified.
Issue 3: Whether the AO had made proper verification and inquiry on the above issues
The PCIT alleged that the AO had not verified the issues of section 14A disallowance and delayed PF payment. The assessee contended that the AO had called for and examined relevant documents and had taken a legally permissible view.
The Tribunal found that the AO had indeed sought and examined relevant information, and the assessment order reflected application of mind on these issues. The AO's conclusions were based on the facts and prevailing judicial precedents.
Therefore, the AO's order was not passed without verification or inquiry, and there was no failure warranting revision under section 263.
3. SIGNIFICANT HOLDINGS
"There can be no doubt that the provision [section 263] cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. ... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law." (Supreme Court precedent)
"Since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for."
"The AO while passing the assessment order was bound by the judgment of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd. (supra). ... since the assessee has admittedly deposited the employees' contribution to PF and ESI before the due date of filing of return, the PCIT was not justified in invoking the provisions of section 263 of the Act by relying on the decision of the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT (supra), which came subsequent to the order passed by the Assessing Officer."
Final determinations:
(a) The assessment order dated 19/03/2022 passed under section 143(3) was not erroneous or prejudicial to the interests of revenue in respect of the two issues raised by PCIT.
(b) The AO's decision not to disallow under section 14A was justified on facts and law.
(c) The AO's decision not to disallow under section 36(1)(va) was a legally permissible view based on judicial precedents prevailing at the time of assessment.
(d) The PCIT erred in setting aside the assessment order under section 263, and the revisionary proceedings were quashed.
Validity of Revision u/s 263 - PCIT holding the assessment order erroneous insofar as prejudicial to the interest of revenue as the AO failed to examine disallowance u/s.14A and disallowance u/s.36(1)(va) for delay in deposit of employees contribution to PF.
HELD THAT:- For disallowance u/s 14A since the dividend income has not been earned from the investment in equity shares, no disallowance u/s. 14A of the Act is called for on the alleged investment in equity shares. To conclude, we find that since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for. Thus, even if the issue is set aside to the file of the Ld.AO for necessary enquiry, no disallowance will be called for and, therefore, no prejudice is caused to the Revenue.
Disallowance u/s. 36(1)(va), for delay in depositing employees‟ contribution - As we find that at the time of finalizing the assessment order, there were various judgments of the Hon'ble Courts where consistent view was taken that if there is any delay in payment of employees‟ contribution and the said sum is deposited prior to the due date of furnishing return of income provided u/s. 139(1) of the Act, no disallowance u/s. 36(1)(va) is called for.
Similar view was taken in the case of CIT (Central) vs. Ghatge Patil Transports Ltd. [2014 (10) TMI 402 - BOMBAY HIGH COURT] The judgment of Hon'ble Apex Court in the case of Checkmate Services P. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] was pronounced on 12/10/2022 whereas the AO passed the assessment on 19/03/2022 and, therefore, the AO while passing the assessment order was bound by the judgment of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd (supra).
This Tribunal in M/s. Karan Sanran Associates [2024 (9) TMI 1048 - ITAT PUNE] while dealing with the revisionary proceedings carried out u/s. 263 as held assessee has admittedly deposited the employees' contribution to PF and ESI before the due date of filing of return, therefore, the PCIT was not justified in invoking the provisions of section 263 is squarely applicable on the issue raised in the instant appeal and, therefore, the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue on the issue of disallowance u/s. 36(1)(va) of the Act raised in the show- cause notice issued by the Ld.PCIT.
Assessee appeal allowed.
Validity of Revision u/s 263 - PCIT holding the assessment order erroneous insofar as prejudicial to the interest of revenue as the AO failed to examine disallowance u/s.14A and disallowance u/s.36(1)(va) for delay in deposit of employees contribution to PF.
HELD THAT:- For disallowance u/s 14A since the dividend income has not been earned from the investment in equity shares, no disallowance u/s. 14A of the Act is called for on the alleged investment in equity shares. To conclude, we find that since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for. Thus, even if the issue is set aside to the file of the Ld.AO for necessary enquiry, no disallowance will be called for and, therefore, no prejudice is caused to the Revenue.
Disallowance u/s. 36(1)(va), for delay in depositing employees‟ contribution - As we find that at the time of finalizing the assessment order, there were various judgments of the Hon'ble Courts where consistent view was taken that if there is any delay in payment of employees‟ contribution and the said sum is deposited prior to the due date of furnishing return of income provided u/s. 139(1) of the Act, no disallowance u/s. 36(1)(va) is called for.
Similar view was taken in the case of CIT (Central) vs. Ghatge Patil Transports Ltd. [2014 (10) TMI 402 - BOMBAY HIGH COURT] The judgment of Hon'ble Apex Court in the case of Checkmate Services P. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] was pronounced on 12/10/2022 whereas the AO passed the assessment on 19/03/2022 and, therefore, the AO while passing the assessment order was bound by the judgment of Hon'ble Jurisdictional High Court in the case of Ghatge Patil Transports Ltd (supra).
This Tribunal in M/s. Karan Sanran Associates [2024 (9) TMI 1048 - ITAT PUNE] while dealing with the revisionary proceedings carried out u/s. 263 as held assessee has admittedly deposited the employees' contribution to PF and ESI before the due date of filing of return, therefore, the PCIT was not justified in invoking the provisions of section 263 is squarely applicable on the issue raised in the instant appeal and, therefore, the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue on the issue of disallowance u/s. 36(1)(va) of the Act raised in the show- cause notice issued by the Ld.PCIT.
Assessee appeal allowed.
The core legal questions considered by the Court were:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether 'Castor Oil Medicinal' is different from 'Castor Oil First Special' post introduction of the TLC test
The relevant legal framework includes the Government Circulars issued by the Ministry of Food and Agriculture (1964, 1989) and Ministry of Commerce (1989, 1991), which defined the grading and eligibility of Castor Oil products under the CCS Scheme. The 1964 Circular prescribed the Carbon Disulphide Test for grading Castor Oil as 'Medicinal'. In 1989, this was superseded by the TLC test.
The Court examined the prior coordinate bench decision in Writ Petition No. 871 of 1994, which dealt with duty drawback benefits but posed an identical controversy regarding product classification. The Court noted that the earlier bench held that 'Castor Oil First Special Grade' qualified as 'Castor Oil Medicinal' for duty drawback purposes despite the change in testing methodology.
The Court reasoned that the change in test does not alter the fundamental nature of the product. The technical reports obtained by the Petitioner, which were undisputed by the Respondents, confirmed that the product remained the same post the change to the TLC test.
Further, the Circular dated 8 May 1991 explicitly recognized 'Castor Oil First Special' as eligible for CCS benefits, indicating the Government's acknowledgment that both descriptions refer to the same product.
Therefore, the Court concluded that 'Castor Oil Medicinal' and 'Castor Oil First Special' are not different goods merely due to the change in testing methodology.
Issue 2: Entitlement to CCS benefit for the period 22 June 1989 to 8 May 1991
The Court considered the applicability of the CCS Scheme Circular dated 31 March 1989, which prescribed a 5% FOB rate for 'Castor Oil Medicinal' for the period 1 April 1989 to 31 March 1992. The Respondents denied the benefit for the period 22 June 1989 to 8 May 1991, relying on the change in product grading.
The Court rejected this denial, holding that since the Circular applied for the entire period and the goods remained the same, the Petitioner was entitled to the benefit. The Court also emphasized that the contracts under which the exports were made were executed prior to the change in test (i.e., prior to 23 June 1989), invoking precedents that protect contractual rights executed before a scheme amendment.
Relevant precedents cited include:
These cases establish that contracts executed prior to a cutoff date are governed by the scheme terms prevailing at contract execution, not subsequent changes.
The Court also noted that the Circular dated 8 May 1991, which granted CCS benefits to 'Castor Oil First Special', underscores the identical nature of the goods and supports the claim for the earlier period.
Issue 3: Validity and challengeability of the rejection order dated 29 October 1993
The Respondents contended that the Petitioner did not challenge the rejection order. The Court examined the petition and found a specific challenge to the said order in the prayer clause, rejecting the Respondents' contention.
Issue 4: Effect of change in test on the nature of goods and entitlement to benefits
The Court observed that a mere change in the test method does not alter the nature of the goods. The technical reports confirmed the product's identity remained unchanged, and the Government's later Circular recognized the eligibility of 'Castor Oil First Special' under the CCS Scheme.
The Court found no justification for denying benefits for the period 22 June 1989 to 8 May 1991 solely on the basis of the test change.
Treatment of competing arguments
The Respondents argued that the duty drawback decision was not applicable to the CCS Scheme and that the Petitioner was not entitled to benefits post the new test introduction. The Court distinguished the schemes but found the factual and legal issues identical, applying the ratio of the earlier decision. The Court also rejected the Respondents' contention regarding non-challenge of the rejection order.
3. SIGNIFICANT HOLDINGS
The Court held:
"...the goods 'Castor Oil Medicinal' and 'Castor Oil First Special' would remain the same although there was a change in the test by Circular dated 23 of June 1989."
"...the ratio of the said decision squarely applies to the facts of the present case and, therefore, respondents are not justified in rejecting the application of the Petitioner denying the benefit of Cash Compensatory Support Scheme merely on the ground that 'Castor Oil First Special' is not the same as 'Castor Oil Medicinal' after the introduction of the new test i.e. the TLC test."
"...the contracts executed prior to the cutoff day would not be governed by the subsequent change in the scheme granting the benefit."
"...merely because the test required is changed would not alter the nature of the goods."
The Court quashed and set aside the rejection order dated 29 October 1993 and directed the Respondents to pay the Petitioner the Cash assistance amounting to Rs. 4,33,75,866/- within eight weeks, with interest at 6% per annum from 1 September 2025 in case of delay.
No order as to costs was made.
Rejection of application for refund of Cash Compensatory Scheme (CCS) - rejection primarily on the ground that 'Castor Oil First Special Grade' cannot be equated as 'Castor Oil Medicinal' for grant of benefit of CCS - whether the goods 'Castor Oil Medicinal' is different than the 'Castor Oil First Special' post of the introduction of the new test i.e. TLC? - HELD THAT:- This issue arose before the Co-ordinate Bench of this Court in the case of this very Petitioner in Writ Petition No. 871 of 1994 [2009 (9) TMI 133 - BOMBAY HIGH COURT]. Though Writ Petition No. 871 of 1994 was in regard to duty drawback rules, the controversy which was posed for consideration of the Co-ordinate Bench was identical to the question raised in the present Writ Petition.
There is also no dispute that the contracts under which the exports were made by the Petitioner for the period under consideration were executed prior to June 1989. The Petitioner is justified in relying upon the various decisions - reliance can be placed in Union of India vs Cosmique International [1994 (2) TMI 180 - DELHI HIGH COURT] and Vibgyor Textile International vs Union of India [1984 (1) TMI 212 - HIGH COURT BOMBAY] wherein the Co-ordinate Bench of this Court and other high courts have taken the view that contracts executed prior to the cutoff day would not be governed by the subsequent change in the scheme granting the benefit. In our view, the ratio of this decision squarely applies to the facts of the present case, since in the present case also, there is no dispute that the exports made for the period under consideration were in respect of contracts executed prior to 23 June 1989 Therefore, even on this count, the rejection of the benefit of cash compensatory support scheme by the respondents is not justified. This view is also supported by the Circular dated 8 May 1991 which lays emphasis on the date of execution of the contracts and not the date of exports.
The Circular dated 31 March 1989 by which rate of 5% of FOB as CCS was granted applied for the period 1 April 1989 to March 1992 and as per the said Circular, the benefit of CCS was granted to the Petitioner on export of goods on the premise that the same constitutes of ‘Castor Oil Medicinal’. Since the said Circular applied for the period 1989 to 1992, the Respondents were not justified in denying the benefit of CCS for the period 22 June 1989 to 8 May 1991 merely on the basis of change of test to be conducted.
Conclusion - The respondents are not justified in rejecting the application of the Petitioner denying the benefit of Cash Compensatory Support Scheme merely on the ground that 'Castor Oil First Special' is not the same as 'Castor Oil Medicinal' after the introduction of the new test i.e. the TLC test.
The Respondents are directed to pay to the Petitioner the Cash assistance of Rs. 4,33,75,866/- within the period of 8 weeks from the date of uploading of the present order. If this is not done, then this amount shall carry interest at 6 per cent per annum, commencing from 1.9.2025 until effective payment - petition allowed.
Rejection of application for refund of Cash Compensatory Scheme (CCS) - rejection primarily on the ground that 'Castor Oil First Special Grade' cannot be equated as 'Castor Oil Medicinal' for grant of benefit of CCS - whether the goods 'Castor Oil Medicinal' is different than the 'Castor Oil First Special' post of the introduction of the new test i.e. TLC? - HELD THAT:- This issue arose before the Co-ordinate Bench of this Court in the case of this very Petitioner in Writ Petition No. 871 of 1994 [2009 (9) TMI 133 - BOMBAY HIGH COURT]. Though Writ Petition No. 871 of 1994 was in regard to duty drawback rules, the controversy which was posed for consideration of the Co-ordinate Bench was identical to the question raised in the present Writ Petition.
There is also no dispute that the contracts under which the exports were made by the Petitioner for the period under consideration were executed prior to June 1989. The Petitioner is justified in relying upon the various decisions - reliance can be placed in Union of India vs Cosmique International [1994 (2) TMI 180 - DELHI HIGH COURT] and Vibgyor Textile International vs Union of India [1984 (1) TMI 212 - HIGH COURT BOMBAY] wherein the Co-ordinate Bench of this Court and other high courts have taken the view that contracts executed prior to the cutoff day would not be governed by the subsequent change in the scheme granting the benefit. In our view, the ratio of this decision squarely applies to the facts of the present case, since in the present case also, there is no dispute that the exports made for the period under consideration were in respect of contracts executed prior to 23 June 1989 Therefore, even on this count, the rejection of the benefit of cash compensatory support scheme by the respondents is not justified. This view is also supported by the Circular dated 8 May 1991 which lays emphasis on the date of execution of the contracts and not the date of exports.
The Circular dated 31 March 1989 by which rate of 5% of FOB as CCS was granted applied for the period 1 April 1989 to March 1992 and as per the said Circular, the benefit of CCS was granted to the Petitioner on export of goods on the premise that the same constitutes of ‘Castor Oil Medicinal’. Since the said Circular applied for the period 1989 to 1992, the Respondents were not justified in denying the benefit of CCS for the period 22 June 1989 to 8 May 1991 merely on the basis of change of test to be conducted.
Conclusion - The respondents are not justified in rejecting the application of the Petitioner denying the benefit of Cash Compensatory Support Scheme merely on the ground that 'Castor Oil First Special' is not the same as 'Castor Oil Medicinal' after the introduction of the new test i.e. the TLC test.
The Respondents are directed to pay to the Petitioner the Cash assistance of Rs. 4,33,75,866/- within the period of 8 weeks from the date of uploading of the present order. If this is not done, then this amount shall carry interest at 6 per cent per annum, commencing from 1.9.2025 until effective payment - petition allowed.
Regarding the classification issue, the legal framework involves the Customs Act, 1962, and the Customs Tariff Act, 1975, particularly the First Schedule thereto, which enumerates tariff headings and items. The General Rules for Interpretation (GIR) and Chapter Notes, especially Chapter Note 2 to Chapter 27, are pivotal. The relevant statutory provision, Section 12 of the Customs Act, mandates that customs duties be levied as per the Customs Tariff Act. The classification must be determined according to the tariff headings, chapter notes, and GIRs, with the essential character of the goods and specific descriptions guiding the classification.
Chapter 27 of the Customs Tariff Act covers mineral fuels, mineral oils, and products of their distillation. Chapter Heading 2707 pertains to oils and other products of the distillation of high-temperature coal tar and similar products where the weight of aromatic constituents exceeds that of non-aromatic constituents. Subheadings under 2707 include benzol, toluol, xylol, naphthalene, other aromatic hydrocarbon mixtures, creosote oils, and others. Conversely, Chapter Heading 2713 covers petroleum coke, petroleum bitumen, and other residues of petroleum oils or oils obtained from bituminous minerals.
Chapter Note 2 to Chapter 27 clarifies that references in heading 2710 to petroleum oils include similar oils provided the weight of non-aromatic constituents exceeds that of aromatic constituents. Thus, the classification hinges on the relative proportions of aromatic and non-aromatic constituents in the imported product.
The appellants argued that their imported goods, Rubber Process Oil, are correctly classifiable under CTI 2707 9900 because the aromatic constituents exceed 50% by weight, consistent with trade practice and CBIC Circular No. 11/89 dated 13.02.1989. They submitted in-house test reports for 64 Bills of Entry (B/Es) indicating aromatic constituents above 50%. They contended that the Department's reliance on departmental test reports for only 10 samples, many of which did not specify aromatic content or showed aniline points below the BIS standard, was insufficient to reclassify all imports. They also invoked judicial precedents establishing that test reports apply only to the samples tested and cannot be extrapolated to other consignments without specific evidence.
The Department, supported by the adjudicating authority, relied on test reports from Customs laboratories indicating aromatic constituents below 50%, and aniline points not meeting BIS IS 15078:2001 standards for petroleum-based oils for the rubber industry. The adjudicating authority rejected the appellants' in-house test reports as afterthoughts and held that all consignments were identical in quality and origin, thus justifying classification under CTI 2713 9000. The authority also relied on a prior Tribunal decision involving the appellants' predecessor company, which had held the classification under 2713 9000.
The Court analyzed the classification issue by applying the GIR and Chapter Notes. It noted that the classification under 2707 9900 requires aromatic constituents by weight to exceed non-aromatic constituents, while 2713 9000 applies where non-aromatic constituents predominate or aromatic constituents are less than 50%. The Court emphasized the importance of chemical composition evidence, including aromatic content and compliance with BIS standards such as the maximum aniline point of 55^0C.
On the evidence, the Court found that for 18 B/Es, the appellants themselves had accepted that aromatic constituents were less than 50% and had paid differential duty with interest, supporting classification under 2713 9000. For 25 B/Es, the Department's test reports indicated aromatic constituents below 50%, and the adjudicating authority's classification was upheld. However, for the remaining B/Es, the Court found that the Department had not followed prescribed procedures for re-testing as per CBEC Circular No. 30/2017-Cus dated 18.07.2017, which mandates opportunity for a second test upon importer's request and requires reliance on representative samples. The Court observed that the adjudicating authority's outright rejection of the appellants' in-house test reports without proper examination was not justified. An illustrative in-house test report showed aromatic constituents of 72.58%, which was not considered.
Furthermore, the Court noted that the Department's chemical test reports from Customs laboratories at JNCH and Kandla did not specify aromatic content for many samples and showed aniline points below the BIS standard, raising questions on the basis for classification under 2713 9000. The Court held that the Department failed to produce specific chemical evidence for many B/Es to justify reclassification and differential duty demand.
On the issue of invoking the extended period of limitation under Section 28(4) of the Customs Act, the Court examined whether the appellants' conduct amounted to mis-declaration, suppression, or wilful misstatement. The appellants had filed Bills of Entry with description, classification, and claimed exemptions, supported by supplier invoices and test reports. The Court relied on judicial precedents, including a Supreme Court judgment, which held that mere classification disputes or erroneous self-assessment do not amount to deliberate mis-declaration warranting extended period invocation. The Court observed that the appellants' claims were bona fide disputes on classification and that no evidence of fraud, collusion, or wilful default was established.
The Court also addressed the procedural aspect of adjudication within the prescribed time under Section 28(9). The appellants contended that the extension order by the Chief Commissioner was not served on them, violating natural justice. The Court found that the SCN was initially kept under call book category pursuant to CBIC instructions following a Supreme Court judgment, and the extension of time was granted by the proper authority. The appellants were given multiple opportunities for personal hearing, and the adjudication was completed within the extended period. The Court held that the procedural requirements were complied with and the extension was valid.
Regarding confiscation, redemption fine, and penalties, the Court found these measures unsustainable in the absence of evidence of deliberate mis-declaration or suppression. The Court noted that classification disputes do not per se justify confiscation or penalty. The Court relied on prior Tribunal decisions holding that demands raised by invoking the extended period in classification disputes are not sustainable.
The Court referred to a coordinate bench decision involving the appellants' predecessor company, which had held that raw Rubber Process Oil merits classification under Chapter Heading 2713 90, as residues of petroleum oils, and not under 2707 99. This decision was upheld by the Supreme Court, although the question of law on classification was left open. The Court adopted the principle that classification depends on the chemical composition, particularly aromatic versus non-aromatic content, and adherence to BIS standards.
In conclusion, the Court held that: (i) consignments where aromatic constituents exceed 50% by weight are classifiable under CTI 2707 9900; (ii) consignments where aromatic constituents are less than 50% or non-aromatic constituents predominate are classifiable under CTI 2713 9000; (iii) the appellants had accepted and paid differential duty for consignments with less than 50% aromatic content, which is sustained; (iv) the Department failed to justify reclassification and differential duty demand for other consignments due to lack of proper test reports and non-compliance with re-testing procedures; (v) invocation of the extended period for demand of differential duty and imposition of confiscation, redemption fine, and penalties are not sustainable as no deliberate mis-declaration was established; and (vi) the adjudication was conducted within the extended statutory time limit in compliance with procedural requirements.
The impugned order was set aside to the extent of confirming differential duty demands beyond those accepted by the appellants, and the appeal was partly allowed in favor of the appellants.
Classification of imported goods - Rubber Process Oil (RPO) - classifiable under Customs Tariff Item (CTI) 2707 9900 or under CTI 2713 9000? - applicability of Sr. No. 130 of N/N.12/2012-Customs dated 17.03.2012 and Sr. No. 147 of N/N. 50/2017-Customs dated 30.06.2017 - demand of differential duty u/s 28(4) of the Customs Act, 1962 - confiscation - redemption fine - penalty - disputed period involved in this case is from 19.01.2017 to 09.08.2019.
HELD THAT:- On the issue of classification of the impugned goods, other than those covered in the above B/Es, the learned adjudicating authority had come to the conclusion that the goods are classifiable under CTI 2713 9000 on the basis of the following findings as recorded in the impugned order.
It is found that the procedure prescribed in Circular No.30/2017Customs dated 18.07.2017 for re-testing as a measure of trade facilitation, either on production of in-house test reports submitted by the appellants in support of the classification claimed by them or for denying their claim have not been followed by the departmental authorities. Further, there is no justification shown by the adjudicating authority for out right rejection of the in-house test reports submitted by the appellants where the aromatic constituents were more than 50%, by simply stating that it is an afterthought. In an illustrative case of B/E No. 3456252 dated 30.05.2019 covering import of RPO at JNCH, Nhava Sheva port, the appellants had submitted the chemical analysis report showing aromatic constituents as % of mass of 72.58%, the extract of which is placed below. However, such factual detail which is crucial in determination of the classification of impugned goods has not been examined in the impugned order.
There are no merits in such findings recorded by the adjudicating authority for classification of the imported goods under CTI 27139000 in the rest of the B/Es.
Extended period of limitation - whether the appellants have made misleading declarations, misclassified the imported goods and claimed ineligible exemption benefits? - HELD THAT:- From the facts on record, it clearly transpires that in respect of all the imported goods, the appellants have filed the B/E providing the description of the goods along with supporting documents such as suppliers invoice etc., and have claimed the customs tariff classification of the goods as per their understanding and also claimed concessional rate of custom duty by availing the notification benefits. The knowledge of the classification of imported goods in the earlier cases of imports under the business entity M/s Sah Petroleums Limited and the Tribunal’s order dated 26.04.2017 in that case has also been shown as the ground for deliberate act of misdeclaration.
It is also a fact on record, that the adjudicating authority on re-assessment of finally assessed B/Es had confirmed the differential duty by invoking the extended period of limitation under Section 18(4) ibid. In view of the above factual position and as there is no specific grounds or evidences placed on record by the investigation in the SCN dated 23.02.2021 and that there is no specific findings recorded in the impugned order proving the ingredients of mis-declaration or suppression of facts with an intention to evade duty, the invocation of extended period in the present case does not stand the scrutiny of law.
Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the fact that non-aromatic constituents exceeds that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the basis for its re-assessment under CTI 2713 9000 and consequent demand of differential duty under Section 18 ibid, in our considered opinion does not stand the scrutiny of law.
On the identical issues of classification of Rubber Process Oil, demand of duty by invoking extended period, we find that the Coordinate Bench of the Tribunal in the case of Sah Petroleums Limited Vs. Commissioner of Customs (Import), JNCH, Nhava Sheva [2017 (5) TMI 1281 - CESTAT MUMBAI] have examined the issue of classification of Rubber Process Oil (RPO) in identical set of facts and have held that raw RPO merit classification under Chapter Heading 2713 90.
The impugned order dated 07.12.2024 confirming the adjudged demands by invoking the extended period of limitation under Section 28(4) of the Customs Act, 1962 and consequent confiscation of imported goods, imposition of redemption fine, penalties on the appellants is not legally sustainable. Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the nonaromatic constituents exceeding that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the demands confirmed in this regard and the demand of duty which could be computed under Section 28(10B) ibid also does not stand the scrutiny of law.
The impugned order dated 07.12.2024 confirming the adjudged demands by invoking the extended period of limitation under Section 28(4) of the Customs Act, 1962 and consequent confiscation of imported goods, imposition of redemption fine, penalties on the appellants is not legally sustainable. Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the nonaromatic constituents exceeding that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the demands confirmed in this regard and the demand of duty which could be computed under Section 28(10B) ibid also does not stand the scrutiny of law.
Conclusion - The impugned order confirming differential duty under extended period, confiscation, redemption fine, and penalties is set aside to the extent it is unsustainable. The classification of imported goods is to be determined based on the relative aromatic content, with differential duty demands upheld where appellants accepted classification under CTI 2713 9000.
Appeal allowed in part.
Classification of imported goods - Rubber Process Oil (RPO) - classifiable under Customs Tariff Item (CTI) 2707 9900 or under CTI 2713 9000? - applicability of Sr. No. 130 of N/N.12/2012-Customs dated 17.03.2012 and Sr. No. 147 of N/N. 50/2017-Customs dated 30.06.2017 - demand of differential duty u/s 28(4) of the Customs Act, 1962 - confiscation - redemption fine - penalty - disputed period involved in this case is from 19.01.2017 to 09.08.2019.
HELD THAT:- On the issue of classification of the impugned goods, other than those covered in the above B/Es, the learned adjudicating authority had come to the conclusion that the goods are classifiable under CTI 2713 9000 on the basis of the following findings as recorded in the impugned order.
It is found that the procedure prescribed in Circular No.30/2017Customs dated 18.07.2017 for re-testing as a measure of trade facilitation, either on production of in-house test reports submitted by the appellants in support of the classification claimed by them or for denying their claim have not been followed by the departmental authorities. Further, there is no justification shown by the adjudicating authority for out right rejection of the in-house test reports submitted by the appellants where the aromatic constituents were more than 50%, by simply stating that it is an afterthought. In an illustrative case of B/E No. 3456252 dated 30.05.2019 covering import of RPO at JNCH, Nhava Sheva port, the appellants had submitted the chemical analysis report showing aromatic constituents as % of mass of 72.58%, the extract of which is placed below. However, such factual detail which is crucial in determination of the classification of impugned goods has not been examined in the impugned order.
There are no merits in such findings recorded by the adjudicating authority for classification of the imported goods under CTI 27139000 in the rest of the B/Es.
Extended period of limitation - whether the appellants have made misleading declarations, misclassified the imported goods and claimed ineligible exemption benefits? - HELD THAT:- From the facts on record, it clearly transpires that in respect of all the imported goods, the appellants have filed the B/E providing the description of the goods along with supporting documents such as suppliers invoice etc., and have claimed the customs tariff classification of the goods as per their understanding and also claimed concessional rate of custom duty by availing the notification benefits. The knowledge of the classification of imported goods in the earlier cases of imports under the business entity M/s Sah Petroleums Limited and the Tribunal’s order dated 26.04.2017 in that case has also been shown as the ground for deliberate act of misdeclaration.
It is also a fact on record, that the adjudicating authority on re-assessment of finally assessed B/Es had confirmed the differential duty by invoking the extended period of limitation under Section 18(4) ibid. In view of the above factual position and as there is no specific grounds or evidences placed on record by the investigation in the SCN dated 23.02.2021 and that there is no specific findings recorded in the impugned order proving the ingredients of mis-declaration or suppression of facts with an intention to evade duty, the invocation of extended period in the present case does not stand the scrutiny of law.
Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the fact that non-aromatic constituents exceeds that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the basis for its re-assessment under CTI 2713 9000 and consequent demand of differential duty under Section 18 ibid, in our considered opinion does not stand the scrutiny of law.
On the identical issues of classification of Rubber Process Oil, demand of duty by invoking extended period, we find that the Coordinate Bench of the Tribunal in the case of Sah Petroleums Limited Vs. Commissioner of Customs (Import), JNCH, Nhava Sheva [2017 (5) TMI 1281 - CESTAT MUMBAI] have examined the issue of classification of Rubber Process Oil (RPO) in identical set of facts and have held that raw RPO merit classification under Chapter Heading 2713 90.
The impugned order dated 07.12.2024 confirming the adjudged demands by invoking the extended period of limitation under Section 28(4) of the Customs Act, 1962 and consequent confiscation of imported goods, imposition of redemption fine, penalties on the appellants is not legally sustainable. Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the nonaromatic constituents exceeding that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the demands confirmed in this regard and the demand of duty which could be computed under Section 28(10B) ibid also does not stand the scrutiny of law.
The impugned order dated 07.12.2024 confirming the adjudged demands by invoking the extended period of limitation under Section 28(4) of the Customs Act, 1962 and consequent confiscation of imported goods, imposition of redemption fine, penalties on the appellants is not legally sustainable. Since, the demand of duty under Section 18 ibid on re-assessment of provisionally assessed B/Es did not place on record any specific chemical test report(s) as evidence in support of the nonaromatic constituents exceeding that of aromatic constituents and further had outrightly rejected the in-house test reports produced by the appellants, the demands confirmed in this regard and the demand of duty which could be computed under Section 28(10B) ibid also does not stand the scrutiny of law.
Conclusion - The impugned order confirming differential duty under extended period, confiscation, redemption fine, and penalties is set aside to the extent it is unsustainable. The classification of imported goods is to be determined based on the relative aromatic content, with differential duty demands upheld where appellants accepted classification under CTI 2713 9000.
Appeal allowed in part.
Issue-wise Detailed Analysis
1. Validity of Rejecting Declared Transaction Value and Re-appraisal under Customs Valuation Rules
The statutory framework for customs valuation is anchored in section 14 of the Customs Act, 1962, which mandates that the value of imported goods be the transaction value-the price actually paid or payable for goods sold for export to India, subject to conditions and adjustments specified in rules made thereunder. The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, provide a detailed scheme for acceptance, rejection, or adjustment of declared values, including provisions for related party transactions and alternative valuation methods.
The adjudicating authority relied on precedents including the Tribunal's decisions in Knowledge Infrastructure Systems Private Limited, Adani Power Maharashtra Ltd, and Maharashtra Eastern Grid Power Transmission Company Ltd, which emphasize that declared transaction value should not be discarded without valid and credible evidence and that mere existence of intermediaries or complex supply chains does not justify substitution of declared value.
The impugned show cause notice sought to reject the declared invoice value on the basis of evidence from third parties suggesting existence of lower negotiated prices at earlier stages of the supply chain, and proposed substitution of value by reference to these earlier "actual prices" in the invoice trail, invoking rule 12 of the 2007 Rules. The adjudicating authority held that such substitution was inconsistent with the statutory scheme, which requires sequential application of rules 4 through 9 to arrive at surrogate values when declared value is rejected, and that direct substitution with an alternative invoice value from an earlier stage was impermissible.
The Tribunal underscored that the valuation scheme contemplates a "gold standard" of transaction value, and that rejection of declared value must be followed by application of prescribed surrogate valuation methods, not arbitrary replacement by prices from unrelated or upstream transactions. The notice's approach was characterized as a "throwback" to a pre-valuation regime era, lacking legal authority and contrary to the evolved international and domestic valuation framework.
2. Scope of Penal Provisions and Confiscation in Absence of Duty Evasion
The show cause notice proposed confiscation under section 111(m) of the Customs Act, 1962, and penalties under sections 112 and 114AA, predicated on alleged overvaluation and misdeclaration of value. However, the adjudicating authority found no evidence of underpayment or evasion of customs duty, as duties were paid at the declared value rates, and no prohibited goods were involved.
The Tribunal reiterated that confiscation and penalties under the Customs Act are contingent on misdeclaration that results in evasion or short payment of duty or contravention of prohibitory provisions. Mere overvaluation, especially when duties are paid in full and no contravention is established, does not justify confiscation or penalties. The Committee of Chief Commissioners' attempt to revive confiscation proposals was held to be legally untenable, as it sought to impose penal consequences without statutory basis.
The Tribunal further noted that the Customs Act's jurisdiction to revisit valuation post-clearance is circumscribed, and once goods are cleared for home consumption with duties paid, the proper officer's jurisdiction to reopen valuation is limited and cannot be exercised arbitrarily or without statutory cause.
3. Interpretation and Application of Section 14 and Related Valuation Rules
Section 14 of the Customs Act, 1962, and the 2007 Valuation Rules collectively establish a structured, hierarchical valuation mechanism. The primary valuation is the transaction value (rule 3(1)), which includes price paid or payable for goods sold for export to India. If the declared value is doubted, the rules prescribe a sequential approach to determine surrogate values (rules 4 to 9), including identical or similar goods, deductive and computed values.
The Tribunal emphasized that rule 12, which allows rejection of declared value, must be read in conjunction with rule 3(4), mandating recourse to surrogate values thereafter. The impugned notice's attempt to substitute declared value with an earlier invoice price from a different seller or location, without following the prescribed sequence, was contrary to the statutory scheme.
The Tribunal also rejected the notion that the place of export must be geographically congruent with the seller, clarifying that "export to India" in section 14 is a description of normal transaction context, not a restrictive geographic mandate. The invoice from an overseas intermediary is not evidence of transaction value between buyer and seller in India, and cannot be substituted for declared value without compliance with valuation rules.
4. Competence of Reviewing Authority and Binding Nature of Tribunal Precedents
The Committee of Chief Commissioners of Customs challenged the adjudicating authority's reliance on Tribunal precedents, arguing that some decisions were not affirmed by the Supreme Court or were withdrawn. The Tribunal clarified that the Committee's review jurisdiction is limited to testing legality and propriety of orders and does not extend to revisiting or overruling Tribunal decisions, especially those not appealed or upheld by the Supreme Court.
The Tribunal underscored the binding nature of its precedents on valuation and classification matters within the customs appellate hierarchy and rejected the Committee's attempt to discard settled law. It held that executive authorities are bound by Tribunal decisions unless overturned by higher courts, and that review powers cannot be used to undermine judicial discipline or settled jurisprudence.
5. Evidentiary Value and Treatment of Complex Supply Chains Involving Intermediaries
The investigation alleged that multiple intermediaries and related parties were used to inflate the declared value of coal imports, suggesting over-invoicing and siphoning off of funds. However, the adjudicating authority and Tribunal found no credible evidence of such manipulation affecting the transaction value as declared, nor proof of flowback or indirect benefits to depress assessable value.
The Tribunal recognized the legitimacy of complex commercial arrangements and centralized procurement systems in the energy sector, noting that customs authorities lack expertise to second-guess commercial prudence or contract structuring. It rejected the notion that the presence of intermediaries or related party transactions per se warranted rejection of declared value without evidence of influence on price.
The Tribunal also noted that the mark-up of approximately 20% over the base supply price was not unreasonably high and did not justify penal consequences. It cautioned against customs administration venturing into commercial judgments beyond statutory mandate.
6. Jurisdictional Limits Post Clearance and Legal Finality of Valuation
The Tribunal highlighted that once goods are cleared for home consumption with duties paid, jurisdiction to reopen valuation is limited and must be based on statutory grounds such as prohibited goods or fraud. The notice's attempt to invoke confiscation and penalties without reversing clearance or establishing misdeclaration affecting duty was impermissible.
The Tribunal also emphasized that valuation for customs purposes is a legal determination distinct from commercial pricing or contractual arrangements, and that customs jurisdiction does not extend to policing business models or commercial risk mitigation strategies.
7. Commercial and Regulatory Context in Energy Sector Procurement
The Tribunal acknowledged the specialized nature of the energy sector, including long-term contracts, tariff pass-through mechanisms, and regulatory oversight by tariff authorities. It noted that customs authorities' narrow understanding of these commercial realities led to flawed assumptions about pricing and procurement strategies.
The Tribunal accepted that the procurement through intermediaries was approved by principal power corporations and was commercially rational given domestic coal shortages. It rejected the appeal's attempt to impose customs valuation principles in a manner inconsistent with the commercial and regulatory framework governing the sector.
Significant Holdings
"A framework that was embedded with a deeming fiction merely for integrating one of the enabling provisions within the construct of the law and to which a machinery provision has been tethered as contextual necessity to make it work has been stretched to breaking point, and, that too, by appropriation at subaltern level, beyond the design of intent in legislated enactment or even contemplated for policy formulation."
"The adjudicating authority arrived at the outcome on 'first principle' appreciation of the provisions sought to be invoked and in disfavouring the proposals to confiscate imported goods for obtaining access to penal detriments."
"Declaration of law left open does not exclude all the findings in a decision of the Tribunal from the catena of binding judicial precedent... all other executive authorities, and not excepting the reviewing authority, are bound, too."
"Any invoice is only a reflection of price agreed between buyer and seller as payable for goods and is not a field in which the State can insert itself under any circumstance; an invoice submitted as evidence of price for assessment to duties of customs may conceivably be rejected by the tax administration but should have the consequence of alternative stipulated in the valuation mechanism, viz., 'surrogate value'."
"The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse, thereby, to discard of declared value."
"The appeal has failed to take note of the stage, and manner, of incorporating the enabling of belief to subject declared value to the rigour of rule 10A of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 thereafter as well as the more stringent context in which the corresponding rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2008 was emplaced."
"The scope of review is limited to examining an order for not being legal and proper and to be exercised over original authority that does not stretch to review of not only any order of the Tribunal let alone those in which appeals of Revenue had been dismissed."
"The attempt to have the findings therein re-considered, after the Central Government withdrew its appeal in one and lost its appeal in the other, by a subordinate executive authority is not in keeping with respect owed to judicial determination."
Final Determinations
Re-determination of the transaction value of imported goods under the Customs Act, 1962 - Steam coal - rejection of declared transaction value - confiscation - penalty - HELD THAT:- The declared value, representing the price in transaction, was proposed to be rejected by recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and, in its stead, an alternative transaction value of the imported goods, which was nothing but the ascertained price at an earlier stage in the ‘invoice trail’, was proposed as legally tenable following which the injunction in rule 11 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 was proposed as sufficing for confiscation and other detriments. The substituted value was assigned credibility coefficient from the impugned consignments having been ‘exported to India’ directly from Indonesia and, therefore, comparatively more in conformity with section 14 of Customs Act, 1962.
In so doing, it would appear that rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 was denuded of its true significance without care for its relevance stemming from the totality of section 14 of Customs Act, 1962 affording inclusion of value of services as well as administration of the antidote for transaction between related persons in which the influence of relationship ‘toxified’ contracted price.
The present controversy starts by positing belief that the transactional engagement was no reflection of the qualifiers for acceptability in rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 mandating not only recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 but also discard of ‘declared value’ which should have had, in terms of rule 3(4) therein, consequence of recourse to one of the ‘surrogate values’ which is absent. Instead, a truncation of the declared price, or ‘actual value’, by reason of non-conformity with description in section 14 of Customs Act, 1962 for ‘transaction value’, was arrived at and by matching the physical movement of impugned goods with invoice representing dispatch from Indonesia by seller in Indonesia as preferable over invoice representing dispatch from Indonesia by seller in Hong Kong. Neither the notice nor the grounds of appeal demonstrate any part of the valuation scheme which accords acceptance of this thesis for ‘substitution’ of invoice.
Clearly, an invoice raised on a buyer, shamed as ‘sham’ inclusion in the notice, outside India, even if concerning the impugned goods which has not been established by provenanced documentation, is not evidence of price between seller and buyer in India and, hence, not conforming either to section 14 of Customs Act, 1962 or to rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse, thereby, to discard of declared value. The mark-up is not of unreasonable magnitude as to suggest that transaction should be penalized. Even without pressing into service the law, as judicially determined, on jurisdictional competence and on evidentiary value of documents for visiting penalties on the respondents under Customs Act, 1962, and as found in the impugned order too, the facts suffice to erase the proposals in the notice.
Conclusion - i) The adjudicating authority was correct in rejecting the proposal to discard the declared transaction value and substitute it with an alternative value derived from earlier stages of the supply chain without following the statutory valuation sequence. ii) The proposals for confiscation and penalties under the Customs Act, 1962, were legally untenable in the absence of duty evasion or misdeclaration affecting assessment. iii) The Committee of Chief Commissioners of Customs exceeded its jurisdiction by attempting to revisit and overturn settled Tribunal precedents and judicial determinations.
There are no merits in the appeal - appeal dismissed.
Re-determination of the transaction value of imported goods under the Customs Act, 1962 - Steam coal - rejection of declared transaction value - confiscation - penalty - HELD THAT:- The declared value, representing the price in transaction, was proposed to be rejected by recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and, in its stead, an alternative transaction value of the imported goods, which was nothing but the ascertained price at an earlier stage in the ‘invoice trail’, was proposed as legally tenable following which the injunction in rule 11 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 was proposed as sufficing for confiscation and other detriments. The substituted value was assigned credibility coefficient from the impugned consignments having been ‘exported to India’ directly from Indonesia and, therefore, comparatively more in conformity with section 14 of Customs Act, 1962.
In so doing, it would appear that rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 was denuded of its true significance without care for its relevance stemming from the totality of section 14 of Customs Act, 1962 affording inclusion of value of services as well as administration of the antidote for transaction between related persons in which the influence of relationship ‘toxified’ contracted price.
The present controversy starts by positing belief that the transactional engagement was no reflection of the qualifiers for acceptability in rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 mandating not only recourse to rule 12 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 but also discard of ‘declared value’ which should have had, in terms of rule 3(4) therein, consequence of recourse to one of the ‘surrogate values’ which is absent. Instead, a truncation of the declared price, or ‘actual value’, by reason of non-conformity with description in section 14 of Customs Act, 1962 for ‘transaction value’, was arrived at and by matching the physical movement of impugned goods with invoice representing dispatch from Indonesia by seller in Indonesia as preferable over invoice representing dispatch from Indonesia by seller in Hong Kong. Neither the notice nor the grounds of appeal demonstrate any part of the valuation scheme which accords acceptance of this thesis for ‘substitution’ of invoice.
Clearly, an invoice raised on a buyer, shamed as ‘sham’ inclusion in the notice, outside India, even if concerning the impugned goods which has not been established by provenanced documentation, is not evidence of price between seller and buyer in India and, hence, not conforming either to section 14 of Customs Act, 1962 or to rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
The scheme of valuation does not stand in support of the manner in which the value has been sought to be substituted in the notice. The facts evinced are not sufficient to tear down the weave of commercial engagement and for recourse, thereby, to discard of declared value. The mark-up is not of unreasonable magnitude as to suggest that transaction should be penalized. Even without pressing into service the law, as judicially determined, on jurisdictional competence and on evidentiary value of documents for visiting penalties on the respondents under Customs Act, 1962, and as found in the impugned order too, the facts suffice to erase the proposals in the notice.
Conclusion - i) The adjudicating authority was correct in rejecting the proposal to discard the declared transaction value and substitute it with an alternative value derived from earlier stages of the supply chain without following the statutory valuation sequence. ii) The proposals for confiscation and penalties under the Customs Act, 1962, were legally untenable in the absence of duty evasion or misdeclaration affecting assessment. iii) The Committee of Chief Commissioners of Customs exceeded its jurisdiction by attempting to revisit and overturn settled Tribunal precedents and judicial determinations.
There are no merits in the appeal - appeal dismissed.
1. Whether the learned Additional Chief Metropolitan Magistrate (ACMM) correctly accepted the 'C' Summary Report without applying independent judicial mind, relying solely on the informant's no-objection.
2. What is the proper procedure and legal framework for a Magistrate to deal with a 'C' Summary Report under Section 173(2)(i) of the Code of Criminal Procedure (CrPC)Rs.
3. Whether the impugned order committing the scheduled offence case to the Special PMLA Court under Section 44(1)(c) of the Prevention of Money Laundering Act, 2002 (PMLA) was valid in the absence of the Magistrate taking cognizance of the scheduled offence.
4. The interplay between the jurisdiction of the Magistrate and the Special PMLA Court in cases involving scheduled offences and money laundering offences, particularly the stage at which committal to the Special Court is permissible.
Issue 1: Validity of Acceptance of 'C' Summary Report Without Application of Mind
The legal framework guiding the Magistrate's consideration of a 'C' Summary Report is derived from Section 173(2)(i) of the CrPC and the authoritative precedent laid down in Bhagwant Singh v. Commissioner of Police. The Court emphasized that upon receipt of a 'C' Summary Report, the Magistrate has three options:
Crucially, the Magistrate must apply independent judicial mind to the facts and evidence before deciding the fate of the report. The informant must be given an opportunity to be heard, but the Magistrate cannot accept the report merely because the informant has no objection. The Court found that the impugned order dated 14th September 2022 failed this test, as it accepted the 'C' Summary Report solely on the informant's no-objection without any independent evaluation of the material.
The Court held that such acceptance without application of mind is legally impermissible and vitiates the order. This conclusion aligns with the principle that the Magistrate's role is not ministerial but judicial in assessing whether sufficient grounds exist to proceed with prosecution.
Issue 2: Proper Procedure for Dealing with 'C' Summary Report
The Court reiterated the procedural safeguards mandated by the CrPC and the Bhagwant Singh judgment. The Magistrate must:
The Court emphasized that the informant's consent or objection is relevant but not determinative. The Magistrate's independent assessment is paramount to ensure justice and prevent arbitrary dismissal of complaints.
Issue 3: Validity of Committal Order to Special PMLA Court Under Section 44(1)(c) of PMLA
Section 44(1)(c) of the PMLA provides that if a court other than the Special Court has taken cognizance of a scheduled offence, it shall, on application by the authorized authority, commit the case to the Special Court which has taken cognizance of the money laundering offence for trial from the stage at which it is committed.
The Court analyzed the sequence of events and the statutory scheme, referring extensively to the Supreme Court's ruling in Rana Ayyub v. Directorate of Enforcement. The key principle established therein is that committal under Section 44(1)(c) is contingent upon the jurisdictional court first taking cognizance of the scheduled offence.
In the present case, since the Magistrate had accepted the 'C' Summary Report without applying mind and thus had not taken cognizance of the offence, the committal to the Special PMLA Court was premature and legally unsustainable. The Court held that the Magistrate must first reject the 'C' Summary Report and take cognizance before committing the case under Section 44(1)(c).
Issue 4: Jurisdictional Interplay Between Magistrate and Special PMLA Court
The Court clarified that the trial of scheduled offences and money laundering offences is to be conducted by the Special Court constituted under Section 43(1) of the PMLA. However, the jurisdictional threshold is that the Magistrate or trial court must first take cognizance of the scheduled offence. Only thereafter can the case be committed to the Special Court for simultaneous trial.
The Court relied on the Supreme Court's elucidation that the trial of scheduled offences should follow the trial of money laundering offences territorially and procedurally. Explanation (i) to Section 44(1) further clarifies that trial by the same court does not amount to joint trial, underscoring the distinct procedural stages.
This interpretation preserves the primacy of the Magistrate's role in initial cognizance and safeguards procedural fairness before transfer to the Special Court.
Significant Holdings and Legal Reasoning
The Court's crucial legal reasoning is encapsulated in the following verbatim excerpt from Bhagwant Singh v. Commissioner of Police:
"Now, when the report forwarded by the officer-incharge of a police station to the Magistrate under sub-section (2) (i) of Section 173 comes up for consideration by the Magistrate...the Magistrate must give notice to the informant and provide him an opportunity to be heard at the time of consideration of the report. It was urged...that if in such a case notice is required to be given to the informant, it might result in unnecessary delay...But we do not think this can be regarded as a valid objection...the difficulty of service of notice on the informant cannot possibly provide any justification for depriving the informant of the opportunity of being heard at the time when the report is considered by the Magistrate."
Further, the Court emphasized from the Supreme Court ruling in Rana Ayyub:
"...if the court which has taken cognizance of the scheduled offence is other than the Special Court which has taken cognizance of the offence of money-laundering...the court which has taken cognizance of the scheduled offence, should commit the case relating to the scheduled offence to the Special Court which has taken cognizance of the complaint of money-laundering...the trial of the scheduled offence should take place in the Special Court which has taken cognizance of the offence of money-laundering...the stage which has been contemplated under Section 44 (1) (c) of the PMLA will be after the jurisdictional Court has taken cognizance of the scheduled offences."
Final Determinations
Money Laundering - scheduled offences - the ‘C’ Summary Report is accepted without application of mind and only on the ground that the First Informant has given no objection - violation of principles of natural justice - HELD THAT:- The learned Magistrate was duty bound to apply his mind to the facts of the case and to the ‘C’ Summary Report and the material annexed to the same and then pass order either accepting the ‘C’ Summary Report or rejecting the said ‘C’ Summary Report and taking cognizance of the offence and issuing process or the learned Magistrate may direct further investigation under sub-section (3) of Section 156. A bare perusal of said Order dated 14th September 2022 shows that the ‘C’ Summary Report is accepted without application of mind and only on the ground that the First Informant has given no objection.
The stage which has been contemplated under Section 44 (1) (c) of the PMLA, 2002 will be after the jurisdictional Court has taken cognizance of the scheduled offences. The said stage will come if the learned Additional Chief Metropolitan Magistrate by rejecting the C-Summary Report takes cognizance of the offence and issues process.
Conclusion - The impugned order dated 14th September 2022 accepting the 'C' Summary Report without application of mind is quashed and set aside.
The matter is remanded to the learned Additional Chief Metropolitan Magistrate for fresh consideration of the 'C' Summary Report in accordance with law, applying judicial mind and following procedural safeguards - petition disposed off.
Money Laundering - scheduled offences - the ‘C’ Summary Report is accepted without application of mind and only on the ground that the First Informant has given no objection - violation of principles of natural justice - HELD THAT:- The learned Magistrate was duty bound to apply his mind to the facts of the case and to the ‘C’ Summary Report and the material annexed to the same and then pass order either accepting the ‘C’ Summary Report or rejecting the said ‘C’ Summary Report and taking cognizance of the offence and issuing process or the learned Magistrate may direct further investigation under sub-section (3) of Section 156. A bare perusal of said Order dated 14th September 2022 shows that the ‘C’ Summary Report is accepted without application of mind and only on the ground that the First Informant has given no objection.
The stage which has been contemplated under Section 44 (1) (c) of the PMLA, 2002 will be after the jurisdictional Court has taken cognizance of the scheduled offences. The said stage will come if the learned Additional Chief Metropolitan Magistrate by rejecting the C-Summary Report takes cognizance of the offence and issues process.
Conclusion - The impugned order dated 14th September 2022 accepting the 'C' Summary Report without application of mind is quashed and set aside.
The matter is remanded to the learned Additional Chief Metropolitan Magistrate for fresh consideration of the 'C' Summary Report in accordance with law, applying judicial mind and following procedural safeguards - petition disposed off.
The core legal questions considered by the Court are:
(a) Whether the prosecution under Section 3 of the Prevention of Money Laundering Act, 2002 (PMLA) can be continued after the death of the sole accused in the predicate scheduled offence, given that the criminal proceedings in the scheduled offence abated on his death;
(b) Whether the abatement of the scheduled offence proceedings upon the death of the accused is equivalent to acquittal, thereby negating the existence of proceeds of crime necessary for a PMLA offence;
(c) Whether the petitioner, as an assignee of receivables arising from commercial agreements between foreign entities, qualifies as a 'claimant' with legitimate interest under Section 8(8) of the PMLA and the Prevention of Money Laundering (Restoration of Property) Rules, 2016 ('Restoration Rules') to seek restoration of attached property;
(d) Whether the order of a foreign court (Bulgaria) transferring receivables can be enforced or recognized in Indian courts in the absence of a reciprocal treaty under Section 44A of the Code of Civil Procedure (CPC); and
(e) Whether the procedural requirements under the Restoration Rules, including publication of notice, were complied with and whether failure to do so affects the maintainability of the petition for restoration.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (a) and (b): Continuation of PMLA proceedings after death of sole accused in scheduled offence and effect of abatement
Relevant legal framework and precedents: Section 3 of PMLA criminalizes money laundering as an independent offence connected with proceeds of crime derived from scheduled offences. The offence under Section 3 is "stand-alone" and can be committed by persons not accused in the scheduled offence but involved in concealment, possession, acquisition, or use of proceeds of crime. The Apex Court in Vijay Madanlal Choudhary and Pavana Dibbur clarified that while the scheduled offence must exist for a PMLA offence to be attracted, the accused in the PMLA offence need not be the same as in the scheduled offence. Abatement of scheduled offence proceedings due to death does not equate to acquittal, and thus does not automatically negate the existence of proceeds of crime or the continuation of PMLA proceedings.
Court's interpretation and reasoning: The Court relied on the above precedents and emphasized that the offence under Section 3 PMLA is independent and can be pursued against persons involved in laundering proceeds of crime even if they were not accused in the scheduled offence. The death of the sole accused in the scheduled offence and the subsequent abatement of those proceedings does not extinguish the foundational facts that gave rise to the money laundering offence. The prosecution complaint filed against the deceased's wife and daughter under Section 3 PMLA is maintainable as they are alleged to be involved in the laundering process. Consequently, the question of abatement equating to acquittal and extinguishing the PMLA offence was held to be irrelevant.
Key evidence and findings: The FIR and investigation revealed that the accused had diverted proceeds from non-existent exports, constituting proceeds of crime. The Enforcement Directorate filed a prosecution complaint under PMLA against the deceased accused's family members. The Court found no legal impediment to continuing PMLA proceedings against the remaining accused.
Application of law to facts: Applying the stand-alone nature of Section 3 PMLA offence and the principle that abatement does not amount to acquittal, the Court held that the PMLA prosecution could continue despite the death of the sole accused in the scheduled offence.
Treatment of competing arguments: The petitioner argued that abatement of the scheduled offence extinguished the offence and thus the PMLA proceedings could not continue. The Court rejected this, relying on authoritative precedents clarifying the independent nature of the PMLA offence and the non-equivalence of abatement to acquittal.
Conclusion: The PMLA proceedings under Section 3 are maintainable against the remaining accused notwithstanding the death of the sole accused in the scheduled offence and abatement of those proceedings.
Issue (c): Whether the petitioner qualifies as a 'claimant' with legitimate interest under Section 8(8) PMLA and Restoration Rules to seek restoration of attached property
Relevant legal framework and precedents: Section 8(8) PMLA permits a Special Court to restore confiscated property to a claimant who has a legitimate interest and has suffered quantifiable loss due to money laundering, provided the claimant acted in good faith, took reasonable precautions, and is not involved in money laundering. The Restoration Rules define 'claimant' and prescribe procedural safeguards including notice publication.
Court's interpretation and reasoning: The Court examined whether the petitioner, as an assignee of receivables purchased from a foreign entity (M/s. Finlease Capital AD), falls within the definition of claimant. It held that the petitioner's claim arises from a commercial transaction involving assignment of receivables and not from direct loss due to money laundering. The loss suffered by the original foreign entity due to breach of contract by the accused does not translate into a quantifiable loss suffered by the petitioner as assignee. Hence, the petitioner does not qualify as a claimant under Section 8(8) or Rule 2(b) of the Restoration Rules. Further, the petitioner's purchase of the receivables was voluntary and for a nominal consideration compared to the amount attached, indicating acquisition of a litigious asset.
Key evidence and findings: The petitioner relied on an order of the Bulgarian court transferring receivables and an assignment agreement executed thereafter. However, the Court found that the Bulgarian order was not a decree for payment but only a transfer of receivables, and the petitioner had not suffered loss due to money laundering but was seeking restoration of attached property worth significantly more than the purchase price paid.
Application of law to facts: The Court applied the statutory requirement that a claimant must have suffered quantifiable loss due to money laundering and acted in good faith. The petitioner's status as assignee of receivables without direct loss or involvement in the offence disqualified it from claiming restoration.
Treatment of competing arguments: The petitioner contended that it had legitimate interest and suffered loss as assignee. The Court rejected this, emphasizing the distinction between commercial loss due to breach of contract and quantifiable loss due to money laundering, and the requirement of good faith and reasonable precautions.
Conclusion: The petitioner does not qualify as a claimant with legitimate interest under Section 8(8) PMLA and Restoration Rules, and therefore is not entitled to restoration of attached property.
Issue (d): Enforcement of foreign court order (Bulgaria) in Indian courts in absence of reciprocal treaty
Relevant legal framework: Section 44A of the Code of Civil Procedure permits enforcement of decrees passed by foreign courts in reciprocating countries. Bulgaria is not a reciprocating country under this provision.
Court's interpretation and reasoning: The Court held that the Bulgarian court order transferring receivables cannot be enforced or recognized by Indian courts in the absence of a reciprocal treaty. Therefore, the petitioner's claim based on that order is not maintainable in Indian proceedings.
Application of law to facts: The petitioner's reliance on the Bulgarian order for assignment of receivables was held insufficient to confer enforceable rights in Indian jurisdiction.
Conclusion: The foreign court order is not enforceable in India, and cannot form the basis for restoration claim.
Issue (e): Compliance with procedural requirements under Restoration Rules
Relevant legal framework: Rule 3A(1) of the Prevention of Money Laundering (Restoration of Property) Rules, 2016 requires issuance of a 30-day notice to consider a restoration claim.
Court's interpretation and reasoning: Since the petitioner does not qualify as a claimant under the Rules, the Court held that the procedural requirement of notice issuance did not arise. Non-compliance with this procedural step was not addressed substantively.
Conclusion: The procedural requirements were not applicable as the petitioner's claim was not maintainable on substantive grounds.
3. SIGNIFICANT HOLDINGS
The Court crystallized the following principles and determinations:
"From the bare language of Section 3 of the 2002 Act, it is amply clear that 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... This offence otherwise has nothing to do with the criminal activity relating to a scheduled offence - except the proceeds of crime derived or obtained as a result of that crime."
"The proceedings under the PMLA would not abate with the death of the sole accused in the predicate offence... Abatement of criminal proceedings does not amount to acquittal and would not erase the foundational facts which had given rise to the prosecution under another enactment."
"For a third party's claim to be maintainable under Section 8(8) of PMLA, the claimant should have legitimate interest in the property and should have suffered quantifiable loss as a result of the offence of money-laundering, in spite of having taken all reasonable precautions. Further, the claimant should have acted in good faith and should not be involved in the offence of money-laundering."
"The trade loss suffered by M/s.Zvezda due to the failure on the part of M/s.Trade International to abide by its commitment, cannot be treated as the quantifiable loss suffered by the assignee of the receivables."
"The order of the Bulgarian Court cannot be executed through Indian Courts, in the absence of a reciprocal treaty between India and Bulgaria."
The Court finally concluded that the Special Court's order rejecting the petition for restoration of attached property was legally sound and dismissed the petition accordingly.
Seeking restoration of the properties attached under Section 5 of the Prevention of Money Laundering Act, 2002 - death of sole accused - continuation of prosecution u/s 3 of the Prevention of Money Laundering Act, 2002 (PMLA) after the death of the sole accused in the predicate scheduled offence, given that the criminal proceedings in the scheduled offence abated on his death - HELD THAT:- For a third party's claim to be maintainable, he should have legitimate interest in the property and should have suffered quantifiable loss as a result of the offence of money-laundering, in spite of having taken all reasonable precautions. Further, the claimant should have acted in good faith and should not be involved in the offence of money-laundering.
In the case at hand, the petitioner's claim is based on the order of a Bulgarian court, assigning the right to the receivables arising out of the non- performance of the commercial contracts by M/s.Trade International. Here, it is pertinent to note that the claim under Section 8 of the PMLA is maintainable only at the instance of a person who has suffered a quantifiable loss as a result of the offence of money-laundering. The trade loss suffered by M/s.Zvezda due to the failure on the part of M/s.Trade International to abide by its commitment, cannot be treated as the quantifiable loss suffered by the assignee of the receivables. Being so, the purchaser of the right to realise the receivables from the assignee, will not fall within the meaning of the term 'claimant' as defined in Rule 2(b) of the Restoration Rules. Moreover, the order of the Bulgarian Court cannot be executed through Indian Courts, in the absence of a reciprocal treaty between India and Bulgaria.
Conclusion - As contended by the learned ASGI, even in a case where the claim under Section 8(8) is found to be entertainable, the procedure prescribed in Rule 3A(1) of the Prevention of Money Laundering (Restoration of property) Rules, 2016 has to be followed. As it is already found that the petitioner does not fall within the ambit of 'claimant' under Rule 2(b) of the Restoration Rules, the question of issuance of notice in accordance with Rule 3A(1) does not arise.
The well considered order of the Special Court warrants no interference. In the result, the Crl.M.C is dismissed.
Seeking restoration of the properties attached under Section 5 of the Prevention of Money Laundering Act, 2002 - death of sole accused - continuation of prosecution u/s 3 of the Prevention of Money Laundering Act, 2002 (PMLA) after the death of the sole accused in the predicate scheduled offence, given that the criminal proceedings in the scheduled offence abated on his death - HELD THAT:- For a third party's claim to be maintainable, he should have legitimate interest in the property and should have suffered quantifiable loss as a result of the offence of money-laundering, in spite of having taken all reasonable precautions. Further, the claimant should have acted in good faith and should not be involved in the offence of money-laundering.
In the case at hand, the petitioner's claim is based on the order of a Bulgarian court, assigning the right to the receivables arising out of the non- performance of the commercial contracts by M/s.Trade International. Here, it is pertinent to note that the claim under Section 8 of the PMLA is maintainable only at the instance of a person who has suffered a quantifiable loss as a result of the offence of money-laundering. The trade loss suffered by M/s.Zvezda due to the failure on the part of M/s.Trade International to abide by its commitment, cannot be treated as the quantifiable loss suffered by the assignee of the receivables. Being so, the purchaser of the right to realise the receivables from the assignee, will not fall within the meaning of the term 'claimant' as defined in Rule 2(b) of the Restoration Rules. Moreover, the order of the Bulgarian Court cannot be executed through Indian Courts, in the absence of a reciprocal treaty between India and Bulgaria.
Conclusion - As contended by the learned ASGI, even in a case where the claim under Section 8(8) is found to be entertainable, the procedure prescribed in Rule 3A(1) of the Prevention of Money Laundering (Restoration of property) Rules, 2016 has to be followed. As it is already found that the petitioner does not fall within the ambit of 'claimant' under Rule 2(b) of the Restoration Rules, the question of issuance of notice in accordance with Rule 3A(1) does not arise.
The well considered order of the Special Court warrants no interference. In the result, the Crl.M.C is dismissed.
- Whether the jewellery seized from the appellant's residential premises constitutes proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA), thereby justifying its retention by the authorities.
- Whether the appellant's disclosure of the jewellery in Income Tax Returns (ITR) and Wealth Tax Returns prior to the registration of the FIR negates the presumption that the jewellery is proceeds of crime.
- Whether the seizure and retention of jewellery belonging to the appellant, who is not named in the FIR or prosecution complaint, is legally sustainable.
- The evidentiary burden on the parties concerning the status of the jewellery as proceeds of crime and the obligation on authorities to verify the declared assets before retention.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether the seized jewellery constitutes proceeds of crime under PMLA
The relevant legal framework is Section 17(4) of the Prevention of Money Laundering Act, 2002, which governs the retention of seized property alleged to be proceeds of crime. The Act mandates that the Adjudicating Authority must be satisfied that the property in question is indeed proceeds of crime before permitting its retention.
The Court noted that the jewellery was seized on 13.11.2019 and an application under Section 17(4) was made on 11.12.2019. The seizure was premised on the assertion that the jewellery was gifted by the grandmother to the accused Rakesh Wadhawan and then passed on to the appellant. However, the appellant was not named in the FIR, nor was the jewellery made part of the prosecution complaint.
The Court emphasized that the respondents failed to produce any material evidence to establish that the jewellery seized was proceeds of crime. The mere fact that the jewellery was gifted to the accused and then passed on to the appellant does not ipso facto render it proceeds of crime without corroborative evidence.
The Court applied the principle that the burden of proof lies on the appellant to show legitimate ownership, but the respondents must produce rebuttal evidence to controvert such claims. Here, the respondents did not discharge this burden.
Issue 2: Effect of disclosure of jewellery in Income Tax and Wealth Tax Returns
The appellant had disclosed the jewellery in Income Tax Returns filed since 2010, well before the FIR registration in 2019. The jewellery was also declared in Wealth Tax Returns. The Court found that the Adjudicating Authority and respondents did not dispute this disclosure.
While the respondents argued that the Income Tax Returns do not detail jewellery, the Court observed that the Wealth Tax Returns provided adequate description and valuation. The respondents were under an obligation to verify whether the seized jewellery matched the declared assets but failed to do so.
The Court reasoned that such prior disclosure negates the presumption that the jewellery is proceeds of crime, especially when the appellant is not implicated in the FIR or prosecution complaint. The Court held that the retention of jewellery without establishing it as proceeds of crime, despite its declared status, was unjustified.
Issue 3: Retention of jewellery when appellant is not named in FIR or prosecution complaint
The appellant's relationship with the accused was examined. She was married 20 years prior to the FIR registration and lived separately with no business connection to the accused. The Court noted that the jewellery was seized solely because of familial association, not due to any direct involvement in the alleged crime.
The Court found no material to implicate the appellant or to justify retention of her jewellery under the PMLA. The prosecution complaint did not include the jewellery as part of the charge sheet against the appellant.
Therefore, the Court concluded that retention of the jewellery was not sustainable in law and ordered its release subject to verification.
Issue 4: Evidentiary burden and verification obligations
The Court underscored the procedural obligation of the respondents to verify the seized jewellery against the declared assets in Income Tax and Wealth Tax Returns before permitting retention. The failure to conduct such verification undermined the basis for retention.
It was held that the respondents must produce cogent evidence to rebut the appellant's claim of legitimate ownership. Mere assumptions or familial links are insufficient to establish proceeds of crime.
The Court stressed that retention beyond the statutory period of six years requires strong justification, which was absent here.
3. SIGNIFICANT HOLDINGS
"The jewellery declared in the ITR from 2010 onwards has not been disputed by the Adjudicating Authority and even in the seizure order."
"The respondents were otherwise under an obligation to find out as to whether the jewellery disclosed in the Income-Tax Return and Wealth Tax Return for the last many years i.e. starting from 2010 is matching to the jewellery seized by the respondents."
"It is otherwise said to be the proceeds of crime which the respondents have failed to establish."
"Though the burden of proof lies on the appellant, the rebuttal evidence has to be produced by the respondents."
"In view of the above, the respondents could not supply reasons to retain the seized jewellery even after expiry of period of six years when the appellant has not been named in the FIR and even ECIR."
Core principles established include:
- Mere familial association with an accused does not justify seizure and retention of property under PMLA without evidence that the property is proceeds of crime.
- Prior disclosure of assets in Income Tax and Wealth Tax Returns is a significant factor negating the characterization of such assets as proceeds of crime.
- The authorities bear an obligation to verify seized property against declared assets before retention.
- The burden of proof for legitimate ownership lies with the appellant, but the authorities must produce rebuttal evidence to justify seizure and retention.
- Retention of property beyond the statutory period requires cogent justification, especially when the appellant is not named in the FIR or prosecution complaint.
Final determinations:
- The jewellery seized from the appellant does not constitute proceeds of crime under the PMLA.
- The seizure and retention were unjustified and contrary to the appellant's legitimate ownership evidenced by prior tax disclosures.
- The jewellery must be released after due verification within three months from the date of the order.
Money Laundering - proceeds of crime - jewellery seized from the appellant's residential premises constitutes proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA) or not - burden of proof - HELD THAT:- The jewellery was seized taking it to be a gift from Rakesh Wadhawan on behalf of late grandmother but no material has been produced or submitted by the respondents to controvert the evidence produced by the appellant. It is stated that description of the jewellery was not given at length in the Income-Tax Return but we find that it has been given in the wealth tax returns. The respondents were otherwise under an obligation to find out as to whether the jewellery disclosed in the Income-Tax Return and Wealth Tax Return for the last many years i.e. starting from 2010 is matching to the jewellery seized by the respondents. It is otherwise said to be the proceeds of crime which the respondents have failed to establish. Though the burden of proof lies on the appellant, the rebuttal evidence has to be produced by the respondents. It is also that the details of the jewellery and other items were disclosed in the Income-Tax Return with the value.
The respondents could not supply reasons to retain the seized jewellery even after expiry of period of six years when the appellant has not been named in the FIR and even ECIR. The prosecution complaint has not been filed against the appellant and it has not been shown that the jewellery seized was made part of the prosecution complaint.
The respondents are directed to release the jewellery disclosed in the Income-Tax return by the appellant if it is not made part of the prosecution complaint. The release of the jewellery, as directed above, would be after due verification but within a period of three months from the date of receipt of a copy of this order - Appeal disposed off.
Money Laundering - proceeds of crime - jewellery seized from the appellant's residential premises constitutes proceeds of crime under the Prevention of Money Laundering Act, 2002 (PMLA) or not - burden of proof - HELD THAT:- The jewellery was seized taking it to be a gift from Rakesh Wadhawan on behalf of late grandmother but no material has been produced or submitted by the respondents to controvert the evidence produced by the appellant. It is stated that description of the jewellery was not given at length in the Income-Tax Return but we find that it has been given in the wealth tax returns. The respondents were otherwise under an obligation to find out as to whether the jewellery disclosed in the Income-Tax Return and Wealth Tax Return for the last many years i.e. starting from 2010 is matching to the jewellery seized by the respondents. It is otherwise said to be the proceeds of crime which the respondents have failed to establish. Though the burden of proof lies on the appellant, the rebuttal evidence has to be produced by the respondents. It is also that the details of the jewellery and other items were disclosed in the Income-Tax Return with the value.
The respondents could not supply reasons to retain the seized jewellery even after expiry of period of six years when the appellant has not been named in the FIR and even ECIR. The prosecution complaint has not been filed against the appellant and it has not been shown that the jewellery seized was made part of the prosecution complaint.
The respondents are directed to release the jewellery disclosed in the Income-Tax return by the appellant if it is not made part of the prosecution complaint. The release of the jewellery, as directed above, would be after due verification but within a period of three months from the date of receipt of a copy of this order - Appeal disposed off.
1. Whether the attachment of properties mortgaged with a bank by the Enforcement Directorate (ED) under PMLA is valid and sustainable, especially when the properties are subject to prior mortgage and sale by the mortgagee bank.
2. Whether the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and related recovery proceedings initiated by the mortgagee bank have precedence over the attachment proceedings under PMLA.
3. The rights of bona fide auction purchasers of mortgaged properties when such properties are attached by the ED under PMLA.
4. The entitlement of the liquidator or secured creditors of a company under liquidation to stake claims on attached properties during the pendency of criminal trial under PMLA.
5. The scope and applicability of Section 8(7) of PMLA, 2002, concerning disposal or release of attached properties before the conclusion of trial.
Issue-wise Detailed Analysis:
1. Validity of Attachment of Mortgaged Properties by ED under PMLA
The legal framework governing attachment of properties under PMLA is primarily found in Sections 5 and 8 of the Act. Section 5 permits the ED to provisionally attach properties involved in money laundering offences, and Section 8(7) provides for disposal or release of such properties by the Special Judge during trial.
Precedents have established that PMLA is a special statute with overriding effect over other laws, as per Section 71 of PMLA, which states that the provisions of PMLA shall have effect notwithstanding anything inconsistent in any other law.
The Court noted that the properties in question were mortgaged with the appellant bank before the alleged commission of fraud and money laundering offences. The bank had initiated SARFAESI proceedings and auctioned three flats (Sl. Nos. 2 to 4), with sale certificates issued and physical possession delivered to bona fide auction purchasers in 2015, prior to the ED's attachment order dated 28.02.2019.
The ED contended that attachment under PMLA is permissible notwithstanding prior mortgage or sale, relying on the special status of PMLA and the ongoing criminal prosecution for money laundering. The bank argued that attachment of already auctioned properties violates the rights of bona fide purchasers and that attachment of mortgaged property interferes with the bank's right to realize its dues.
The Court interpreted Section 71 of PMLA to mean that PMLA proceedings have precedence; however, it also recognized the rights of bona fide auction purchasers and mortgagees. The Court held that attachment of properties already sold and delivered to auction purchasers was improper and set aside the attachment in respect of flats at Sl. Nos. 2 to 4.
Regarding the remaining mortgaged property (Sl. No.1), the Court held that the bank's rights as secured creditor are preserved and that the bank or liquidator can seek disposal of the property under Section 8(7) of PMLA before the Special Judge, with an undertaking to deposit any excess proceeds with ED.
2. Precedence of SARFAESI and Recovery Proceedings vis-`a-vis PMLA Attachment
The bank contended that its recovery proceedings under SARFAESI and the DRT Recovery Certificate dated 28.06.2018 entitle it to realize dues by selling mortgaged properties, and that ED's attachment interferes with this right.
The ED argued that PMLA is a special law and overrides other statutes, including SARFAESI, thus attachment under PMLA is valid despite prior mortgage or recovery actions.
The Court acknowledged the special status of PMLA but clarified that Section 8(7) allows the Special Judge to dispose of attached properties after inviting claims of creditors. The bank, as a secured creditor, can approach the Special Judge for auction of mortgaged properties even before trial conclusion, subject to depositing excess proceeds with ED.
This balances the competing interests of the State's interest in preventing money laundering and the secured creditor's right to recover dues.
3. Rights of Bona Fide Auction Purchasers
The bank submitted that the flats at Sl. Nos. 2 to 4 were auctioned and sale certificates issued in 2015, with physical possession delivered to purchasers, prior to ED's attachment in 2019.
The ED's attachment of these flats was challenged as infringing on the rights of bona fide purchasers.
The Court held that bona fide auction purchasers have the right to retain ownership and possession and that attachment of these properties by ED was improper. Consequently, attachment orders in respect of these flats were set aside.
4. Rights of Liquidator and Secured Creditors in Liquidation Proceedings
The company, being under liquidation, raised issues regarding the effect of attachment on liquidation proceedings.
The Court held that the liquidator has the right to stake claims on attached properties before the Special Judge under Section 8(7) of PMLA, with an undertaking to deposit excess amounts with ED. In absence of action by the liquidator, secured creditors may also approach the Special Judge similarly.
This preserves the rights of creditors and liquidators to realize assets despite attachment under PMLA.
5. Application of Section 8(7) of PMLA
Section 8(7) provides the Special Judge with discretion to release or dispose of attached properties during trial, after hearing claims of interested parties.
The Court emphasized that this section enables creditors and liquidators to apply for disposal of attached properties, balancing the interests of investigation and recovery.
Key Evidence and Findings:
The investigation revealed that the accused officials floated shell companies and created fictitious invoices to obtain loans fraudulently from multiple banks, including Dena Bank, Andhra Bank, and Union Bank of India. The loans were diverted and laundered through these entities.
Loan amounts defaulted significantly, and the properties attached were mortgaged assets or auctioned flats.
Documents and statements from bank officials, company employees, and auction purchasers established the timeline and ownership of properties, as well as the fraudulent scheme.
Treatment of Competing Arguments:
The bank's argument that attachment interfered with its rights as secured creditor and bona fide purchasers' rights was accepted in part, leading to setting aside attachment of auctioned flats.
ED's contention of PMLA's overriding effect was accepted concerning the mortgaged property, subject to claims under Section 8(7).
The Court balanced the competing rights by allowing secured creditors and liquidators to seek disposal of attached properties under judicial supervision, preserving the integrity of money laundering proceedings while protecting legitimate creditor interests.
Significant Holdings:
"After the filing of prosecution complaint it is the prerogative of the Ld. Special Judge, PMLA Court, to release/dispose of the attached mortgaged properties at the time of conclusion of trial, after inviting claim of the creditors."
"Being a secured mortgagee of the aforementioned properties, the appellant bank is at liberty to stake its claim before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of mortgaged properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount with ED by way of FDRs, if any."
"All the auction purchasers, who already purchased the flats have right to retain the ownership and possession of the properties, sold by mortgagee bank. The properties of the said auction purchasers are wrongly attached by ED, without appreciating the fact that they are bona-fide auction purchasers and sale certificates are already issued in their favour."
"The liquidator will also have right to stake the claim for other secured & unsecured creditors, before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount (if any) with ED by way of FDRs."
"It is made clear that nothing expressed herein will affect the right of any party in the criminal trials."
These holdings establish the principle that while PMLA has overriding effect, the rights of bona fide purchasers and secured creditors are protected by judicial mechanisms under the Act, particularly Section 8(7). The Court upheld the balance between anti-money laundering objectives and legitimate proprietary and creditor rights.
Money Laundering - right of auction purchasers - attachment of properties - properties are subject to prior mortgage and sale by the mortgagee bank - floating fictitious shell companies - precedence of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and related recovery proceedings initiated by the mortgagee bank over the attachment proceedings under PMLA - HELD THAT:- The contention of learned counsel for Respondent ED agreed upon that after the filing of prosecution complaint it is the prerogative of the Ld. Special Judge, PMLA Court, to release/dispose of the attached mortgaged properties at the time of conclusion of trial, after inviting claim of the creditors. However, being a secured mortgagee of the aforementioned properties, the appellant bank is at liberty to stake its claim before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of mortgaged properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount with ED by way of FDRs, if any.
All the auction purchasers, who already purchased the flats have right to retain the ownership and possession of the properties, sold by mortgagee bank. The properties of the said auction purchasers are wrongly attached by ED, without appreciating the fact that they are bona-fide auction purchasers and sale certificates are already issued in their favour.
As accused company M/s Zylog Systems Ltd. is under liquidation, the liquidator will also have right to stake the claim for other secured & unsecured creditors, before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount (if any) with ED by way of FDRs. In absence of any action on the part of liquidators, the secured creditors, can also move application under section 8(7) of PMLA, 2002.
Conclusion - While PMLA has overriding effect, the rights of bona fide purchasers and secured creditors are protected by judicial mechanisms under the Act, particularly Section 8(7). The balance between anti-money laundering objectives and legitimate proprietary and creditor rights upheld.
The present appeals are hereby disposed of accordingly and thereby the attachment qua the flats mentioned at S.No. 2 to 4 is hereby set aside in favour of the auction purchasers. Liberty is granted to the liquidator/secured creditor qua the property at S. No. 1, as per section 8(7) of PMLA, 2002.
Money Laundering - right of auction purchasers - attachment of properties - properties are subject to prior mortgage and sale by the mortgagee bank - floating fictitious shell companies - precedence of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and related recovery proceedings initiated by the mortgagee bank over the attachment proceedings under PMLA - HELD THAT:- The contention of learned counsel for Respondent ED agreed upon that after the filing of prosecution complaint it is the prerogative of the Ld. Special Judge, PMLA Court, to release/dispose of the attached mortgaged properties at the time of conclusion of trial, after inviting claim of the creditors. However, being a secured mortgagee of the aforementioned properties, the appellant bank is at liberty to stake its claim before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of mortgaged properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount with ED by way of FDRs, if any.
All the auction purchasers, who already purchased the flats have right to retain the ownership and possession of the properties, sold by mortgagee bank. The properties of the said auction purchasers are wrongly attached by ED, without appreciating the fact that they are bona-fide auction purchasers and sale certificates are already issued in their favour.
As accused company M/s Zylog Systems Ltd. is under liquidation, the liquidator will also have right to stake the claim for other secured & unsecured creditors, before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount (if any) with ED by way of FDRs. In absence of any action on the part of liquidators, the secured creditors, can also move application under section 8(7) of PMLA, 2002.
Conclusion - While PMLA has overriding effect, the rights of bona fide purchasers and secured creditors are protected by judicial mechanisms under the Act, particularly Section 8(7). The balance between anti-money laundering objectives and legitimate proprietary and creditor rights upheld.
The present appeals are hereby disposed of accordingly and thereby the attachment qua the flats mentioned at S.No. 2 to 4 is hereby set aside in favour of the auction purchasers. Liberty is granted to the liquidator/secured creditor qua the property at S. No. 1, as per section 8(7) of PMLA, 2002.
The core legal questions considered by the Court include:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Maintainability of the Appeal and Writ Petition before the High Court
Relevant Legal Framework and Precedents: Section 35-G of the Central Excise Act, 1944 allows appeals to the High Court from orders passed by the CESTAT, except where the order relates to questions involving the rate of duty or valuation of goods. Section 35-L provides that such orders involving rate or valuation questions are appealable only before the Supreme Court. The Court referred to precedents including decisions in Commissioner of Central Excise, Mumbai-V vs Reliance Media Works Ltd and BCCI vs Commissioner of Service Tax, which emphasize the strict demarcation of appellate jurisdiction between the High Court and Supreme Court under these provisions.
Court's Interpretation and Reasoning: The Court examined the CESTAT's Final Order dated 24 January 2025 and noted that it explicitly discusses issues of valuation and taxability, which are central to the dispute. The Appeal memo also raised grounds relating to valuation and taxability. Accordingly, the Court held that the appeal is not maintainable before the High Court under Section 35-G but must be instituted before the Supreme Court under Section 35-L.
Treatment of Competing Arguments: The Respondent argued for non-maintainability of both the Appeal and the Writ Petition before the High Court, relying on the statutory scheme and relevant precedents. The Petitioner/Appellant contended for maintainability, but the Court found the statutory provisions and facts favor the Respondent's position.
Conclusion: The Appeal challenging the CESTAT's Final Order dated 24 January 2025 is not maintainable before the High Court and must be filed before the Supreme Court.
Issue 2: Nature and Appealability of the CESTAT's Order dated 06 May 2025 under Rule 41 of the 1982 Rules
Relevant Legal Framework: Rule 41 of the 1982 Rules empowers the CESTAT to issue orders or directions necessary to give effect to its orders or prevent abuse of process. The Court considered whether such an order is a separate order appealable before the High Court or Supreme Court.
Court's Interpretation and Reasoning: The Court held that the 06 May 2025 order supplements, interprets, or aids in the implementation of the original CESTAT order dated 24 January 2025. The decisions cited by the Respondent indicate that such orders are appealable before the Supreme Court under Section 35-L, not before the High Court under Section 35-G. The Court emphasized the phrase "among other things" in Sections 35-G and 35-L, which broadens the scope of orders appealable before the Supreme Court.
Competing Arguments: The Petitioner/Appellant argued that the 06 May 2025 order was a separate order without jurisdiction, thus challengeable by Writ Petition before the High Court. The Respondent contended it is part of the original order and appealable only before the Supreme Court.
Conclusion: The order dated 06 May 2025 is effectively part of the original order and appealable only before the Supreme Court.
Issue 3: Legality of the CESTAT's Direction for Cash Refund of Rs. 256.45 Crores in Light of Proviso to Section 142(6)(a) of the CGST Act, 2017
Relevant Legal Framework: Section 142(6)(a) of the CGST Act, 2017 contains a proviso that prohibits cash refunds of CENVAT credit amounts that were carried forward under the CGST Act as on the appointed date (1 July 2017). The Petitioner/Appellant contended that since the Respondent had carried forward CENVAT credit on the appointed date, the proviso bars any cash refund.
Court's Reasoning and Findings: The Court acknowledged the Petitioner/Appellant's submission that the reversal of credit after nearly seven years was an attempt to circumvent the statutory embargo on cash refunds. The Court noted that the original CESTAT order did not specifically order a cash refund; the cash refund direction was granted only by the 06 May 2025 order, which was passed purportedly under Rule 41. The Court recognized the prima facie force of the proviso to Section 142(6)(a) and the potential jurisdictional infirmity in granting the cash refund.
Competing Arguments: The Respondent disputed the Petitioner/Appellant's position but the Court refrained from deciding the merits, keeping all contentions open.
Conclusion: The direction for cash refund raises serious legal questions under the CGST Act proviso and requires further consideration in appeal.
Issue 4: Exercise of Discretionary Jurisdiction under Article 226 to Entertain the Writ Petition
Court's Reasoning: The Court observed that jurisdiction under Article 226 is plenary and discretionary but should not be exercised to entertain partial or truncated proceedings when a complete remedy exists before the Supreme Court. The Court emphasized that partial interference with the CESTAT's orders would not be in the interest of justice and could render the reliefs granted by the Tribunal meaningless.
Conclusion: The Court declined to exercise its discretionary jurisdiction under Article 226 to entertain the Writ Petition challenging the 06 May 2025 order.
Issue 5: Grant of Stay on the CESTAT's Direction for Cash Refund Pending Appeal
Court's Reasoning: Considering the prima facie legal embargo on cash refunds under the CGST Act proviso and the potential irreversibility if the refund is paid (especially given the Respondent's claim of factory closures), the Court found it just and proper to grant a limited stay. The Court balanced the prejudice, noting that refusal of stay would prejudice the Revenue irreparably, whereas the Respondent could recover the amount if ultimately entitled.
Competing Arguments: The Respondent opposed the stay, arguing the CESTAT order was akin to a money decree and should not be stayed. The Court, however, prioritized protecting the Revenue's interest pending appeal.
Conclusion: The Court granted an eight-week stay on the direction for cash refund of Rs. 256.45 crores from the date of uploading the order.
3. SIGNIFICANT HOLDINGS
The Court made the following key determinations and legal pronouncements:
"Having regard to the provisions of Section 35-G and 35-L, we are satisfied that the Appeal will not be maintainable before this Court but may have to be instituted before the Hon'ble Supreme Court."
"The order dated 06 May 2025 could be said to either supplement, interpret or aid in the implementation of CESTAT's final order dated 24 January 2025... such an order would be appealable under Section 35-L before the Hon'ble Supreme Court and not before this Court under Section 35-G."
"If this Court is unable to grant complete relief, there is no point in exercising discretionary jurisdiction under Article 226 of the Constitution and examining only part of the controversy."
"The prejudice to the Revenue by the refusal of some protection for a limited period would far outweigh the prejudice to the Respondent... Therefore, we are satisfied that this is a fit case that the CESTAT's direction for cash refund of Rs.256.45 Crores should be stayed for a period of eight weeks..."
Core principles established include the strict demarcation of appellate jurisdiction between the High Court and Supreme Court under Sections 35-G and 35-L of the Central Excise Act, the limited scope of Rule 41 orders as extensions of original orders appealable only before the Supreme Court, and the cautious exercise of discretionary writ jurisdiction to avoid piecemeal adjudication when a complete remedy exists.
Final determinations on each issue are:
Maintainability of appeal - appropriate forum - High Court or Supreme Court - issues relating to the rate of duty and valuation of goods - entitlement to cash refund in light of the proviso to Section 142(6)(a) of the CGST Act, 2017 - HELD THAT:- The scope of the proviso to Section 142 (6) (a) warrants serious consideration. Under this proviso, once any amount of CENVAT credit as on the appointed date had been carried forward under the CGST Act 2017, at least prima facie, there was an embargo on cash refunds. The Tribunal’s Original Order dated 24 January 2025 had not, at least specifically, ordered any cash refund. Only consequential relief was granted without specifying what this consequential relief would be. The relief of cash refund was granted only by the order dated 06 May 2025, disposing of Misc. Application No. 85710 of 2025 and by purportedly exercising the powers under Rule 41 of the 1982 Rules.
The prejudice to the Revenue by the refusal of some protection for a limited period would far outweigh the prejudice to the Respondent. If ultimately the Respondent is found eligible for the relief now granted by the CESTAT, there should be no serious difficulty in recovering this amount from the Revenue. However, if any cash refunds are granted to the Respondent and the Revenue succeeds in its Appeal/s, the position may not be as simple, since it is the Respondent’s case that it is not undertaking any active business or has closed down its factories.
This is a fit case that the CESTAT’s direction for cash refund of Rs.256.45 Crores should be stayed for a period of eight weeks from the date of uploading of this order. Accordingly, we order such stay for a period of eight weeks from the date of uploading of this order.
This Petition and the Appeal are disposed of as not pressed with liberty to the Petitioner/Appellant to prefer Appeal/s before the Hon’ble Supreme Court by invoking the provisions of Section 35-G and 35-L of the Central Excise Act, 1944, within eight weeks from the date of uploading of this order.
Conclusion - i) The Appeal and Writ Petition are not maintainable before the High Court and must be filed before the Supreme Court. ii) The direction for cash refund potentially violates the proviso to Section 142(6)(a) of the CGST Act and requires appellate scrutiny. iii) The direction for cash refund is stayed for eight weeks pending appeal before the Supreme Court.
Petition and appeal disposed off.
Maintainability of appeal - appropriate forum - High Court or Supreme Court - issues relating to the rate of duty and valuation of goods - entitlement to cash refund in light of the proviso to Section 142(6)(a) of the CGST Act, 2017 - HELD THAT:- The scope of the proviso to Section 142 (6) (a) warrants serious consideration. Under this proviso, once any amount of CENVAT credit as on the appointed date had been carried forward under the CGST Act 2017, at least prima facie, there was an embargo on cash refunds. The Tribunal’s Original Order dated 24 January 2025 had not, at least specifically, ordered any cash refund. Only consequential relief was granted without specifying what this consequential relief would be. The relief of cash refund was granted only by the order dated 06 May 2025, disposing of Misc. Application No. 85710 of 2025 and by purportedly exercising the powers under Rule 41 of the 1982 Rules.
The prejudice to the Revenue by the refusal of some protection for a limited period would far outweigh the prejudice to the Respondent. If ultimately the Respondent is found eligible for the relief now granted by the CESTAT, there should be no serious difficulty in recovering this amount from the Revenue. However, if any cash refunds are granted to the Respondent and the Revenue succeeds in its Appeal/s, the position may not be as simple, since it is the Respondent’s case that it is not undertaking any active business or has closed down its factories.
This is a fit case that the CESTAT’s direction for cash refund of Rs.256.45 Crores should be stayed for a period of eight weeks from the date of uploading of this order. Accordingly, we order such stay for a period of eight weeks from the date of uploading of this order.
This Petition and the Appeal are disposed of as not pressed with liberty to the Petitioner/Appellant to prefer Appeal/s before the Hon’ble Supreme Court by invoking the provisions of Section 35-G and 35-L of the Central Excise Act, 1944, within eight weeks from the date of uploading of this order.
Conclusion - i) The Appeal and Writ Petition are not maintainable before the High Court and must be filed before the Supreme Court. ii) The direction for cash refund potentially violates the proviso to Section 142(6)(a) of the CGST Act and requires appellate scrutiny. iii) The direction for cash refund is stayed for eight weeks pending appeal before the Supreme Court.
Petition and appeal disposed off.
(i) Whether the refund of service tax amounting to Rs.1,52,17,889/- is admissible under Section 103 of the Finance Act, 1994, given the nature of services provided, the period of service tax payment, and the contractual framework;
(ii) Whether the refund amount is barred by the principle of unjust enrichment, considering the accounting treatment of service tax paid and the possibility of burden being passed on to customers.
Issue-wise Detailed Analysis:
1. Admissibility of Refund under Section 103 of the Finance Act, 1994
Relevant Legal Framework and Precedents: Section 103, introduced by the Finance Act, 2016, provides a special exemption for service tax levied on services related to construction, erection, commissioning, or installation of original works pertaining to airports or ports under contracts entered into before 1st March 2015, where appropriate stamp duty has been paid. It specifies that no service tax shall be levied or collected during the period from 1st April 2015 to 29th February 2016 for such services, and refund shall be made for any service tax collected during this period. The refund claim must be filed within six months from the date of assent of the Finance Bill, 2016.
Section 66B and Section 68 of the Finance Act, 1994, govern the levy and payment of service tax, respectively. The Point of Taxation Rules, 2011, particularly Rules 2(e), 3(a), and 4A of the Service Tax Rules, 1994, define the point of taxation as the time when the invoice is issued or payment received, and prescribe timelines for invoice issuance, especially in cases of continuous supply of services.
Court's Interpretation and Reasoning: The Tribunal observed that the service tax exemption under Section 103 applies strictly to the period from 01.04.2015 to 29.02.2016. The invoices issued prior to 01.04.2015 and after 29.02.2016, even if related to contracts entered into before 01.03.2015, fall outside this period and thus are not eligible for refund. The Tribunal emphasized that the point of taxation rules determine when the service is deemed to have been provided, which is generally the invoice date or completion of the event under continuous supply of service contracts. Since the invoices outside the specified period do not correspond to service provision within the exemption window, the refund claim on those invoices is rightly rejected.
The Tribunal further analyzed the definition of "original works" as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006. It held that contracts involving new construction, additions, alterations to abandoned or damaged structures, and erection, commissioning, or installation of plant or machinery qualify as original works. The Tribunal found that contracts for expansion of terminals, construction of new facilities, and refurbishment involving civil and interior works fall within this definition, thereby entitling the appellant to refund of service tax paid on such original works during the specified period.
Key Evidence and Findings: The appellant submitted master contracts entered into before 01.03.2015, purchase orders issued pursuant to these contracts, and invoices raised against the purchase orders. Although some invoices did not explicitly reference the master contracts, the appellant provided a detailed worksheet correlating invoices, purchase orders, and contracts. The Tribunal accepted this correlation in absence of any contradictory evidence from the Revenue.
Application of Law to Facts: The Tribunal applied the statutory provisions and rules to the facts, affirming that only service tax paid on invoices dated within the exemption period qualifies for refund. It also recognized the appellant's entitlement to refund for services relating to original works as defined, rejecting the Revenue's contention that refurbishment works do not qualify.
Treatment of Competing Arguments: The Revenue argued that invoices must explicitly reference contracts entered before 01.03.2015 for refund eligibility, and that refurbishment works do not constitute original works. The Tribunal rejected these contentions, holding that correlation through purchase orders suffices and that refurbishment involving civil and interior works is covered under original works. The appellant's reliance on Point of Taxation Rules to assert refund eligibility for invoices outside the specified period was also rejected based on the temporal scope of Section 103.
Conclusion: Refund is admissible only for service tax paid on invoices dated between 01.04.2015 and 29.02.2016 relating to original works under contracts entered before 01.03.2015. Refund claims for invoices outside this period are not maintainable.
2. Applicability of the Principle of Unjust Enrichment to the Refund Claim
Relevant Legal Framework and Precedents: The principle of unjust enrichment bars refund where the claimant has passed on the burden of tax to others, meaning the claimant has not borne the economic cost. The appellant relied on a Chartered Accountant certificate stating no unjust enrichment, referencing a Supreme Court decision holding refund admissible where service tax was paid during exemption period. The Revenue cited prior Tribunal decisions and regulatory orders indicating that fees charged by the appellant are regulated and likely include the tax burden.
Court's Interpretation and Reasoning: The Tribunal noted that the appellant had accounted for the service tax paid as an expenditure in their Profit & Loss Account, which prima facie suggests the burden may have been passed on to customers. The appellant did not submit detailed financial documents to establish that the tax burden was not recovered from customers. The Revenue referred to the Airports Economic Regulatory Authority order fixing aeronautical tariffs and user development fees (UDF), implying that the tax cost may have been factored into regulated fees.
The Tribunal found the Chartered Accountant certificate insufficiently detailed to conclusively negate unjust enrichment. It recognized the need for a thorough examination of whether the appellant absorbed the tax cost or passed it on.
Key Evidence and Findings: The appellant's P&L Account showed the service tax as expenditure; no further documents were submitted to demonstrate non-passing of tax burden. The regulatory order indicated fees are fixed by statutory authorities, which could incorporate the tax cost.
Application of Law to Facts: Given the lack of conclusive evidence from the appellant and the regulatory framework, the Tribunal remanded the issue to the adjudicating authority for fresh examination. The appellant was directed to submit further documents to establish non-passing of the tax burden.
Treatment of Competing Arguments: The appellant argued that the tax was expensed due to non-eligibility of cenvat credit and that fees are regulated, not reflecting passed-on tax. The Revenue countered with accounting evidence and regulatory orders suggesting the tax burden was passed on. The Tribunal found both sides' arguments plausible but requiring detailed fact-finding.
Conclusion: The issue of unjust enrichment remains open and is remanded for further adjudication based on additional documentary evidence to be submitted by the appellant.
Significant Holdings:
"A plain reading of the said provision makes it clear that service tax shall not be levied or collected during the period from 1st day of April 2015 to 29th day of February, 2016 in respect of services provided by way of construction, erection, commissioning or installation of original works pertaining to an airport or port under a contract."
"The invoices raised before 01.04.2015 and after 29.02.2016 cannot fall within the scope of refund of service tax under Section 103 of the Finance Act, 1994 since as per the said Rules the service had not been rendered during the period specified."
"The construction services under various contracts would definitely come under the scope of 'original works' and accordingly admissible to refund of service tax paid under the Section 103 of the Finance Act, 1994."
"Once the appellant could able to correlate the contract with particular invoices linking through the individual purchase orders, we do not find any reason not to accept the same and deny refund of the service tax paid on such invoices solely on the ground that the invoices do not reflect the contracts."
"The matter needs to be remanded to the adjudicating authority and the appellant is directed to submit further documents to establish the fact that the refund amount has not been passed on to others."
The Tribunal's final determinations are:
(i) Refund is admissible only for service tax paid on invoices dated within 01.04.2015 to 29.02.2016 relating to original works under contracts entered before 01.03.2015;
(ii) Refund claims for invoices outside this period are rejected;
(iii) The issue of unjust enrichment is remanded for fresh adjudication with directions to the appellant to submit additional evidence demonstrating that the tax burden was not passed on to customers.
Refund of service tax paid - refund disallowed alleging that invoices issued prior to 01.04.2015 or after 29.02.2016 are not eligible to refund - section 103 of the Finance Act, 1994 - applicability of principles of unjust enrichment.
Whether refund of service tax Rs.1,52,17,889/- is admissible under Section 103 of the Finance Act, 1994? - argument of the appellant is that irrespective of the Point of Taxation Rules, under Section 103 of the Finance Act, no service tax has been levied or collected during the said period irrespective of the date of invoices before 01.4.2015 and after 29.2.2016 - HELD THAT:- On reading various provisions alongwith charging Section 66B and Section 68, it is clear that the invoices raised on completion of services be considered as relevant for determining the point of rendition of service. In the present case, the vendors carry out the work as per the contracts entered prior to 01.04.2015 and invoices are raised continuously as and when the work mentioned in a purchase order for a particular work is completed. Therefore, the invoices raised before 01.04.2015 and after 29.02.2016 cannot fall within the scope of refund of service tax under Section 103 of the Finance Act, 1994 since as per the said Rules the service had not been rendered during the period specified under Section 103 of the Finance Act, 1994. Therefore, the learned Commissioner(Appeals) was right in upholding rejection of the refund of Rs.31,67,199/- for the invoices issued before 01.04.2015 and after 29.02.2016.
With reference to the contract with M/s. Ess Kay Bee Pvt. Ltd., it relates to construction of new public toilet facility on the western part of the passenger arrival building, which would definitely fall under the scope of ‘new construction’. Similarly, the contract with M/s. Larsen & Toubro Ltd. is for expansion of existing Terminal-1 with a view to accommodate increased capacity of passenger traffic; hence, it would definitely fall under the scope of ‘all new construction’ - the construction services under various contracts would definitely come under the scope of “original works” and accordingly admissible to refund of service tax paid under the Section 103 of the Finance Act, 1994. Therefore, the appellant are entitled to refund of the service tax claimed to have been paid during the period from 01.04.2015 or after 29.02.2016 under Section 103 of the Finance Act, 1994.
Once the appellant could able to corelate the contract with particular invoices linking through the individual purchase orders, we do not find any reason not to accept the same and deny refund of the service tax paid on such invoices solely on the ground that the invoices do not reflect the contracts indicating the same were entered prior to 01.04.2015, in absence of any contrary evidence is brought on record by the Revenue indicating that the correlation statement is incorrect. Therefore, the finding in this regard cannot be sustained.
Whether the refund amount is hit by principles of unjust enrichment? - HELD THAT:- The explanation furnished in their written submissions that the amount has been shown in the P&L Account since at the time of payment of service tax, they were not eligible to cenvat credit, hence expensed in the P&L account, could not by itself be considered as discharge of their burden. Also, it is not impressed with the argument of the Learned AR for the Revenue that, the amount claimed as refund spent by the appellant in the construction/expansion of airport, since reflected in their books of accounts as an expenditure may have been affected in the UDF and other fees charged by the appellant during the specific period mentioned under section 103 of Finance Act, 1994, when the said fees are fixed by the statutory authorities. Thus, the matter needs to be remanded to the adjudicating authority and the appellant is directed to submit further documents to establish the fact that the refund amount has not been passed on to others.
Conclusion - The amount claimed as refund is admissible only relating to the invoices raised between 01.04.2015 and 29.02.2016. Invoices raised prior to 01.04.2015 and after 29.02.2016 involving a total amount of Rs.31,67,199/- is not admissible. For the purpose of verification of applicability of unjust enrichment, the matter is remanded to the adjudicating to examine the issue afresh taking note of the documents that would be submitted by the appellant.
Appeal disposed off.
Refund of service tax paid - refund disallowed alleging that invoices issued prior to 01.04.2015 or after 29.02.2016 are not eligible to refund - section 103 of the Finance Act, 1994 - applicability of principles of unjust enrichment.
Whether refund of service tax Rs.1,52,17,889/- is admissible under Section 103 of the Finance Act, 1994? - argument of the appellant is that irrespective of the Point of Taxation Rules, under Section 103 of the Finance Act, no service tax has been levied or collected during the said period irrespective of the date of invoices before 01.4.2015 and after 29.2.2016 - HELD THAT:- On reading various provisions alongwith charging Section 66B and Section 68, it is clear that the invoices raised on completion of services be considered as relevant for determining the point of rendition of service. In the present case, the vendors carry out the work as per the contracts entered prior to 01.04.2015 and invoices are raised continuously as and when the work mentioned in a purchase order for a particular work is completed. Therefore, the invoices raised before 01.04.2015 and after 29.02.2016 cannot fall within the scope of refund of service tax under Section 103 of the Finance Act, 1994 since as per the said Rules the service had not been rendered during the period specified under Section 103 of the Finance Act, 1994. Therefore, the learned Commissioner(Appeals) was right in upholding rejection of the refund of Rs.31,67,199/- for the invoices issued before 01.04.2015 and after 29.02.2016.
With reference to the contract with M/s. Ess Kay Bee Pvt. Ltd., it relates to construction of new public toilet facility on the western part of the passenger arrival building, which would definitely fall under the scope of ‘new construction’. Similarly, the contract with M/s. Larsen & Toubro Ltd. is for expansion of existing Terminal-1 with a view to accommodate increased capacity of passenger traffic; hence, it would definitely fall under the scope of ‘all new construction’ - the construction services under various contracts would definitely come under the scope of “original works” and accordingly admissible to refund of service tax paid under the Section 103 of the Finance Act, 1994. Therefore, the appellant are entitled to refund of the service tax claimed to have been paid during the period from 01.04.2015 or after 29.02.2016 under Section 103 of the Finance Act, 1994.
Once the appellant could able to corelate the contract with particular invoices linking through the individual purchase orders, we do not find any reason not to accept the same and deny refund of the service tax paid on such invoices solely on the ground that the invoices do not reflect the contracts indicating the same were entered prior to 01.04.2015, in absence of any contrary evidence is brought on record by the Revenue indicating that the correlation statement is incorrect. Therefore, the finding in this regard cannot be sustained.
Whether the refund amount is hit by principles of unjust enrichment? - HELD THAT:- The explanation furnished in their written submissions that the amount has been shown in the P&L Account since at the time of payment of service tax, they were not eligible to cenvat credit, hence expensed in the P&L account, could not by itself be considered as discharge of their burden. Also, it is not impressed with the argument of the Learned AR for the Revenue that, the amount claimed as refund spent by the appellant in the construction/expansion of airport, since reflected in their books of accounts as an expenditure may have been affected in the UDF and other fees charged by the appellant during the specific period mentioned under section 103 of Finance Act, 1994, when the said fees are fixed by the statutory authorities. Thus, the matter needs to be remanded to the adjudicating authority and the appellant is directed to submit further documents to establish the fact that the refund amount has not been passed on to others.
Conclusion - The amount claimed as refund is admissible only relating to the invoices raised between 01.04.2015 and 29.02.2016. Invoices raised prior to 01.04.2015 and after 29.02.2016 involving a total amount of Rs.31,67,199/- is not admissible. For the purpose of verification of applicability of unjust enrichment, the matter is remanded to the adjudicating to examine the issue afresh taking note of the documents that would be submitted by the appellant.
Appeal disposed off.
(i) Whether the consequential relief granted by the Tribunal includes the entire amount whose appropriation was held contrary to law;
(ii) Whether the specific relief sought by the appellant through amendment of the appeal memo, namely refund of Rs. 256,45,51,029/- in cash, is permissible under the applicable legal framework;
(iii) Whether the disputed amount of Rs. 122,05,41,156/-, reversed as credit related to trading of goods, is eligible for refund as consequential relief;
(iv) Whether the issuance of a show-cause notice dated 13.03.2025 by the respondent proposing to reject the refund granted by the Tribunal was proper and legally sustainable.
Regarding the first and third issues concerning the scope of consequential relief and eligibility of the Rs. 122.05 crore amount for refund, the Tribunal examined the provisions of the Finance Act, 1994, the Cenvat Credit Rules, 2004, and the CGST Act, 2017. The Tribunal noted that the original adjudicating authority had appropriated Rs. 299.81 crores and Rs. 122.05 crores towards recovery of alleged wrongly availed Cenvat credit. However, the Tribunal found that these appropriations were not sustainable in law because the amounts had been reversed by the appellant prior to the issuance of the show-cause notice, and Section 73(3) of the Finance Act, 1994 prohibits issuance of such notices where the amount has already been paid or reversed, barring invocation of extended limitation period which was not applicable here.
The Tribunal emphasized that the reversal of these amounts precluded their inclusion in the demand and appropriation proceedings. It specifically reproduced paras 8.4 and 8.5 of its final order dated 24.01.2025, which held that the original authority's actions to appropriate these sums were illegal and unsustainable. The Tribunal thus set aside the entire confirmed demand of Cenvat credit amounting to Rs. 683,31,98,658/-.
On the question of whether the Rs. 122.05 crore reversed amount qualifies for refund as consequential relief, the Tribunal observed that the appellant had not initially sought refund of this amount as part of its consequential relief. The appellant's reversal was stated to be on account of the credit relating to services used for trading goods, but the Tribunal found no detailed findings or evidence in the show-cause notice or impugned order substantiating the revenue's claim that the credit was ineligible due to trading activities. The appellant had submitted sale registers and contended that it did not undertake trading of telephone equipment, but rather provided telecom services.
The Tribunal concluded that the issue required further scrutiny by the revenue to determine whether the reversed credit pertained to eligible input services or was indeed ineligible due to trading. It directed the Respondent-Commissioner to examine the appellant's documents and records and decide on the eligibility of refund of this amount within three months, thereby ensuring that the relief granted is consistent with the facts and law. This approach was aimed at avoiding multiplicity of litigation and ensuring justice.
Regarding the second issue on the permissibility of cash refund of Rs. 256,45,51,029/-, the Tribunal analyzed the provisions of Section 142(6)(a) of the CGST Act, 2017, which governs refund claims for Cenvat credit transitioned to the GST regime. The Respondent-Department agreed to re-credit the amount to the appellant's electronic credit ledger but denied cash refund based on the proviso to Section 142(6)(a) that prohibits refund of any Cenvat credit balance carried forward under the CGST Act.
The appellant contended that it had ceased business operations since 2018 and thus could not utilize the credit in the electronic ledger, necessitating cash refund to repay debts. The appellant relied on precedents, including the Tribunal's decision in Chariot International Pvt. Ltd. and the Supreme Court's ruling in Chandrapur Magnet Wires (P) Ltd., which establish that reversal of credit without utilization equates to non-availment of credit, thereby entitling the taxpayer to cash refund, especially upon business closure.
The Tribunal referred to Section 142(7)(b) of the CGST Act, which mandates that appeals and proceedings relating to output tax or duty liability initiated under the existing law prior to the appointed day shall be disposed of under the existing law, and any admissible amount shall be refunded in cash notwithstanding anything to the contrary in the existing law. The Tribunal held that this provision overrides the proviso to Section 142(6)(a) and entitles the appellant to cash refund of the said amount.
The Tribunal further noted that the amount in question was never utilized and there was no evidence of unjust enrichment. It therefore directed the Respondent-Commissioner to pay the refund amount along with applicable interest within four weeks, emphasizing the binding nature of the Tribunal's earlier order that had expressly granted consequential relief including cash refund.
On the fourth issue concerning the propriety of the show-cause notice dated 13.03.2025, the Tribunal held that the issuance of such notice was improper and amounted to defiance of the Tribunal's order. The notice was vague, lacking reference to any specific legal provisions, and was issued despite the ongoing appeal and the absence of a stay or suspension of the Tribunal's order. The Tribunal cited relevant precedent establishing that a department cannot disregard a judicial order unless stayed by a competent authority.
The Tribunal struck down the show-cause notice as a nullity and an abuse of the judicial process, directing that no adverse action be taken against the appellant pursuant to the notice. This ensured the sanctity and enforceability of the Tribunal's orders and prevented harassment of the appellant through unauthorized administrative action.
In conclusion, the Tribunal's significant holdings are:
"The Tribunal may make such orders or give such directions as may be necessary or expedient to give effect or in relation to its orders or to prevent abuse of its process or to secure the ends of justice." (Rule 41, CESTAT (Procedure) Rules, 1982)
"Section 73(3) of the Finance Act, 1994 does not allow issue of show cause notice when the duty or the amount is already paid before issue of show cause notice except for the circumstances leading to invocation of extended period which were not available in the present case."
"The amount of Rs. 299.81 crores and Rs. 122.05 crores which were reversed prior to show cause notice cannot be appropriated or included in the demand as per law."
"Section 142(7)(b) of the CGST Act mandates that any amount found admissible in appeals relating to output tax or duty liability initiated under existing law shall be refunded in cash notwithstanding anything to the contrary."
"The Respondent-Department is directed to refund Rs. 256,45,51,029/- in cash along with applicable interest within four weeks."
"The show cause notice dated 13.03.2025 issued by the Respondent proposing to reject the refund granted by the Tribunal is declared null and void and struck down as an abuse of process."
These principles affirm the Tribunal's inherent power under Rule 41 to enforce its orders and prevent abuse of process, clarify the limits on appropriation of reversed credits, uphold the entitlement to cash refund under transitional provisions, and protect litigants from arbitrary administrative action post adjudication. The order also mandates a further inquiry by the revenue on the eligibility of refund of Rs. 122.05 crores to ensure comprehensive resolution of the dispute.
Direction to carry out and comply with the order passed by this Tribunal - reference to Rule 41 of the CESTAT (Procedure) Rules, 1982 to invoke jurisdiction of this Tribunal so as to give effect to its order.
Whether consequential relief granted by the Tribunal would include the entire amount, the appropriation of which was held by us to be contrary in law? - HELD THAT:- The appropriation of Rs. 299.81 crore and Rs. 122.052 crore was held to be not inconformity to law since reversal of those two amounts happened much prior to issue of show-cause notice and Section 73 sub Section 3 of the Finance Act, 1994, as existing them, was not permitting issue of show-cause notice when duty or the amount was already paid before issue of show-cause notice except when extended period was invoked - the entire demand of CENVAT Credit of Rs. 683,31,98,658/- that was confirmed by the Commissioner in the impugned order was set aside while holding that appropriation of the amount referred in para 8.4 and 8.5 of the order was held to be not valid only for the reason that it was contrary to Section 73 (3) of the Finance Act, 1994.
Whether the disputed amount of Rs. 122,05,41,156/-, which is stated to be taken as credit towards trading of goods is also eligible for refund since appropriation of the same was held by the Tribunal as improper? - HELD THAT:- Neither the show-cause notice nor the Order-in- Original impugned have given any detail of any sales undertaken by the Appellant during the period of show-cause notice and from the record it is noted that Appellant was contractually obligated to provide various telecom services like co-location, hosting, marketing and sale promotion, business and technology consulting and other business support service - there is a a strong believe that concerning eligibility of Appellant to get refund of Rs. 122.05 crores, there is a requirement of scrutinisation of documents to find out if, in fact, the said reversed amount was done in respect of trading of goods or as pointed out in the show-cause notice at para 8.1 that those credits availed by the Appellant were on input services received from different companies which, was reversed by the Appellant on persuasion (apparently by the Respondent). Therefore, there is a requirement that Respondent-Department may delve into the matter in detail and prepare a Report regarding the credit to the tune of Rs. 122.05 crores taken by the Appellant were taken from input services received and were utilised for the trading of goods and to extend the benefit of consequential relief accordingly in respect of this amount of Rs. 122,05,41,156/-.
The understanding of learned Joint Commissioner appreciated, who submitted para wise reply to this miscellaneous application and in making a note as to why this Tribunal had concluded that ‘order by the Original Authority appropriating the said amount of Rs. 122,05,41,156/- was not sustainable’ and also taking note of the fact that no findings of this Tribunal was made in respect of self assessed and suo-moto payments of tax of the amount of Rs. 122,05,41,156/- was not payable. This aspect has to be looked into in determining consequential relief while granting refund so as to avoid multiplicity of litigation but not in the way department intended to do by issuing show-cause notice to deny consequential relief which was also expressly granted by this Tribunal in respect of amount of Rs. 256,45,51,029/- mentioned in the miscellaneous application.
Whether the specific relief sought through amendment of the appeal memo in granting refund of Rs. 256,45,51,029/- in cash to the Appellant is permissible under the law? - HELD THAT:- When the command of the law is “shall be refunded to him in cash”,irrespective of anything contained in the existing act and whether Appellant had closed its business or not, it is entitled to cash refund, and since the amount was never utilised when the matter was sub-judiced and nothing from record would reveal receipt of the said amount from any other person to apply the doctrine of unjust enrichment, to which effect affidavit of the Director of Appellant has also been filed, consequential relief to grant refund of Rs. 256,45,51,029/-, that was specifically incorporated in the prayer portion vide this Bench order dated 19.11.2024, has to be paid in cash alone and since more than three months have passed in the mean time, Respondent-Department is directed to pay the same with applicable interest forthwith and not later than four weeks of receipt of copy of this order.
Whether the issue of show-cause notice dated 13.03.2025 by the Respondent to the Appellant proposing to refuse the relief granted by the Tribunal in its final order was proper? - HELD THAT:- First of all such a notice, which Respondent-Commissioner states to have been issued in conformity to the principle of natural justice, prima facie establishes a defiance attitude to the Tribunal’s order since Respondent-Department had recourse to file appeal challenging legality of the said order and also can take administrative decision in the presence of the Assessee- Appellant as to what would be the exact nature of the consequential relief. As noted in the final order of this Tribunal. Secondly, without reference to the provision of law, how such notice is to be adjudicated by the concerned official unless law and legal procedure are to be applied to deal with such show-cause notice. Thirdly, if at all it is to be considered as a notice under Section 73 of the Finance Act, 1994 then no refund was made to hold the said as erroneous refund for the purpose of issuing a show-cause notice for its recovery apart from the fact, as pointed out by the learned Counsel for the Appellant, that Respondent-Department can’t disregard an order unless a competent authority or Court grant a stay on the said order - the said show-cause notice dated 13.03.2025 as nullity in the eye of law.
Conclusion - Miscellaneous application filed under Rule 41 of the CESTAT (Procedure) Rules, 1982 for implementation of Bench’s order by way of grant of refund of Rs. 256,45,51,029/- in cash with applicable interest is allowed. Respondent-Commissioner is directed to pay the same forthwith and in no event, later than four weeks of receipt of this order. A decision on the eligibility of getting refund of the other amount of Rs. 122,05,41,156/- is to be taken at the Commissioner’s end within three months of receipt of this order upon examination of documents record of the Appellant/Applicant. Compliance report be submitted to this Bench on 10.06.2025 through a mention memo.
Application disposed off.
Direction to carry out and comply with the order passed by this Tribunal - reference to Rule 41 of the CESTAT (Procedure) Rules, 1982 to invoke jurisdiction of this Tribunal so as to give effect to its order.
Whether consequential relief granted by the Tribunal would include the entire amount, the appropriation of which was held by us to be contrary in law? - HELD THAT:- The appropriation of Rs. 299.81 crore and Rs. 122.052 crore was held to be not inconformity to law since reversal of those two amounts happened much prior to issue of show-cause notice and Section 73 sub Section 3 of the Finance Act, 1994, as existing them, was not permitting issue of show-cause notice when duty or the amount was already paid before issue of show-cause notice except when extended period was invoked - the entire demand of CENVAT Credit of Rs. 683,31,98,658/- that was confirmed by the Commissioner in the impugned order was set aside while holding that appropriation of the amount referred in para 8.4 and 8.5 of the order was held to be not valid only for the reason that it was contrary to Section 73 (3) of the Finance Act, 1994.
Whether the disputed amount of Rs. 122,05,41,156/-, which is stated to be taken as credit towards trading of goods is also eligible for refund since appropriation of the same was held by the Tribunal as improper? - HELD THAT:- Neither the show-cause notice nor the Order-in- Original impugned have given any detail of any sales undertaken by the Appellant during the period of show-cause notice and from the record it is noted that Appellant was contractually obligated to provide various telecom services like co-location, hosting, marketing and sale promotion, business and technology consulting and other business support service - there is a a strong believe that concerning eligibility of Appellant to get refund of Rs. 122.05 crores, there is a requirement of scrutinisation of documents to find out if, in fact, the said reversed amount was done in respect of trading of goods or as pointed out in the show-cause notice at para 8.1 that those credits availed by the Appellant were on input services received from different companies which, was reversed by the Appellant on persuasion (apparently by the Respondent). Therefore, there is a requirement that Respondent-Department may delve into the matter in detail and prepare a Report regarding the credit to the tune of Rs. 122.05 crores taken by the Appellant were taken from input services received and were utilised for the trading of goods and to extend the benefit of consequential relief accordingly in respect of this amount of Rs. 122,05,41,156/-.
The understanding of learned Joint Commissioner appreciated, who submitted para wise reply to this miscellaneous application and in making a note as to why this Tribunal had concluded that ‘order by the Original Authority appropriating the said amount of Rs. 122,05,41,156/- was not sustainable’ and also taking note of the fact that no findings of this Tribunal was made in respect of self assessed and suo-moto payments of tax of the amount of Rs. 122,05,41,156/- was not payable. This aspect has to be looked into in determining consequential relief while granting refund so as to avoid multiplicity of litigation but not in the way department intended to do by issuing show-cause notice to deny consequential relief which was also expressly granted by this Tribunal in respect of amount of Rs. 256,45,51,029/- mentioned in the miscellaneous application.
Whether the specific relief sought through amendment of the appeal memo in granting refund of Rs. 256,45,51,029/- in cash to the Appellant is permissible under the law? - HELD THAT:- When the command of the law is “shall be refunded to him in cash”,irrespective of anything contained in the existing act and whether Appellant had closed its business or not, it is entitled to cash refund, and since the amount was never utilised when the matter was sub-judiced and nothing from record would reveal receipt of the said amount from any other person to apply the doctrine of unjust enrichment, to which effect affidavit of the Director of Appellant has also been filed, consequential relief to grant refund of Rs. 256,45,51,029/-, that was specifically incorporated in the prayer portion vide this Bench order dated 19.11.2024, has to be paid in cash alone and since more than three months have passed in the mean time, Respondent-Department is directed to pay the same with applicable interest forthwith and not later than four weeks of receipt of copy of this order.
Whether the issue of show-cause notice dated 13.03.2025 by the Respondent to the Appellant proposing to refuse the relief granted by the Tribunal in its final order was proper? - HELD THAT:- First of all such a notice, which Respondent-Commissioner states to have been issued in conformity to the principle of natural justice, prima facie establishes a defiance attitude to the Tribunal’s order since Respondent-Department had recourse to file appeal challenging legality of the said order and also can take administrative decision in the presence of the Assessee- Appellant as to what would be the exact nature of the consequential relief. As noted in the final order of this Tribunal. Secondly, without reference to the provision of law, how such notice is to be adjudicated by the concerned official unless law and legal procedure are to be applied to deal with such show-cause notice. Thirdly, if at all it is to be considered as a notice under Section 73 of the Finance Act, 1994 then no refund was made to hold the said as erroneous refund for the purpose of issuing a show-cause notice for its recovery apart from the fact, as pointed out by the learned Counsel for the Appellant, that Respondent-Department can’t disregard an order unless a competent authority or Court grant a stay on the said order - the said show-cause notice dated 13.03.2025 as nullity in the eye of law.
Conclusion - Miscellaneous application filed under Rule 41 of the CESTAT (Procedure) Rules, 1982 for implementation of Bench’s order by way of grant of refund of Rs. 256,45,51,029/- in cash with applicable interest is allowed. Respondent-Commissioner is directed to pay the same forthwith and in no event, later than four weeks of receipt of this order. A decision on the eligibility of getting refund of the other amount of Rs. 122,05,41,156/- is to be taken at the Commissioner’s end within three months of receipt of this order upon examination of documents record of the Appellant/Applicant. Compliance report be submitted to this Bench on 10.06.2025 through a mention memo.
Application disposed off.
1. Whether the accused's issuance of a cheque that was dishonoured constitutes an offence under Section 138 of the Negotiable Instruments Act (NI Act).
2. Whether the presumption under Sections 118 and 139 of the NI Act arises upon admission of the cheque's issuance and signature, and if so, whether the accused successfully rebutted this presumption.
3. Whether issuing a blank cheque as security exempts the accused from liability under Section 138 of the NI Act.
4. Whether the complainant was required to prove the advancement of the loan or financial capacity to make the loan.
5. Whether the notice of demand was duly served and whether the accused failed to pay the cheque amount within the stipulated period.
6. Whether the sentence and compensation awarded by the trial court were appropriate and justified.
Issue-wise Detailed Analysis
1. Offence under Section 138 of the NI Act on issuance and dishonour of cheque
The legal framework mandates that if a cheque issued for discharge of a debt or liability is dishonoured due to insufficient funds, the drawer is liable under Section 138. The trial court found that the cheque was issued by the accused, was dishonoured with the endorsement 'insufficient funds', and the accused failed to pay the amount despite notice. The appellate court concurred with these findings.
The accused admitted issuance of the cheque but denied the rest of the case. The courts relied on the presumption under Sections 118 and 139 of the NI Act that the cheque was issued for discharge of a legal liability. The accused failed to present any evidence to rebut this presumption, leading to conviction.
Competing arguments included the accused's claim of issuing a blank cheque as security; however, this was not supported by evidence. The courts rejected this plea and held that the offence under Section 138 was made out.
2. Presumptions under Sections 118 and 139 of the NI Act and rebuttal
Sections 118(a) and 139 create a statutory presumption that a cheque is issued for consideration and discharge of debt or liability once the signature and issuance are admitted. The burden then shifts to the accused to rebut this presumption by adducing evidence of a probable defence on the preponderance of probabilities.
Precedents clarified that mere denial or statement under Section 313 CrPC is insufficient to rebut the presumption; affirmative evidence is required. The accused did not lead any defence evidence. The courts noted the accused's failure to rebut the presumption despite opportunities.
Further, the accused's contention that the cheque was a blank security cheque filled by the complainant was unsupported by evidence. The courts held that even a blank cheque voluntarily signed and handed over attracts the presumption under Section 139. The accused did not claim coercion, forgery, or theft of the cheque.
3. Issuance of cheque as security and its effect on liability
The accused argued that the cheque was issued as security and thus should not attract criminal liability. The courts referred to binding precedents holding that a cheque issued as security is not exempt from Section 138 liability if it represents discharge of an existing debt or liability.
It was emphasized that a security cheque can be presented once the loan or instalment matures. If the cheque is dishonoured, criminal liability arises unless the debt has been discharged or there is an altered agreement. The accused did not claim repayment of the loan or any altered arrangement.
The courts rejected the accused's argument that the cheque being a security cheque absolved him of liability, citing authoritative rulings that such a plea does not negate the offence under Section 138.
4. Requirement of proving advancement of loan or financial capacity
The complainant was not required to prove the actual advancement of the loan or financial capacity at the threshold. The presumption under Section 139 shifts the burden to the accused to rebut. Unless the accused raises a credible defence supported by evidence, the complainant's case stands established.
The complainant's witness admitted not being present at the time of loan sanction, but this did not vitiate the presumption of legal liability. The accused did not dispute the loan taken. The courts held that the complainant was not obliged to prove the financial capacity unless challenged with evidence by the accused.
5. Service of notice and failure to pay
The complainant proved service of statutory notice by postal receipts, and the accused did not rebut the presumption of service under Section 27 of the General Clauses Act and Section 114 of the Evidence Act. The accused also failed to pay the cheque amount within 15 days of receipt of notice, fulfilling the statutory requirements for offence under Section 138.
Precedents emphasized that failure to pay within 15 days of receipt of summons precludes the accused from claiming non-receipt of notice as a defence.
6. Appropriateness of sentence and compensation
The trial court sentenced the accused to one year simple imprisonment and imposed a fine of Rs. 2,32,000/- with an additional one month imprisonment in default. The courts held that Section 138 is deterrent in nature to ensure credibility of negotiable instruments.
The compensation awarded was justified considering the cheque amount, delay in adjudication, loss of interest, and litigation expenses. The courts referred to Supreme Court directions that compensation up to twice the cheque amount with interest at 9% per annum is appropriate.
Conclusions
The courts below correctly applied the legal framework and evidentiary presumptions under Sections 118 and 139 of the NI Act. The accused failed to rebut the statutory presumption of discharge of debt by the cheque. The plea of a blank cheque issued as security was unsupported by evidence and does not negate liability. The complainant was not required to prove the loan advancement or financial capacity absent a credible defence.
Notice was duly served, and the accused failed to pay within the prescribed period. The conviction and sentence under Section 138 were upheld as lawful and appropriate. The revision petition challenging these findings was dismissed.
Significant Holdings
"Once the execution of the cheque is admitted, Section 139 of the Act mandates a presumption that the cheque was for the discharge of any debt or other liability."
"The presumption under Section 139 is a rebuttable presumption, and the onus is on the accused to raise the probable defence. The standard of proof for rebutting the presumption is that of preponderance of probabilities."
"Even if the cheque was issued towards security, the accused will be liable under Section 138 if the cheque represents discharge of an existing debt or liability."
"The statement of the accused recorded under Section 313 of the Code is not substantive evidence of defence, but only an opportunity for the accused to explain incriminating circumstances. Mere denial is insufficient to rebut the presumption under Section 139."
"The High Court in criminal revision is not supposed to exercise jurisdiction like an appellate court; the scope of interference is extremely narrow and limited to patent defects, errors of jurisdiction or law."
"The object of Section 138 of the Negotiable Instruments Act is to infuse credibility into negotiable instruments and to deter callous issuance of cheques without intention to honour them."
"The complainant is not required to prove the advancement of the loan or financial capacity unless the accused raises a credible defence supported by evidence."
"The memo issued by the bank showing dishonour of cheque is presumed to be correct unless rebutted."
"Notice of demand is deemed served if sent to the correct address and failure to pay within 15 days of receipt of summons bars the accused from claiming non-receipt of notice."
Dishonour of Cheque - challenge to conviction and sentencing the accused - presumption that the cheque was issued in discharge of the legal liability for a valid consideration - accused failed to rebut presumption by leading any evidence - HELD THAT:- It was laid down by the Hon’ble Supreme Court in Malkeet Singh Gill v. State of Chhattisgarh, [2022 (7) TMI 1455 - SUPREME COURT] that the revisional court is not an appellate court and it can only rectify the patent defect, errors of jurisdiction or the law.
It was held in Kishan Rao v. Shankargouda, [2018 (7) TMI 101 - SUPREME COURT] that it is impermissible for the High Court to reappreciate the evidence and come to its conclusions in the absence of any perversity.
The issuance of cheque is not disputed. It was asserted in the revision petition that a blank cheque was issued as security to raise the loan. Therefore, learned Courts below had rightly proceeded on the basis that the accused had issued a cheque in favour of the complainant and once the execution of the cheque was admitted, a presumption under Section 118 and Section 139 of the NI Act would arise. It was laid down by this Court in Naresh Verma vs. Narinder Chauhan [2019 (10) TMI 1578 - HIMACHAL PRADESH HIGH COURT] that where the accused had not disputed his signatures on the cheque, the Court has to presume that it was issued in discharge of legal liability and the burden would shift upon the accused to rebut the presumption.
The complainant was not required to prove the advancement of the loan, especially when the accused has not disputed the taking of the loan from the complainant - there is no infirmity in the findings recorded by the learned Courts below that the accused had issued a cheque to discharge his legal liability.
In the present case, no evidence was produced to rebut the presumption, and the learned Courts below had rightly held that the cheque was dishonoured with an endorsement ‘insufficient funds’.
The learned Trial Court sentenced the accused to undergo simple imprisonment for one year. It was laid down by the Hon’ble Supreme Court in Bir Singh v. Mukesh Kumar, [2019 (2) TMI 547 - SUPREME COURT] that the penal provisions of section 138 is deterrent in nature - Keeping in view the deterrent nature of the sentence to be awarded, the sentence of one year imprisonment cannot be said to be excessive, and no interference is required with it.
Learned Trial Court had ordered the accused to pay a compensation of ₹2,32000/-. The cheque was issued on 25.05.2019, whereas the sentence was imposed on 05.08.2024 after the lapse of 5 years. The complainant Bank lost interest on the amount, and it had to pay the litigation expenses for filing the complaint. It was entitled to be compensated for the same - It was laid down by the Hon’ble Supreme Court in Kalamani Tex v. P. Balasubramanian, [2021 (2) TMI 505 - SUPREME COURT] that the Courts should uniformly levy a fine up to twice the cheque amount along with simple interest at the rate of 9% per annum - Therefore, the amount of ₹72,000/- awarded as compensation on the cheque amount of ₹1,60,000/- is not excessive.
Conclusion - The accused failed to rebut the statutory presumption of discharge of debt by the cheque. The plea of a blank cheque issued as security was unsupported by evidence and does not negate liability. The complainant was not required to prove the loan advancement or financial capacity absent a credible defence.
The present revision is dismissed.
Dishonour of Cheque - challenge to conviction and sentencing the accused - presumption that the cheque was issued in discharge of the legal liability for a valid consideration - accused failed to rebut presumption by leading any evidence - HELD THAT:- It was laid down by the Hon’ble Supreme Court in Malkeet Singh Gill v. State of Chhattisgarh, [2022 (7) TMI 1455 - SUPREME COURT] that the revisional court is not an appellate court and it can only rectify the patent defect, errors of jurisdiction or the law.
It was held in Kishan Rao v. Shankargouda, [2018 (7) TMI 101 - SUPREME COURT] that it is impermissible for the High Court to reappreciate the evidence and come to its conclusions in the absence of any perversity.
The issuance of cheque is not disputed. It was asserted in the revision petition that a blank cheque was issued as security to raise the loan. Therefore, learned Courts below had rightly proceeded on the basis that the accused had issued a cheque in favour of the complainant and once the execution of the cheque was admitted, a presumption under Section 118 and Section 139 of the NI Act would arise. It was laid down by this Court in Naresh Verma vs. Narinder Chauhan [2019 (10) TMI 1578 - HIMACHAL PRADESH HIGH COURT] that where the accused had not disputed his signatures on the cheque, the Court has to presume that it was issued in discharge of legal liability and the burden would shift upon the accused to rebut the presumption.
The complainant was not required to prove the advancement of the loan, especially when the accused has not disputed the taking of the loan from the complainant - there is no infirmity in the findings recorded by the learned Courts below that the accused had issued a cheque to discharge his legal liability.
In the present case, no evidence was produced to rebut the presumption, and the learned Courts below had rightly held that the cheque was dishonoured with an endorsement ‘insufficient funds’.
The learned Trial Court sentenced the accused to undergo simple imprisonment for one year. It was laid down by the Hon’ble Supreme Court in Bir Singh v. Mukesh Kumar, [2019 (2) TMI 547 - SUPREME COURT] that the penal provisions of section 138 is deterrent in nature - Keeping in view the deterrent nature of the sentence to be awarded, the sentence of one year imprisonment cannot be said to be excessive, and no interference is required with it.
Learned Trial Court had ordered the accused to pay a compensation of ₹2,32000/-. The cheque was issued on 25.05.2019, whereas the sentence was imposed on 05.08.2024 after the lapse of 5 years. The complainant Bank lost interest on the amount, and it had to pay the litigation expenses for filing the complaint. It was entitled to be compensated for the same - It was laid down by the Hon’ble Supreme Court in Kalamani Tex v. P. Balasubramanian, [2021 (2) TMI 505 - SUPREME COURT] that the Courts should uniformly levy a fine up to twice the cheque amount along with simple interest at the rate of 9% per annum - Therefore, the amount of ₹72,000/- awarded as compensation on the cheque amount of ₹1,60,000/- is not excessive.
Conclusion - The accused failed to rebut the statutory presumption of discharge of debt by the cheque. The plea of a blank cheque issued as security was unsupported by evidence and does not negate liability. The complainant was not required to prove the loan advancement or financial capacity absent a credible defence.
The present revision is dismissed.
The core legal questions considered by the Court in this matter are:
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Maintainability of the writ petition despite alternate remedy
Legal framework and precedents: It is a settled principle that when an alternate and efficacious remedy is available under the statute, a writ petition challenging an order is generally not maintainable. The statutory appellate remedy is preferred and must be exhausted before approaching the Court by extraordinary writ jurisdiction.
Court's interpretation and reasoning: The Court observed that the petitioner admitted the availability of an alternate remedy in the form of an appeal filed within the prescribed limitation period against the impugned assessment order dated 20 April 2023. The appeal was pending at the time of filing the writ petition. The Court emphasized that the petitioner cannot treat the extraordinary remedy of a writ petition as an alternate or substitute remedy to the statutory appeal. The petitioner's attempt to pursue parallel remedies was held to be misconceived and an abuse of the judicial process.
Key evidence and findings: The petitioner's counsel acknowledged the pendency of the appeal and the availability of the alternate remedy. However, the writ petition did not disclose this fact clearly, especially in paragraph 11, which dealt with the alternate remedy. The fact that the appeal was filed and a stay application was pending before the assessing officer was suppressed and only revealed after Court's queries.
Application of law to facts: Given the admitted availability and pendency of the appeal, the writ petition was held not maintainable. The Court reiterated that the existence of an alternate remedy bars the exercise of extraordinary writ jurisdiction unless exceptional circumstances are shown, which were absent here.
Treatment of competing arguments: The petitioner contended that the assessment order was wholly without jurisdiction, which could justify entertaining the writ petition despite the alternate remedy. The Court rejected this argument, noting that the position in the cited coordinate bench orders was different and that no exceptional circumstances were demonstrated here.
Conclusion: The writ petition was dismissed as barred by the availability of an alternate efficacious remedy in the form of a pending appeal.
Issue 2: Grant of stay of demands pending appeal
Legal framework and precedents: The routine procedure in such matters requires an application for stay of demands to be made before the assessing officer, who is the appropriate authority to decide such interim relief.
Court's interpretation and reasoning: The Court noted that the petitioner did not explain why no stay was applied for before the assessing officer initially. It was only later accepted that a stay application was pending before the assessing officer. The Court held that this was a procedural lapse and that the petitioner must follow the prescribed procedure rather than seek stay from the Court prematurely.
Key evidence and findings: The petitioner's counsel admitted the pendency of the stay application before the assessing officer, but this was not disclosed in the writ petition. The Court considered this suppression material.
Application of law to facts: The Court declined to grant any stay of demands, emphasizing that the petitioner must exhaust the remedy before the assessing officer first.
Treatment of competing arguments: The petitioner relied on orders of coordinate benches granting stay in other matters, but the Court distinguished those facts and held that the present case was different due to the availability of alternate remedy and procedural non-compliance.
Conclusion: No stay was granted by the Court; the petitioner must pursue the stay application before the assessing officer.
Issue 3: Abuse of process and suppression of material facts
Legal framework and precedents: Courts frown upon suppression of material facts and abuse of judicial process by filing petitions with incomplete or misleading disclosures. Full and frank disclosure is mandatory, especially regarding alternate remedies and pending proceedings.
Court's interpretation and reasoning: The Court found that the petitioner deliberately suppressed the fact of the appeal having been filed and the stay application pending before the assessing officer. Paragraph 11 of the petition did not disclose these facts, and paragraph 9 was couched ambiguously. The Court considered this suppression material and a serious breach of duty to the Court.
Key evidence and findings: The Court's queries revealed the suppressed facts, contradicting the petitioner's averment in paragraph 10 that no material information was withheld.
Application of law to facts: The suppression of material facts was held to be deliberate and amounted to an abuse of the judicial process. This justified dismissal with exemplary costs.
Treatment of competing arguments: The petitioner's counsel did not provide any satisfactory explanation for the suppression or delay in filing the petition.
Conclusion: The petition was dismissed with exemplary costs to deter such conduct in future.
Issue 4: Imposition of exemplary costs
Legal framework and precedents: Courts have the inherent power to impose costs to discourage frivolous or vexatious litigation that burdens the judicial system and wastes judicial time.
Court's interpretation and reasoning: The Court observed that the petitioner was taking chances with the judicial process by filing a petition despite the availability of an alternate remedy and the pendency of an appeal and stay application. Such conduct was held to be an abuse and warranted exemplary costs to deter repetition.
Key evidence and findings: The petitioner's conduct was characterized as classic parallel pursuit of remedies without justification.
Application of law to facts: The Court imposed costs of Rs. 1,00,000, directing payment partly to a hospital and partly to the High Court Employees Medical Welfare Fund, with strict timelines and compliance requirements.
Treatment of competing arguments: No mitigating factors were found to reduce or waive costs.
Conclusion: The petitioner was ordered to pay exemplary costs to deter misuse of judicial process.
3. SIGNIFICANT HOLDINGS
The Court held that:
"This is a classic case where the petitioner is pursuing parallel remedies at the same time. The position in the orders relied upon by the learned counsel for the petitioner was entirely different. This petition is misconceived and amounts to taking chances with the judicial process. It virtually amounts to treating the extraordinary remedy as an alternate remedy to the appellate remedy provided in the statute. This cannot be encouraged."
"The fact that an appeal was already filed as of the date of the institution of this petition is suppressed... The fact that a stay was already applied before the assessing officer constituted 'material information'. This has been deliberately suppressed."
"Due to such petitions, the judicial time that could otherwise be utilised to deal with genuine and old matters is severely curtailed."
Core principles established include:
Final determinations on each issue were:
Maintainability of petition - availability of alternate and efficacious remedy of appeal - challenge to assessment order - pendency of appeal - petitioner now accepts that the petitioner has also applied for the stay of the demands before the assessing officer - HELD THAT:- The petitioner stated that it had not withheld any material information from this Court. The fact that a stay was already applied before the assessing officer constituted 'material information'. This has been deliberately suppressed.
The delay in instituting this petition is also not explained. This petition is filed to take chances with the judicial process. Due to such petitions, the judicial time that could otherwise be utilised to deal with genuine and old matters is severely curtailed.
Petition dismissed.
Maintainability of petition - availability of alternate and efficacious remedy of appeal - challenge to assessment order - pendency of appeal - petitioner now accepts that the petitioner has also applied for the stay of the demands before the assessing officer - HELD THAT:- The petitioner stated that it had not withheld any material information from this Court. The fact that a stay was already applied before the assessing officer constituted 'material information'. This has been deliberately suppressed.
The delay in instituting this petition is also not explained. This petition is filed to take chances with the judicial process. Due to such petitions, the judicial time that could otherwise be utilised to deal with genuine and old matters is severely curtailed.
Petition dismissed.
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