TaxTMI Login
Just a moment...
By creating an account you can:
of 45
Press 'Enter' after typing page number.
of 45Press 'Enter' after typing page number.
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of 45Press 'Enter' after typing page number.
of 45Press 'Enter' after typing page number.
All Daily Newsletter
of 45Press 'Enter' after typing page number.
All Daily Newsletter
Join Channel
Note
Bookmark
Share
Don't have an account? Register Here
Entitlement for refund of unutilized Input Tax Credit (ITC) qua Cess - zero-rated supplies - goods manufactured for export - Validity of Circular No.125/44/2019-GST-as well as para-5 of the Circular No.45/19/2018-GST issued under Section 168 - challenged the show cause notice and the order of sanction of refund - it was held by High Court that 'when the petitioner has paid the IGST under Section 16(3) of the IGST Act on the zero rated supply and refund is claimed by the payment of such IGST, the petitioner admittedly would not be able to utilize input tax credit of cess as cess is not payable on the zero rated supply. Therefore, proviso to Section 11(2) of the Act would not be applicable in the facts of the case and the petitioner would be entitled to refund of the unutilized input tax credit on cess paid on purchase of coal utilized for the purpose of manufacture of goods which are exported.'
HELD THAT:- It is not deemed necessary to exercise jurisdiction under Article 136 of the Constitution of India - SLP dismissed.
ISSUES PRESENTED AND CONSIDERED
1. Whether anticipatory/pre-arrest bail under Section 482 of the BNSS should be granted to the petitioner accused of allegedly assaulting and threatening a public servant engaged in official duty.
2. Whether the nature and gravity of the alleged offences, risk to investigation, and likelihood of tampering with evidence or influencing witnesses justify denial of anticipatory bail at the nascent stage of investigation.
3. Whether the petitioner's assertions of false implication, presence of CCTV footage and counter-allegations against the complainant are sufficient to displace the prima facie case and entitle the petitioner to anticipatory bail.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Grant of anticipatory/pre-arrest bail for alleged assault and threats to a public servant
Legal framework: The power to grant anticipatory bail arises from the court's inherent jurisdiction under Section 482 of the BNSS, to prevent abuse of process and to secure the ends of justice, balanced against statutory and public interest considerations relating to cognizable offences and protection of public servants while on duty.
Precedent treatment: The Court relied on established authority recognizing that custodial interrogation can be qualitatively more effective than interrogation of an accused shielded by pre-arrest protection, and that custodial interrogation may be necessary to elicit information vital to investigation. The precedent principle was applied rather than distinguished or overruled.
Interpretation and reasoning: The FIR alleges that the accused, along with others, followed, abused, threatened and physically assaulted a public servant performing vehicle checks and issuing challans. Given the alleged assault on a public servant while on duty, the Court treats the accusations as serious and cognizable. At the stage of anticipatory bail, questions of fact (e.g., whether the complainant was on duty or demanded bribe) cannot be adjudicated; the Court must consider prima facie material and the requirements of effective investigation. The Court found no cogent material before it negativing the prima facie case; the CCTV evidence asserted by the petitioner remained to be examined by the investigation. The possibility that custodial interrogation is necessary to elicit further information and prevent ritualistic questioning weighed against granting anticipatory bail.
Ratio vs. Obiter: Ratio - where prima facie material establishes serious allegations of assault/threats to a public servant, and where custodial interrogation is necessary for effective investigation, anticipatory bail may be refused. Obiter - general observations on the balance between individual liberty and societal interest are explanatory but consistent with the ratio.
Conclusion: Anticipatory bail was declined because the allegations are serious, a prima facie case exists, and custodial interrogation is necessary for a fair and thorough investigation into alleged offences against a public servant.
Issue 2: Risk of hampering investigation, tampering with evidence or influencing of witnesses as grounds to refuse anticipatory bail
Legal framework: Courts must weigh the need to protect the investigative process and witnesses against the accused's right to liberty; anticipatory bail may be denied where reasonable grounds exist to believe that investigation will be impeded or evidence/witnesses may be tampered with.
Precedent treatment: The Court followed authoritative direction that custodial interrogation is often indispensable to elicit information and that a pre-arrest bail order may blunt the efficacy of interrogation, thereby impairing investigation. The precedent was applied to the facts here as supportive of refusing anticipatory bail.
Interpretation and reasoning: The State's submission that custodial interrogation is imperative to secure a fair and thorough investigation was accepted as plausible given the factual matrix: alleged coordinated following, abuse and threats by multiple persons, and the public-safety dimension. The Court observed potential threats to complainant/witnesses and found that release at this stage could impede collection of evidence or influence witnesses. Mere assertion of innocence or unexamined CCTV footage cannot override these investigative concerns at the anticipatory-bail stage.
Ratio vs. Obiter: Ratio - when credible risk to investigation or witnesses exists based on prima facie allegations, denial of anticipatory bail is justified to preserve the integrity of the investigative process. Obiter - cautionary remarks on policing responsibility and presumption of proper conduct by officers are ancillary.
Conclusion: Denial of anticipatory bail is warranted to prevent obstruction of investigation and to guard against tampering or influence upon witnesses in the factual circumstances presented.
Issue 3: Sufficiency of petitioner's factual counter-claims (false implication, CCTV, complaint against complainant) to secure anticipatory bail
Legal framework: On an application for anticipatory bail the court assesses whether the applicant has produced material that negatived prima facie allegations or shown compelling reasons why custodial interrogation is unnecessary; mere assertions do not suffice, particularly at preliminary stages of investigation.
Precedent treatment: The Court applied settled precepts that allegations of false implication and reliance on unexamined documentary or electronic material (e.g., CCTV) require scrutiny by the investigating agency before they can displace the prima facie case; such contentions do not automatically entitle a person to anticipatory bail.
Interpretation and reasoning: The petitioner alleged false implication and reliance on CCTV footage and a counter-complaint to higher authorities. The Court found these contentions untested and insufficient to rebut the FIR's prima facie case. The presence of a counter-complaint and unexamined CCTV does not demonstrate absence of reasonable basis for accusations or eliminate the need for custodial interrogation. Questions of credibility and factual disputes fall within the remit of investigation and trial, not anticipatory-bail adjudication.
Ratio vs. Obiter: Ratio - unexamined evidence and allegations of false implication, standing alone, are insufficient to displace prima facie allegations and justify anticipatory bail; such factual disputes must be resolved through investigation and trial. Obiter - observations that CCTV and other material should be examined as part of investigation are ancillary.
Conclusion: The petitioner's asserted defences and unexamined evidence do not furnish a plausible reason to grant anticipatory bail at this stage; the objections were therefore rejected.
Overall Disposition and Guidance
On balancing individual liberty against societal interest and the integrity of investigation, and having regard to prima facie material alleging serious assault and threats to a public servant, anticipatory bail was refused. The Court emphasized that nothing in its order is an expression of opinion on merits of the case or the ultimate guilt or innocence of the accused, and that pending applications stand disposed of accordingly.
Grant of pre-arrest/anticipatory bail - Physical assault inflicted upon the complainant, a public servant engaged in official duty - HELD THAT:- As per the case put forth in the FIR in question, indubitably, serious allegations have been levelled against the petitioner. The FIR prima facie indicates that the petitioner alongwith co-accused physically threatened and assaulted the complainant, a public servant, engaged in official duty, which is a serious offence. The allegations against the petitioner are serious in nature, involving assault and issuing threats to the complainant. The plea of false implication cannot be accepted at this stage, particularly when the investigation is at a nascent stage and crucial evidence is yet to be collected. The claim of the petitioner that the complainant was not on duty and demanded bribe is also a question of fact that cannot be adjudicated at the stage of consideration of the anticipatory bail.
It is befitting to mention here that while considering a plea for grant of anticipatory bail, the Court has to equilibrate between safeguarding individual rights and protecting societal interest(s). The Court ought to reckon with the magnitude and nature of the offence; the role attributed to the accused; the need for fair and free investigation as also the deeper and wide impact of such alleged iniquities on the society. At this stage, there is no material on record to hold that prima facie case is not made out against the petitioner. The material which has come on record and preliminary investigation, appear to be established a reasonable basis for the accusations. Thus, it is not appropriate to grant anticipatory bail to the petitioner, as it would necessarily cause impediment in effective investigation.
In view of the gravity of the offence, the possibility of threat to the complainant or witnesses and the necessity of custodial interrogation for a fair and thorough investigation, this Court is of the considered opinion that the petitioner does not deserve the concession of anticipatory bail in the factual matrix of the case in hand.
The instant petition is devoid of merits and is hereby dismissed.
ISSUES PRESENTED AND CONSIDERED
1. Whether, on the materials before the Court, the requisites for constituting offences under Section 132(1)(b) and (c) of the SGST Act, 2017 are established even prima facie so as to justify continued custodial detention.
2. Whether statutory notice and assessment under the SGST/CGST framework are mandatory preconditions before invoking penal provisions and effecting arrest/continued detention for alleged GST fraud.
3. Whether the settled supervisory principles and guidelines (as applied by higher courts) governing grant of bail in economic/GST offences weigh in favour of release where investigation is complete, complaint is filed, the tax liability remains unassessed/appealable, and the accused has cooperated.
4. Whether the economic character of the statute, availability of compounding, the nature and quantum of tax liability (unassessed), and the accused's conduct collectively preclude further custody and justify grant of regular bail subject to conditions.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Prima facie establishment of offences under Section 132(1)(b) & (c) of the SGST Act, 2017
Legal framework: Section 132(1)(b) and (c) prescribe penal liability for specified offences involving tax evasion/claims of inadmissible ITC; criminal process requires satisfaction of statutory ingredients before custody is justified.
Precedent Treatment: The Court referred to recent decisions holding that mere allegation of tax fraud does not automatically justify custodial detention and that bail should ordinarily be considered where the statutory and evidential preconditions are not firmly established at the arrest stage.
Interpretation and reasoning: The Court examined the prosecution case that alleges orchestration of a network to claim ineligible/false ITC. Noting the material on record, the Court found that assessment of tax liability - a determinative element for quantum of punishment - has not been completed; therefore, the ingredients necessary to justify continued custody are not conclusively established on the present record. The accused's role, though alleged, had not been shown to require further custodial interrogation or to pose a real risk of evidence tampering on the material before the Court.
Ratio vs. Obiter: Ratio - custodial detention is not warranted where the prima facie material does not establish the statutory requisites for the offence and where investigation is complete and no further custodial necessity appears. Obiter - observations on the alleged modus operandi and enumeration of connected companies are descriptive of the prosecution case but not determinative of guilt.
Conclusion: On the materials before the Court, the requisites for sustaining continued custody under Section 132(1)(b) and (c) are not sufficiently made out to justify denial of bail.
Issue 2 - Necessity of statutory notice/assessment before invoking penal provisions
Legal framework: The SGST/CGST statutory scheme contemplates assessment and opportunity for objection/appeal; certain judicial authorities have held that statutory notice and assessment are essential prerequisites to criminal penal action in tax matters.
Precedent Treatment: The Court relied on High Court decisions emphasizing mandatory notice/assessment prior to penal invocation and accepted the proposition as a relevant consideration in bail adjudication; it also relied on higher-court guidance limiting custodial measures where assessment is pending.
Interpretation and reasoning: The Court observed that no statutory notice or assessment has been served/undertaken against the accused; as the quantum of tax - which determines the nature/extent of penal consequences - remains unassessed and appealable, initiating or continuing custodial incarceration would be premature and contrary to the remedial/administrative character of tax assessment remedies.
Ratio vs. Obiter: Ratio - absence of statutory assessment/notice is a significant factor militating against custodial detention in GST-related offences at the bail stage. Obiter - remarks on the administrative objectives of assessment procedures supplement but do not replace fact-specific inquiry.
Conclusion: The lack of statutory notice/assessment is a material consideration against continued custody and supports grant of bail in the circumstances presented.
Issue 3 - Application of bail principles in economic/GST offences where investigation is complete and complaint filed
Legal framework: Principles for bail in economic offences include examination of nature of accusation, gravity of offence, likelihood of tampering with evidence, character and antecedents of the accused, completion of investigative steps, and public interest; higher-court guidelines direct liberal grant of bail in certain GST offences where custodial necessity is absent.
Precedent Treatment: The Court applied the guiding decisions that recommend early bail in offences under Section 132(1) where punishment is not of extreme severity and custodial interrogation is not requisite; these precedents were followed as applicable to the facts.
Interpretation and reasoning: The Court noted that investigation is complete and the complaint has been filed, that the accused cooperated fully, and that no further evidence was shown to require custodial interrogation or to indicate risk of tampering. Given these factors and the composite judicial guidance favoring bail in similar GST matters, the Court concluded that continued detention would not further investigation or protect public interest beyond what conditions of bail could secure.
Ratio vs. Obiter: Ratio - where investigation is complete, complaint filed, the accused has cooperated, and no custodial necessity is demonstrated, bail should ordinarily be granted notwithstanding the seriousness of economic allegations, subject to appropriate conditions. Obiter - comparative references to other benches' treatments reinforce but do not expand the ratio beyond fact-specific application.
Conclusion: The established bail principles, applied to the completed investigation and cooperation by the accused, weigh in favour of regular bail subject to conditions.
Issue 4 - Role of compounding, economic object of statute, and unassessed quantum in bail determination
Legal framework: The SGST Act allows compounding of offences; the statutory scheme aims at revenue recovery and regulation of economic activity rather than purely punitive incarceration; assessment determines tax liability which informs sentencing exposure.
Precedent Treatment: Courts have treated the availability of compounding, remedial character of tax statutes, and unassessed/appealable tax liability as relevant mitigating considerations at bail stage; those lines of authority were relied upon to assess proportionality of custody.
Interpretation and reasoning: The Court emphasized that the primary object of the Act is economic recovery, that compounding is available, and that the monetary quantum which defines the severity of penal consequences remains unassessed. Taken together with the accused's cooperation and lack of custodial necessity, continued detention was deemed disproportionate and unnecessary for public interest or the integrity of the investigation.
Ratio vs. Obiter: Ratio - compounding availability and unassessed tax quantum are relevant, substantial considerations in favour of bail in GST offences where other custodial necessities are absent. Obiter - broader policy remarks on prison overcrowding and objective of statutes were made in support but are not dispositive of distinct factual permutations.
Conclusion: The economic objective of the statute, availability of compounding, and unassessed/appealable tax liability cumulatively support release on bail under appropriate conditions.
Overall Disposition
Conclusions drawn by the Court: Considering the absence of statutory assessment/notice, completion of investigation and filing of complaint, the accused's cooperation, the economic/recovering object of the statute, and binding/salient judicial guidance favouring early bail in comparable GST matters, custodial detention was not warranted; accordingly, regular bail was granted subject to furnishing prescribed bonds and surety, without adjudication on merits.
Seeking grant of regular bail - availing ineligible or fake Input Tax Credit (ITC) from non-existent, registration-cancelled, or suspected business entities - HELD THAT:- Taking into consideration the fact that the complaint has already been filed against the applicant and further no statutory notice or assessment has been conducted against the applicant under the SGST Act, 2017, the quantum of tax involved remains unassessed and appealable, and the applicant has fully cooperated with the investigation and further the compliant has been filed, it appears that no purpose would be served by his further detention. The primary object of the Act is economic recovery rather than punitive incarceration.
In view of the settled principles of law laid down by the Hon’ble Supreme Court in Vineet Jain [2025 (5) TMI 925 - SC ORDER], as well as various High Court rulings, and considering the character, standing, and conduct of the applicant and the fact that applicant is languishing in jail since 20.08.2025, his custodial detention is not warranted hence, without commenting anything on merits of the case, it is inclined to grant regular bail to the applicant, subject to fulfilment of conditions imposed.
Accordingly, the bail application on behalf of the applicant – Ankit Singh is allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether a Summary of Show Cause Notice in FORM GST DRC-01 with an attached determination of tax (statement) can, by itself, constitute a valid Show Cause Notice under Section 73 of the GST Act.
2. Whether documents (Show Cause Notice, Statement of determination, and final Order) issued/uploaded as attachments to GST DRC-01 and GST DRC-07 must be authenticated by the Proper Officer in accordance with Rule 26(3) CGST Rules, 2017, and whether absence of such authentication vitiates the notices/orders.
3. Whether an opportunity of hearing was mandated under Section 75(4) of the GST Act when an adverse decision was contemplated and whether passing an order without affording such hearing violates principles of natural justice.
4. Whether Rule 142(1)(a) (requirement to issue a summary in FORM GST DRC-01) can dispense with the statutory requirement of issuing a proper SCN and Statement under Section 73.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of DRC-01 Summary with Attached Determination as SCN
Legal framework: Section 73 (paras (1)-(4), (9), (10)) prescribes conditions triggering issuance of a Show Cause Notice (SCN), mandates reasons for issuance, requires issuance of statement under sub-section (3) in specified cases, and provides timelines for passing orders; Rule 142(1)(a) requires serving, along with notice under Section 73, a summary electronically in FORM GST DRC-01.
Precedent treatment: Decisions of the Jharkhand and Karnataka High Courts (Nkas Services; LC Infra) and other High Courts have held that a summary in DRC-01 cannot substitute a proper SCN or that a proper SCN is essential before recovery proceedings.
Interpretation and reasoning: A combined reading of Section 73(1)-(4), (9) and (10) shows the legislature contemplates separate instruments: (a) SCN under Section 73(1) stating reasons and circumstances justifying invocation of Section 73; (b) Statement under Section 73(3) of tax determination; and (c) final Order under Section 73(9) after considering representations. Rule 142 mandates issuance of a summary (DRC-01) in addition to these instruments, not in substitution. The attachment containing tax determination appended to DRC-01 is a statement and lacks the statutory content and form of an SCN; therefore initiation relying solely on such attachment is inadequate to invoke Section 73.
Ratio vs. Obiter: Ratio - A DRC-01 summary with attached determination does not, by itself, constitute a valid SCN under Section 73; the SCN must be a distinct, properly issued document. Obiter - Observations on practical sufficiency of details in attachments where a full SCN might be present (not applicable here because attachment lacked required form).
Conclusion: The attached determination in DRC-01 cannot be treated as the SCN; issuance of a proper SCN is mandatory. The impugned order based solely on the attachment/summary is contrary to Section 73 and Rule 142(1)(a).
Issue 2: Requirement of Authentication under Rule 26(3) and Effect of Absence of Signature
Legal framework: Rule 26(3) CGST Rules, 2017 prescribes that notices, certificates and orders under the Chapter must be issued electronically by the Proper Officer or authorized officer using digital signature/e-signature/Board-notified mode; Chapter III (Registration) contains Rule 26, while Demand and Recovery provisions fall in a different Chapter.
Precedent treatment: Several High Court decisions (including those relied upon in submissions) have held that unsigned notices/orders lose efficacy and digital signatures/e-signatures are necessary; some benches extended Rule 26(3) requirements to demand and recovery documents.
Interpretation and reasoning: Section 73 requires that SCN, the Statement under Section 73(3), and final Order under Section 73(9) be issued by the Proper Officer. While Rule 26(3) is located in Chapter III (Registration), no specific authentication mode is provided in Chapter XVIII (Demand and Recovery). Absent a specific alternative rule, there is a regulatory lacuna regarding authentication of demand/recovery documents. Given the statutory insistence that the Proper Officer issue these documents and the Board's power to notify authentication mechanisms, the Court applied Rule 26(3) by default to ensure authenticity, traceability and legal validity. Where attachments bear no digital signature but only a pro forma "Sd-Proper Officer" notation and the portal itself requires digital authentication for operation, such unsigned attachments lack the statutory authentication and thus legal efficacy.
Ratio vs. Obiter: Ratio - Notices, statements and orders issued under Section 73 must be properly authenticated by the Proper Officer; in the absence of specific Chapter XVIII rules, Rule 26(3) authentication requirements apply by default to demand and recovery documents. Obiter - Observations recognizing the Board could fill the regulatory gap by specific rulemaking and that procedural sections (Sections 160/169) cannot cure an unsigned notice.
Conclusion: Attachments to DRC-01/DRC-07 lacking authentication by the Proper Officer as required (digital/e-signature or Board-notified mode) are invalid; the impugned orders based on such unauthenticated documents are unenforceable.
Issue 3: Requirement of Hearing under Section 75(4) and Natural Justice
Legal framework: Section 75(4) mandates that an opportunity of hearing be granted when a written request is made by the person chargeable or "where any adverse decision is contemplated against such person"; the provision is a statutory safeguard for procedural fairness in adjudicatory proceedings.
Precedent treatment: Decisions (including a Division Bench ruling referenced) hold that when statute mandates hearing as a requirement of natural justice, it cannot be bypassed; failure to afford hearing renders orders vulnerable.
Interpretation and reasoning: FORM GST DRC-01 contains fields for reply, date/time of personal hearing and venue. In the present case, only the reply submission field was filled; hearing particulars were left "NA". Section 75(4) has two limbs: (i) when a written request for hearing is made, and (ii) when an adverse decision is contemplated. The second limb imposes an independent duty to grant hearing even if no written request is filed. Passing an adverse order without affording hearing where such an adverse decision is contemplated defeats the statutory protection and violates principles of natural justice. Presuming that personal hearing is required only if the recipient requests it reduces the second limb to redundancy and is inconsistent with the statutory scheme.
Ratio vs. Obiter: Ratio - When an adverse decision is contemplated, an opportunity of hearing must be afforded under Section 75(4) irrespective of a request; failure to do so invalidates the order. Obiter - Practical permutations of combining reply-only responses with hearing requirements and portal-based communications.
Conclusion: The impugned order, passed without granting a hearing though an adverse decision was evidently contemplated, violates Section 75(4) and principles of natural justice and is therefore vitiated.
Issue 4: Interaction of Rule 142(1)(a) Summaries and Statutory Requirements of Section 73
Legal framework: Rule 142(1)(a) mandates serving a summary (FORM GST DRC-01) electronically along with the notice under Section 73; Rule 142(1)(b) deals with FORM GST DRC-02 for statements under Section 73(3).
Precedent treatment: High Courts have treated DRC-01 summaries as supplementary and not substitutive of full statutory notices; summary cannot supplant the substantive requirements of Section 73.
Interpretation and reasoning: Rule 142(1)(a) is permissive only for an additional summary in DRC-01 and does not dispense with the requirement of issuing the substantive SCN and Statement as required by Section 73. The legislative scheme contemplates distinct roles for SCN, Statement and Summary; relying solely on the summary and attached statement to initiate demand fundamentally alters the statutory safeguard structure.
Ratio vs. Obiter: Ratio - Rule 142 summaries are supplementary and do not eliminate the statutory obligation to issue a distinct, properly authenticated SCN and Statement under Section 73. Obiter - Remarks on technical compliance practices and portal metadata.
Conclusion: Rule 142(1)(a) does not authorize substituting a DRC-01 summary (with attached determination) for the SCN mandated by Section 73; compliance with Section 73's document issuance requirements remains mandatory.
Relief and Practical Consequence
Because the impugned order was passed without a proper SCN, without authentication as required, and without granting hearing where an adverse decision was contemplated, the order was set aside. Liberty was granted to initiate de novo proceedings under Section 73, and the period between issuance of the summary and service of a certified copy of the judgment was excluded for computation of limitation under Section 73(10) to preserve respondents' ability to proceed lawfully.
Violation of principles of natural justice - proper service of SCN - no proper SCN was attached to the Summary of the SCN in the portal - attachment as well as the Summary of the Order uploaded in GST DRC-01 and GST DRC-07 were not authenticated by any signature of the Proper Officer - impugned orders under Section 73 (9) of the State Act is in conformity with Section 75(4) of the State Act and is in consonance with the principles of natural justice or not - HELD THAT:- The Proper Officer is mandated to issue a SCN only under specific circumstances as outlined in Section 73. Therefore, the SCN must clearly state the reasons and circumstances justifying its issuance under this section. Only then can the recipient effectively respond, particularly if they wish to challenge the applicability of Section 73. Section 73(9) requires the Proper Officer to determine the tax, interest, and penalty after considering the representation. Section 73(2) and 73(10) are interconnected, while Section 73(10) allows passing the order within three years from the due date of the annual return, Section 73(2) mandates that the SCN must be issued at least three months before the deadline. Furthermore, a combined reading of subsections (1) to (4) of Section 73 shows that the legislature has made a clear distinction between a Show Cause Notice and a Statement. Even if a Statement is issued under Section 73(3), a separate and proper SCN is still required.
From a perusal of the Rule 142 of CGST Rules 2017, it would show that in addition to the Show Cause Notice to be issued under Section 73 (1) and the Statement of determination of tax under Section 73 (3), there is an additional requirement of issuance of a Summary of the Show Cause Notice in GST DRC-01 and the Summary of the Statement in GST DRC-02. The natural corollary from the above analysis is that the issuance of the Show Cause Notice and the Statement of determination of tax by the Proper Officer are mandatory requirement in addition to the Summary of Show Cause Notice in GST DRC-01 and Summary of the Statement in GST DRC-02.
The Division Bench of the Hon’ble Jharkhand High Court in Nkas Services Pvt. Ltd. [2022 (2) TMI 1157 - JHARKHAND HIGH COURT] held that a summary in GST DRC-01 cannot replace a proper SCN. Similarly, in LC Infra Projects Pvt. Ltd.[2019 (8) TMI 84 - KARNATAKA HIGH COURT], the Hon’ble Karnataka High Court emphasized that issuing a proper SCN is essential before the recovery of interest or penalty under the Act.
The Court holds that merely attaching a tax determination order to the summary in DRC-01 does not amount to valid initiation under Section 73. The summary is only supplementary to a full SCN. Thus, the impugned orders, having been passed without a proper SCN, are in violation of Section 73 and Rule 142(1)(a).
The question arises whether Rule 26(3), though located under Chapter III (Registration), can apply to Chapter XVII (Demand and Recovery). In the case of M/s Silver Oak Villas LLP, [2024 (4) TMI 367 - TELANGANA HIGH COURT] it was held that Rule 26(3) applies even to Chapter XVIII, requiring authentication through digital or e-signature for all notices and orders and this view was endorsed in the case of A.V. Bhanoji Row [2023 (2) TMI 1224 - ANDHRA PRADESH HIGH COURT]. It was laid down that signatures cannot be dispensed with, and Sections 160 and 169 (which deal with procedural lapses) cannot cure an unsigned notice or order - Since no specific rule under Chapter XVIII (relating to Demand and Recovery) governs authentication, a regulatory gap exists. Given the critical importance of authentication by the Proper Officer, the Court held that, until proper rules or notifications are issued by the Board to address this gap, Rule 26(3), which requires digital or e-signature, must be applied by default. This ensures that any notice, statement or order issued under the Act maintains its legal validity and enforceability.
This Court, upon detailed analysis, hold that the Summary of the SCN issued in FORM GST DRC-01 does not substitute the proper SCN required under Section 73(1) of both the Central and State GST Acts. A formal and duly authenticated SCN is mandatorily required to initiate proceedings under Section 73. The Statement of tax determination under Section 73(3), which is attached to the summary in the present case cannot be treated as a valid SCN. Therefore, initiating proceedings solely based on such a statement is not in conformity with law.
This Court has also noted that the impugned order contravenes Section 75(4) of the Act which mandates that a reasonable opportunity of hearing must be provided either when an adverse decision is contemplated or when a written request is made by the assessee. In the present case, although the DRC-01 summary specifies the date for filing a reply, it leaves the field regarding the date and time of personal hearing as “NA”. In a situation where no reply is submitted, the Proper Officer cannot proceed to pass an adverse order without granting an opportunity of hearing, as doing so would render the safeguards under Section 75(4) ineffective and violate principles of natural justice.
The impugned order dated 27.12.2023 is interfered with and set aside. However, as it appears that the respondents have proceeded under the mistaken impression that attaching the determination of tax to the summary constitutes a valid Show Cause Notice, the Court grants them liberty to initiate de novo proceedings under Section 73, if considered appropriate - Petition allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether an order of cancellation of GST registration passed under Rule 22(1) of the GST Rules, 2017 can be suspended/treated as revocable where the assessee has filed pending returns and deposited substantial tax, interest and late fees after cancellation.
2. Whether rejection of an application for revocation of cancellation for delay (appeal dismissed for delay) can be set aside in exercise of writ jurisdiction under Article 226 where the registrant offers to (a) file outstanding returns, (b) pay outstanding dues, and (c) furnish an undertaking to comply with statutory obligations in future.
3. The appropriate scope of directions that a writ court may give to revenue authorities when registration has been cancelled but returns are filed and dues are paid post-cancellation.
ISSUE-WISE DETAILED ANALYSIS - Issue 1: Suspension/Revocation of Cancellation where returns filed and dues paid
Legal framework: Rule 22(1) of the GST Rules, 2017 (procedure for cancellation of registration on grounds including non-furnishing of returns for continuous six months); provisions enabling revocation of cancellation; statutory regime requires filing of returns and payment of tax, interest and late fees to regularize registration.
Precedent treatment: No previous judicial precedents were cited or applied by the Court in the judgment; the Court proceeded on statutory scheme and facts.
Interpretation and reasoning: The Court noted that the registrant had filed pending GSTR-3B returns up to a defined period and deposited substantial amounts towards tax, interest and late fees (detailed challan amounts verified by the Assistant Government Pleader). Given these steps, the Court reasoned that the revenue authority should consider the pending returns and, if they are in order, determine and call for any outstanding liability so that the order of cancellation may be revoked.
Ratio vs. Obiter: Ratio - where a registrant submits pending returns and makes deposit of dues after cancellation, the authority ought to examine those returns and, if compliant, allow revocation on payment of outstanding dues. Obiter - none significant beyond factual amplification.
Conclusions: The Court directed suspension of cancellation and ordered the respondent authority to consider the pending returns and, if found lawful, call upon the registrant to pay outstanding dues, after which the cancellation shall stand revoked.
ISSUE-WISE DETAILED ANALYSIS - Issue 2: Rejection of revocation application and delay in appeal where registrant remedies defaults
Legal framework: Section 107 (appeal to first appellate authority) of the GST Act (appeal against order of rejecting revocation), procedural timelines for filing appeal; power of writ court under Article 226 to grant equitable relief when statutory remedies lead to harsh outcomes.
Precedent treatment: No precedents invoked; Court applied principles of administrative fairness and practicality inherent in writ jurisdiction.
Interpretation and reasoning: The Court acknowledged that the first appeal was dismissed by the appellate authority on the ground of delay (11 months and 4 days). Having regard to the petitioner's conduct of subsequently filing returns and depositing substantial dues, the Court exercised supervisory jurisdiction under Article 226 to direct the revenue to entertain and consider the pending returns and to permit revocation upon compliance. The Court conditioned relief on the petitioner's undertaking to abide by GST law and be regular in future filings, recognizing the authority's role to assess remaining liability in accordance with law.
Ratio vs. Obiter: Ratio - delay in filing appeal does not preclude writ relief where the registrant has remedied defaults (filed returns and paid dues) and offers an undertaking; Court may direct authorities to consider revocation subject to payment of outstanding dues. Obiter - emphasis on absence of mala fide and on financial hardship as explanation for defaults, which does not bind future cases.
Conclusions: The Court set aside the consequences of the appellate dismissal to the extent of directing consideration of the returns and potential revocation, subject to payment of any additional dues and the petitioner's undertaking.
ISSUE-WISE DETAILED ANALYSIS - Issue 3: Scope of writ relief and conditions to be imposed
Legal framework: Article 226 writ jurisdiction enabling courts to issue directions to administrative authorities; statutory requirement for regular filing of returns and payment of dues under GST statute and rules.
Precedent treatment: No precedents referenced; Court relied on equitable exercise of jurisdiction consistent with statutory compliance.
Interpretation and reasoning: The Court balanced the statutory mandate to maintain compliance with taxpayers' remedial conduct. It required (a) an undertaking by the registrant to comply with the GST Act and Rules and be regular in future filings, (b) that respondents consider the pending returns and verify payments already made, and (c) that any outstanding dues be paid forthwith if found due. The Court made clear that failure to comply with the undertaking would render the registration liable to automatic cancellation. This combination of conditions reflects a protective but conditional invocation of writ powers to restore registration where defaults have been cured.
Ratio vs. Obiter: Ratio - a writ court may grant conditional relief (suspension/revocation) by directing authorities to consider returns and call for any residual payment, subject to a registrant's undertaking; failure of the undertaking can justify subsequent cancellation. Obiter - procedural specifics (timeframes for compliance) are not prescribed and left to administrative action consistent with law.
Conclusions: The Court directed (i) filing of an undertaking by the registrant, (ii) suspension of cancellation to enable administrative verification of returns and deposits, and (iii) revocation of cancellation upon payment of any additional verified dues. The Court refused to award costs.
Cross-references and operative effect
1. Issue 1 and Issue 2 are interrelated: remedial acts by the registrant (filing returns and payment) form the factual basis permitting equitable intervention on appeal delay grounds.
2. Issue 3 operationalizes Issues 1-2 by prescribing the procedural steps and conditions for the authority to follow for possible revocation.
Final disposition (as applied to issues)
The Court, exercising writ jurisdiction under Article 226, directed suspension of the cancellation, ordered the registrant to file an undertaking to comply with the GST law, directed the revenue authority to consider pending returns and verify payments, and to call upon payment of any outstanding dues, after which revocation shall follow; failure to comply with the undertaking will lead to automatic cancellation. No costs were awarded.
Cancellation of GST registration certificate of the petitioner - petitioner had not furnished returns of income for continuous six months - HELD THAT:- Having perused the material on record, it appears that there is no other contentions raised on behalf of the petitioner in view of the fact that the petitioner has deposited the amount of outstanding substantial amount of outstanding tax with interest and late fees.
The petitioner shall file an undertaking before this Court that the petitioner shall abide by the provisions of the GST Act and the GST Rules and shall be regular in filing the returns in future, failing which, the registration of the petitioner shall be cancelled automatically.
The respondents are therefore, directed to consider the pending returns filed by the petitioner by suspending the order of cancellation of registration and if the same are found in accordance with law, call upon the petitioner to pay the outstanding dues, if any, forthwith - Petition disposed off.
Issues: Whether the petitioner was entitled to regular bail in a complaint under the Central Goods and Services Tax Act, 2017.
Analysis: The petitioner had already enjoyed interim regular bail without any material showing misuse of the concession. The witnesses were official witnesses, reducing the apprehension of interference with evidence. No tangible material was shown to indicate that the petitioner was likely to abscond or obstruct the trial. The Court also noted that the rival contentions raised serious disputed questions better left for trial and that further detention as an undertrial was not warranted in the facts of the case.
Conclusion: Regular bail was granted to the petitioner, subject to conditions imposed for appearance, cooperation, and non-interference with the trial.
Grant of regular bail - irregular availment of ITC - receiving invoices without actual supply of goods - operation of fake forms - HELD THAT:- The petitioner was initially arrested on 09.10.2020 whereinafter he was released on bail on account of the Covid-19 pandemic. He was, thereafter, again taken into custody on 01.05.2023. The petitioner is on interim regular bail since 03.04.2024 and nothing substantiate has brought forth to indicate that the petitioner has misused the concession of interim regular bail. The case in hand pertains to a complaint wherein all the witnesses are officials and, thus, there is no chance for tampering with the evidence.
The rival contentions raised at Bar give rise to debatable issues shall be ratiocinated upon during the course of trial. This Court does not deem it appropriate to delve deep into these rival contentions, at this stage, lest it may prejudice the trial. Nothing tangible has been brought forward to indicate the likelihood of the petitioner absconding from the process of justice or interfering with the prosecution evidence. Suffice to say, further detention of the petitioner as an undertrial is not warranted in the facts and circumstances of the case.
Petitioner is ordered to be released on regular bail on his furnishing bail/surety bonds to the satisfaction of the Ld. concerned trial Court/Duty Magistrate. However, in addition to conditions that may be imposed by the concerned trial Court/Duty Magistrate, the petitioner shall remain bound by the conditions imposed - petition allowed.
Outcome: The petition was disposed of on the basis of an arrangement between the petitioner and the developer, with payment of the stated amount and handover of the alternate accommodation. The order expressly left the GST liability unanswered and to be worked out before the GST authorities in accordance with law.
Right or Remedy available to a Person buyer Property where Developer pays GST without protest to Revenue - Placing the petitioner in possession of the alternate premises agreed to be provided to him - Handover of alternate accommodation conditioned on payment of alleged GST liability - HELD THAT:- After receipt of an amount of Rs. 6,44,945/-, it is for the developer to decide the further course of action qua the GST authorities. However, if the developer decides to pay this amount to the GST authorities, the same must be without prejudice and subject to adjudication by the GST authorities. If the GST authorities finally hold that this amount was not payable, then the developer must return this amount to the Petitioner. This is agreed to by the developer (R4), and a statement is made to this effect. Even this statement is accepted.
Nothing in this order decides whether, in law, this amount is liable to be paid as GST or not. All these are matters that will have to be sorted out by the GST authorities and the developer (R4) in accordance with the law and on their own merits.
At this stage, it is recorded that the Petitioner has handed over a pay order in an amount of Rs. 6,44,945/- dated 14 October 2025 issued by Bank of India bearing no. 026863 to the learned Counsel for the developer (R4). The learned Counsel for the developer (R4) acknowledges this and now states that the possession of the alternate accommodation on an ownership basis will be handed over to the Petitioner.
Petition disposed off.
ISSUES PRESENTED AND CONSIDERED
1. Whether a Proper Officer of Central tax (DGGI/Central Proper Officer) could initiate and conclude adjudicatory proceedings under Section 74 of the GST Act on the same subject-matter after a Proper Officer of State tax had already initiated proceedings under Section 74 in respect of identical allegations.
2. Whether issuance of summons under Section 70 or other investigative steps by one authority constitute "initiation of proceedings" within the meaning of Section 6(2)(b) so as to bar subsequent initiation of adjudicatory proceedings by the other authority on the same subject-matter.
3. Whether, on the facts, the Show Cause Notice dated 13.08.2021 issued by the Central authority and the consequential Order-in-Original dated 30.01.2025 are sustainable in law given Section 6(2)(b) and the authoritative exposition in Armour Security (India) Ltd.
ISSUE-WISE DETAILED ANALYSIS - 1. Competence of Central Proper Officer to initiate proceedings after State Proper Officer has initiated proceedings under Section 74
Legal framework: Section 6(1) and (2) of the GST enactments provide for cross-empowerment of Central and State officers as Proper Officers; Section 6(2)(b) expressly bars initiation of proceedings by one Proper Officer where a Proper Officer under the other Act "has initiated any proceedings on a subject matter." Administrative instructions (D.O. dated 05.10.2018 and F. No. CBEC-20/10/07/2019-GST dated 22.06.2020) clarify ambit of cross-empowerment and permit intelligence-based action by either authority but also indicate the authority initiating intelligence action may proceed to logical conclusion.
Precedent treatment: The Supreme Court's decision in Armour Security (India) Ltd. is treated as authoritative on interpretation of "proceedings" and "subject-matter" under Section 6(2)(b), providing tests and guidelines to avoid duplication and to determine which authority may continue where overlap exists.
Interpretation and reasoning: The Court analysed timelines and documents and found that Show Cause Notices under Section 74 were issued by the State Proper Officer (dated 02.07.2021 and 30.07.2021) on the basis of intelligence/alerts communicated to the State authority. The Central authority's Show Cause Notice dated 13.08.2021, though preceded by investigative acts (visits, summons) by Central officers, was issued later than the State SCNs. Under Section 6(2)(b), once adjudicatory proceedings on the same subject-matter are initiated by one Proper Officer, the other cannot initiate proceedings on that same subject-matter. The administrative D.O. (05.10.2018) and CBIC clarification (22.06.2020) support the position that the authority which initiates intelligence-based enforcement can complete it and need not transfer the matter; conversely, the other authority should not commence duplicative proceedings.
Ratio vs. Obiter: Ratio - Section 6(2)(b) prohibits initiation of proceedings by the other Proper Officer where proceedings on the same subject matter have already been initiated; once the State Proper Officer had issued SCNs pertaining to the identical fake-invoice allegations, the Central Proper Officer's SCN and consequent adjudication on the same subject-matter were barred. Obiter - administrative clarifications and general policy remarks on coordination and IT integration supplement but do not displace statutory interpretation.
Conclusion: The Central Proper Officer lacked jurisdiction to initiate and conclude adjudicatory proceedings under Section 74 after the State Proper Officer had initiated proceedings on the identical subject-matter; the subsequent SCN and Order are invalid and liable to be quashed under Section 6(2)(b).
ISSUE-WISE DETAILED ANALYSIS - 2. Whether issuance of summons under Section 70 or investigatory steps constitute "initiation of proceedings" under Section 6(2)(b)
Legal framework: Section 6(2)(b) uses the expression "has initiated any proceedings on a subject matter"; interpretation requires parsing what constitutes "initiation" and the scope of "subject matter."
Precedent treatment: Armour Security (India) Ltd. is decisive, holding that the "initiation of any proceedings" means formal commencement of adjudicatory proceedings by issuance of a show cause notice and does not encompass issuance of summons, searches, seizures, visits, or other investigatory acts. The decision furnishes a two-fold test to determine "sameness" of subject-matter (identical liability/contravention and identical demand/relief sought) and guidelines for inter-authority communication and coordination.
Interpretation and reasoning: The Court applied Armour Security: investigatory acts such as visits and summons (Section 70 statements) are not by themselves the "initiation of proceedings" under Section 6(2)(b). However, where a formal SCN/adjudicatory proceeding is issued by one authority prior to the other issuing its SCN on the same facts and liability, the bar under Section 6(2)(b) is attracted. Here, although the Central officers conducted visits and issued a summons in 2019, the State issued formal SCNs under Section 74 in July 2021 and thereby initiated adjudicatory proceedings on the subject-matter; the Central SCN dated 13.08.2021 came later and therefore was barred despite earlier investigatory steps.
Ratio vs. Obiter: Ratio - Summons or other fact-gathering measures do not amount to "initiation of proceedings" under Section 6(2)(b); the decisive act is issuance of a show cause notice or formal adjudicatory initiation. Obiter - guidelines on cooperation and procedure from Armour Security (communication between authorities, which authority continues, forwarding of materials) further inform equitable and administrative practice.
Conclusion: Issuance of summons under Section 70 and other investigatory steps do not per se commence proceedings under Section 6(2)(b); but where a rival authority issues a formal SCN earlier on identical liability, a later SCN is barred notwithstanding earlier investigatory steps by the later authority.
ISSUE-WISE DETAILED ANALYSIS - 3. Application of legal principles to the present facts and remedial consequence
Legal framework: Application of Section 6(2)(b) read with Armour Security (India) Ltd.; ancillary application of administrative D.O.s and CBIC clarifications on cross-empowerment and intelligence-based action.
Precedent treatment: Armour Security supplies the controlling interpretative matrix and mandatory guidelines (including the two-fold test and the procedural steps to be followed when overlap occurs).
Interpretation and reasoning: Factual matrix established that State SCNs (02.07.2021 and 30.07.2021) related to alleged wrongful availment of input tax credit on the same fake invoices and named suppliers that formed the basis of the Central SCN dated 13.08.2021. The petitioner had explicitly informed the Central authority (by reply in Form DRC-06) that State proceedings were pending on the same allegations. Armour Security requires communication and verification between authorities upon such notice; rather than deferring or coordinating, the Central Proper Officer proceeded to issue a SCN and pass an O-O on 30.01.2025. Given that the State had already formally initiated adjudicatory proceedings on the same subject-matter, Section 6(2)(b)'s bar applied and the later Central SCN and Order are void. Reliance on earlier summons or investigative steps by Central officers does not cure the jurisdictional defect because summons are not initiation of proceedings under Armour Security.
Ratio vs. Obiter: Ratio - On these facts the Central SCN and the resultant Order are invalid; the appropriate remedial consequence is quashing of the SCN and setting aside of the Order and demands. Obiter - administrative best practices (inter-authority consultation, transfer of materials, avoidance of duplication) are reiterated but do not change the statutory bar.
Conclusion: The Show Cause Notice dated 13.08.2021 is quashed as being barred by Section 6(2)(b); consequentially the Order-in-Original dated 30.01.2025 and the Summary of Orders/Form DRC-07 reflecting demands are set aside. The writ is allowed and no order as to costs was made.
CROSS-REFERENCES AND PRACTICAL GUIDANCE (as applied)
1. Where an assessee notifies a subsequently acting authority that the matter is already the subject of proceedings by another authority, the authorities must communicate and verify overlap (see Armour Security guidance reproduced and applied).
2. Investigative actions (visits, summons under Section 70) by themselves do not trigger the statutory bar under Section 6(2)(b); the bar is triggered by formal initiation of adjudicatory proceedings (SCN) and identity/overlap of the tax liability or relief sought.
3. Where a later SCN is quashed for breach of Section 6(2)(b), any consequential adjudicatory order and demands founded on that SCN fall with it (Sublato fundamento cedit opus).
Parallel proceedings or not - Jurisdiction of Central Proper Officer to initiate proceedings on the same subject matter when State Proper Officer already initiated the “proceeding” u/s 74 of CGST Act - input tax credit being wrongfully availed and utilised by the petitioner - HELD THAT:- By virtue of cross-empowerment under Section 6(1) of the GST Act the State Proper Officer and the Central Proper Officer are appointed for all the purpose of the CGST Act and the OGST Act. Taking into consideration the events enumerated above, it is apparent that the exercise of power under Section 74 by the State Proper Officer based on the intelligence received is before the initiation of proceeding by the Central Proper Officer under said provisions on the very same subject-matter. Letter bearing D.O.F. No. CBEC/20/43/01/2017-GST(Pt.), dated 05.10.2018, referred to supra, clarifying the position as to the purport of Section 6(2) of the GST Act, unequivocally indicates that if an Officer of the State Tax Authority initiates intelligence based enforcement action against a taxpayer administratively assigned to Central Tax Authority, the Officers of State Tax Authority would not transfer the said case to its Central Tax counterpart and would themselves take the case to its logical conclusions.
The Central Proper Officer made ineffective and inchoate approach by concluding the proceeding at latter point of time which is hit by provisions of Section 6(2). Even though the reply of the petitioner to the Show Cause Notice dated 13.08.2021 contained such objection, the learned Junior Standing Counsel could not throw light with respect to such aspect being considered by the Central Proper Officer in the Order-in-Original dated 30.01.2025. Hence, the Order dated 30.01.2025 passed by the Assistant Commissioner, Rourkela-I Division having jurisdiction over Rourkela-II Circle, Sundargarh is vitiated and treated as non-est in the eye of law.
In the instant case, the petitioner flagged issue whether summons issued vide F. No. 10/DGGI/RRU/INV/Gr-A/GST/2018/859, dated 24.05.2019, as found mentioned in the Show Cause Notice dated 13.08.2021, for recording of statement under Section 70 of the CGST Act would suffice to construe that the initiation of proceeding was at earlier point of time by the Central Proper Officer than the Show Cause Notices dated 02.07.2021 and 30.07.2021 issued by the State Proper Officer for the purpose of determination of liability under Section 74 of the said Act, notwithstanding the fact that the Central Proper Officer has issued Show Cause Notice dated 13.08.2021 under Section 74 at a later date.
Regard may be had to a decision of the Hon’ble Supreme Court of India rendered in the case of Armour Security (India) Ltd. Vrs. Commissioner, CGST, Delhi East Commissionerate and Another, [2025 (8) TMI 991 - SUPREME COURT], wherein the purport of use and meaning attached to “proceedings” and “subject-matter” as employed in Section 6 have been discussed and it was held that 'Where the proceedings concern distinct infractions, the same would not constitute a “same subject matter” even if the tax liability, deficiency, or obligation is same or similar, and the bar under Section 6(2)(b) would not be attracted.'
Taking aid of clause (h) of Paragraph 97 of the judgment in Armour Security (India) Ltd. the learned Senior Counsel would submit that this writ petition is liable to be entertained. He, referring to clause (v) of Paragraph 97 of said judgment, urged that all actions undertaken by the Central Officers by issue of summons under Section 70 to gather information cannot be construed to be “proceedings” initiated. Neither the learned Standing Counsel for the CT and GST Organisation nor the learned Junior Standing Counsel (CGST) placed any other material to indicate that prior to issue of Show Cause Notice dated 13.08.2021 by the Central Proper Officer initiating proceeding under Section 74, any other notice contemplating “proceedings” on the same “subject-matter” had been initiated.
In view of purport and application of provisions of Section 6(2) of the GST Act as expounded by the Hon’ble Supreme Court of India in the case of Armour Security (India) Ltd, the Deputy Director, DGGI, Rourkela Regional Unit (Annexure-13) purporting to determine the liability of the petitioner under Section 74 lacks jurisdiction to issue the Show Cause Notice dated 13.08.2021 - Since the Show Cause Notice dated 13.08.2021 is held to be not in consonance with the statutory requirement and contrary to what has been explicitly mandated in Section 6 read with interpretation put forth by the Hon’ble Supreme Court of India in Armour Security (India) Ltd., the Order-in-Original dated 30.01.2025 passed as a resultant effect of such Show Cause Notice cannot be countenanced on the principle “Sublato fundamento cedit opus”.
This Court entertaining the writ petition questioning the propriety of Central Proper Officer to proceed with the matter under Section 74, this Court is inclined to intervene.
Conclusion - As is apparent that the initiation of proceedings on the same subject-matter under Section 74 of the GST Act by the Deputy Director, DGGI, Rourkela Regional Unit (Annexure-13) in pursuance of which the Assistant Commissioner, GST and Central Excise, Rourkela-I Division, Rourkela proceeded to pass Order-in-Original, the initiation of proceeding by the Central Proper Officer cannot be sustained in view of provisions contained in Section 6(2)(b) of the GST Act and is liable to be quashed.
Since Show Cause Notice dated 13.08.2021 is quashed, the Order-in-Original dated 30.01.2025 passed by the Assistant Commissioner, GST and Central Excise, Rourkela-I Division (Annexure-1) cannot be protected and the same is also hereby set aside - Petition allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether, for the project under investigation, any benefit of Additional Input Tax Credit (ITC) accrued to the developer in the post-GST period such that there was contravention of section 171(1) of the CGST Act, 2017.
2. Whether the Directorate General of Anti-Profiteering (DGAP) investigation was adequate and addressed specific deficiencies identified by the Authority, namely: (a) apparent mismatch in number of EWS units between developer's submissions and Occupancy Certificates (OCs); (b) inclusion of Total ITC figures for 951 units without corresponding treatment of retail turnover; and (c) treatment of reversal of ITC on receipt of Occupancy Certificate.
3. Whether directions to re-investigate in light of a judicial decision required any change to the substantive conclusion reached by DGAP on contravention under section 171(1).
ISSUE-WISE DETAILED ANALYSIS - Issue 1: Accrual of Additional ITC post-GST and contravention of section 171(1)
Legal framework: Section 171(1) CGST Act, 2017 obliges suppliers/developers to pass on benefits of input tax credits to recipients; anti-profiteering inquiry focuses on whether additional ITC accruing post-GST was retained and not passed on.
Precedent Treatment: The Court/Tribunal followed the statutory framework and previous administrative practice requiring investigation by DGAP and consideration by the Authority; a subsequent judicial decision by the High Court prompted re-examination but did not displace the statutory test.
Interpretation and reasoning: DGAP's multi-stage investigations established that the relevant project was substantially completed in the pre-GST period, with only a small portion completed immediately after GST implementation (OCs showing part completion dates 25.07.2016 and 28.09.2017). DGAP concluded that no additional ITC benefit accrued in the post-GST period for the developer during 01.07.2017-31.12.2020. The Tribunal notes DGAP's repeated investigations (including after directions from the Authority and pursuant to the High Court order) and accepts DGAP's factual finding that post-GST there was no material accrual of additional ITC to be passed on in respect of the project under scrutiny.
Ratio vs. Obiter: Ratio - where a project is largely completed pre-GST and the balance construction completed immediately after GST introduction, no additional ITC benefit may accrue in the post-GST period for the purposes of section 171(1); administrative findings of no accrual, after adequate investigation, discharge the anti-profiteering charge. Obiter - observations on timing nuances of occupation certificates and their evidentiary weight in other factual matrices.
Conclusion: The Court accepts DGAP's conclusion that no post-GST benefit of Additional ITC accrued to the developer and therefore no contravention of section 171(1) is established for the period investigated.
ISSUE-WISE DETAILED ANALYSIS - Issue 2: Adequacy of DGAP investigation addressing identified deficiencies
Legal framework: Anti-profiteering inquiries require DGAP to examine (inter alia) quantum of ITC attributable to specified units, turnover allocation across unit types (residential, retail, EWS), reconciliation with statutory documents (OCs), and adjustments/reversals of ITC on attaining completion/OC.
Precedent Treatment: The Authority directed DGAP to re-investigate specific lacunae identified in its initial report; the Tribunal recognizes and enforces administrative direction to cure defects and obtain further factual clarifications. The subsequent High Court decision necessitated an additional re-examination, which DGAP undertook.
Interpretation and reasoning: DGAP's original report considered Total ITC figures for 951 units but initially did not incorporate retail turnover in its turnover computation; the Authority explicitly required DGAP to address this omission. DGAP's supplemental reports (28.09.2022 and following the High Court direction) are recorded as dealing with (a) the 21-unit discrepancy in EWS figures between developer's claim and OC, (b) the retail turnover treatment in Table A, and (c) reconciliation of ITC reversal upon receipt of OC. The Tribunal notes multiple, layered investigations and accepts that DGAP examined these matters and reaffirmed its conclusion. The Tribunal imputes that DGAP's final report satisfactorily reconciled the EWS unit figures, accounted for retail turnover issues, and considered reversals of ITC on OC in concluding no contravention.
Ratio vs. Obiter: Ratio - Where an investigating authority pursues directed factual clarifications (unit reconciliation, turnover allocation, ITC reversal treatment) and documents its findings, the administrative process is adequate; absence of contravention may be upheld if post-reconciliation facts show no additional ITC benefit. Obiter - specific methodological preferences for allocation of ITC across mixed-use projects are not elaborated and remain context-dependent.
Conclusion: The Tribunal finds DGAP's further investigations responsive to the Authority's directives and adequate; the identified deficiencies were investigated and did not alter the conclusion of no accrual of Additional ITC and no contravention under section 171(1).
ISSUE-WISE DETAILED ANALYSIS - Issue 3: Effect of judicial direction to re-investigate on the substantive finding
Legal framework: Administrative findings can be revisited pursuant to judicial pronouncements; compliance with such directions is required before final administrative disposal. The standard of proof remains the statutory/administrative standard applicable to anti-profiteering inquiries.
Precedent Treatment: The DGAP complied with the High Court direction to re-investigate and returned the same substantive finding; the Tribunal regarded this compliance as reinforcing the reliability of the investigative conclusion rather than necessitating a contrary outcome.
Interpretation and reasoning: Following the High Court order, DGAP again examined the matter and reaffirmed that no contravention under section 171(1) had occurred. The Tribunal emphasizes that repeated independent examinations that consistently reach the same factual and legal conclusion strengthen the conclusion's credibility. The Tribunal therefore accepted the final DGAP report dated 23.05.2025.
Ratio vs. Obiter: Ratio - Judicially-directed re-investigation that results in consistent findings supports acceptance of the administrative conclusion; compliance with judicial directions is a material factor in upholding an administrative outcome. Obiter - the procedural history of multiple reinvestigations does not itself indicate substantive liability unless new contrary facts emerge.
Conclusion: The Court accepts DGAP's re-investigated conclusion post judicial direction and holds that compliance with the judicial direction does not change the outcome - no contravention under section 171(1) is established.
CONSOLIDATED CONCLUSION AND ORDER-ORIENTED FINDING
After multiple inquiries directed by the Authority and pursuant to judicial direction, DGAP's final report concludes and the Tribunal accepts that (a) the subject project was largely completed pre-GST with limited activity immediately post-GST, (b) reconciliations concerning EWS units, retail turnover, and ITC reversals were undertaken, and (c) no Additional ITC benefit accrued to the developer in the post-GST period for the period 01.07.2017-31.12.2020. Consequently, there is no contravention of section 171(1) CGST Act, 2017.
Benefit of additional input tax credit - anti-profiteering - section 171(1) of the Central Goods & Services Tax Act, 2017 - investigation and reinvestigation - occupancy certificate and ITC reversal
Benefit of additional input tax credit - section 171(1) of the Central Goods & Services Tax Act, 2017 - occupancy certificate and ITC reversal - investigation and reinvestigation - Whether the respondent contravened the mandate of section 171(1) of the CGST Act, 2017 by accruing benefit of additional input tax credit in respect of the Ireo Victory Valley project during the investigation period. - HELD THAT: - The DGAP's investigation, covering the period 31.07.2017 to 31.12.2020, found that the subject project was largely completed in the preGST regime with part OCs dated 25.07.2016 and balance OC dated 28.09.2017 and that no benefit of additional input tax credit accrued to the respondent in the postGST period. The DGAP's conclusion of no accrual of postGST ITC benefit was considered and queried by the NAA on discrete points (mismatch in EWS unit counts, inclusion of retail turnover in turnover aggregation, and reversal of ITC on receipt of OC), leading to a reinvestigation and further report. The CCI (erstwhile authority) directed a further reinvestigation in light of a Delhi High Court judgment, after which DGAP again concluded that there was no contravention of section 171(1). Having regard to repeated and successive investigations conducted under directions of higher authorities and DGAP's consistent finding that no additional ITC benefit accrued in the postGST period, the Appellate Tribunal accepted the DGAP report dated 23.05.2025. [Paras 7, 8, 12, 14, 15]
DGAP report dated 23.05.2025 accepted; respondent did not contravene section 171(1) of the CGST Act, 2017 for the period under investigation.
Final Conclusion: After multiple investigations and reinvestigations pursuant to directions of NAA and CCI, the Appellate Tribunal accepted the DGAP report dated 23.05.2025 and concluded that the respondent did not contravene the provisions of section 171(1) of the CGST Act, 2017 for the investigation period 31.07.2017 to 31.12.2020.
ISSUES PRESENTED AND CONSIDERED
1. Whether the Respondent contravened the provisions of Section 171(1) of the CGST Act, 2017 by not passing on the commensurate benefit of the reduction in tax rate effective 15.11.2017.
2. Whether the Respondent reduced, re-fixed and displayed the MRPs of the impacted SKUs commensurately w.e.f. 15.11.2017 and conveyed such reduction to its dealers (distributors/wholesalers/retailers).
3. Whether the Respondent affixed stickers, stamped or online-printed reduced MRPs on stock lying with it or its dealers as on 15.11.2017 so as to pass on the benefit of tax reduction.
4. Whether the Respondent continued to charge 18% GST on the impacted SKUs after the rate reduction of 15.11.2017.
5. On what grounds the Respondent increased the base price of its products in November 2017 immediately after the tax reduction and whether such increase was attributable to increase in crude oil prices (including what evidence, if any, supports such claim).
6. Whether, having regard to the above, there was a quantifiable contravention amount (quantum of profiteering) and, if so, its computation.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Contravention of Section 171(1) CGST Act, 2017 (overall question)
Legal framework: Section 171(1) CGST Act, 2017 imposes an obligation on suppliers to pass on the benefit of reduction in rate of tax to recipients by way of commensurate reduction in prices.
Precedent treatment: The matter was re-opened for re-investigation in light of a judgment of the High Court (Writ Petition (C) No. 7743/2019 dated 29.01.2024), and the CCI directed re-investigation accordingly; the Tribunal notes those directions and ensuing actions.
Interpretation and reasoning: Multiple independent investigations were conducted by the DGAP (initial report dated 15.12.2021, remand investigation resulting in report dated 27.01.2023, re-investigation after CCI direction, and final report dated 23.05.2025). On each occasion, the DGAP concluded there was no contravention of Section 171(1). The Tribunal examined the record and the DGAP's repeated findings and found no material to displace the consistent investigative conclusion.
Ratio vs. Obiter: The Tribunal's acceptance of the DGAP's repeated investigative conclusion that there was no contravention is ratio decidendi for the disposal of the reference before it; the observation that multiple reinvestigations were conducted under higher authority directions and still yielded the same conclusion is dispositive rather than obiter.
Conclusion: The Tribunal accepts the DGAP's report and concludes there was no contravention of Section 171(1) by the Respondent.
Issues 2-4 - Reduction/refixing/displaying MRPs; affixing reduced MRPs on stock; charging of GST post rate-change
Legal framework: Obligation to reflect commensurate reduction in price and make it known through MRP adjustments, markings on existing stock (stickers/stamps/online printing), and through invoicing practices consistent with the reduced rate.
Precedent treatment: These specific factual inquiries were remitted by the NAA to DGAP for detailed fact-finding; the DGAP's scope included checking MRP displays, communication to dealers, physical marking of stock and taxation charged post rate change.
Interpretation and reasoning: The DGAP's investigations addressed whether MRPs were reduced/re-fixed and displayed, whether reduced MRPs were affixed to stock, and whether post-15.11.2017 sales bore a reduced GST incidence. After examining records and dealer interactions across successive inquiries, DGAP concluded no failure to pass benefit in these respects. The Tribunal reviewed the DGAP's reports and found no contrary material warranting a different conclusion.
Ratio vs. Obiter: The finding that evidence did not establish failure to reduce MRPs or to mark stock and that GST was not improperly charged is part of the operative reasoning (ratio) sustaining acceptance of the DGAP report.
Conclusion: On the factual matrix investigated, the Tribunal accepts that MRPs and dealer communication practices did not amount to a breach of Section 171(1), and there is no established practice of charging 18% GST on impacted SKUs after the rate reduction that would constitute contravention.
Issue 5 - Alleged base-price increase and crude oil cost justification
Legal framework: Suppliers may adjust base prices for legitimate cost increases, but such increases proximate to a tax-rate reduction may attract scrutiny to determine whether price hikes negate the benefit of tax reduction.
Precedent treatment: NAA had specifically directed enquiry into grounds for base-price increase in November 2017 and evidence regarding crude oil price movements relied upon to justify increases; DGAP's remand reports addressed these points.
Interpretation and reasoning: DGAP examined the Respondent's asserted rationale (increase in crude oil prices) and the evidence relied upon. The DGAP repeatedly determined that the available evidence did not demonstrate contravention of Section 171(1). The Tribunal, having perused the investigation records and reports, found no material to displace DGAP's conclusion that price changes were not a proximate contravention of the statutory obligation to pass on tax-rate reduction benefits.
Ratio vs. Obiter: The Tribunal's acceptance that the Respondent's base-price adjustments, as supported by the investigative record, do not establish unlawful profiteering is part of the court's operative conclusion.
Conclusion: The DGAP's finding that claimed cost increases (including crude oil-related claims) do not establish contravention is accepted; no quantum of profiteering is made out on that basis.
Issue 6 - Quantum of profiteering
Legal framework: If contravention under Section 171(1) is established, DGAP/NAA/Tribunal must quantify the profiteering amount and prescribe remedial measures per statutory scheme.
Precedent treatment: DGAP repeatedly investigated and did not find a contravention; therefore, quantification was not undertaken as a requisite remedial step.
Interpretation and reasoning: Because the factual and evidentiary inquiries concluded absence of contravention on multiple investigations (including re-investigation per CCI direction and final DGAP report of 23.05.2025), there is no basis to compute or impose any quantum of profiteering.
Ratio vs. Obiter: The conclusion that no quantum is payable flows directly from the primary finding of no contravention and is a ratio of disposition.
Conclusion: No quantum of profiteering is established or imposed.
Disposition and Administrative Direction
Interpretation and reasoning: Given repeated investigations under higher authorities and consistent findings of no contravention, the Tribunal accepts the DGAP report dated 23.05.2025 and disposes of the reference accordingly.
Conclusion: The DGAP report is accepted; the matter is closed with directions to send a copy of the order to the Respondent and concerned Commissionerate for any action as may be necessary. The Tribunal's acceptance of the investigative conclusion is final for the proceedings before it.
Profiteering - Respondent has not passed the commensurate benefit of the Reduction of tax rate to Recipient - HELD THAT:- It is apparent that the investigation was conducted by the DGAP on several occasions under the direction of the higher authorities. On the basis of investigation, the DGAP arrived at the conclusion that the Respondent has not contravened with any provisions as contained under section 171(1) of the CGST, Act, 2017. Therefore, the report of the DGAP dated 23.05.2025 deserves to be accepted.
The report submitted by DGAP dated 23.05.2025 is accordingly accepted.
ISSUES PRESENTED AND CONSIDERED
1. Whether a notice under Section 148 read with Section 147 of the Income Tax Act can be sustained in the absence of stated "reasonable grounds" or specification of material forming the basis of the assessing officer's belief that income had escaped assessment.
2. Whether a writ petition challenging proceedings under Sections 147/148 is maintainable where the notice under Section 148 has not been annexed to the writ and there is significant delay between issuance of notice and filing of the petition.
3. Whether a writ petition directed against reopening of assessment becomes infructuous once a final assessment order has been passed, and if so, whether the writ court should entertain merits or direct the petitioner to avail statutory remedies.
4. Whether the High Court may adjudicate disputed questions of fact in a writ proceeding challenging assessment proceedings, or whether the availability of alternative efficacious statutory remedies precludes such interference.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Requirement of reasonable grounds for reopening under Sections 147/148
Legal framework: Reopening under Section 147/148 is permissible only where the assessing authority has a "reason to believe" that income chargeable to tax has escaped assessment; such belief must be based on relevant and material reasons and cannot be arbitrary or merely speculative.
Precedent Treatment: Reliance is placed by the petitioner on recent authoritative decisions (noted from the record) affirming that vague or unspecific assertions of evasion are insufficient and that reopening must specify the material on which the belief is founded.
Interpretation and reasoning: The Court reiterated the principle that a mere ipse dixit or unsubstantiated suspicion by the assessing officer does not satisfy the statutory requirement. The belief must spring from tangible material; the Department must state reasonable grounds for reopening so that the court can examine whether the statutory threshold was crossed.
Ratio vs. Obiter: Ratio - the statutory requirement that a reopening must rest on material leading to a reasonable belief and cannot be founded on vague allegations. Obiter - none beyond application to facts, since the Court did not proceed to decide whether the particular reopening met the standard due to procedural deficiencies in the petition.
Conclusions: The Court affirmed the legal principle requiring specification of reasonable grounds for reopening, but did not finally adjudicate whether the notice in question complied because the notice was not before the Court.
Issue 2 - Maintainability where Section 148 notice is not annexed and delay in challenging
Legal framework: Writ jurisdiction under Article 226 is discretionary; challenge to tax notices ordinarily requires the document under challenge to be placed before the Court so compliance with procedural and pleading requirements is essential. Timeliness and completeness of pleadings are material to maintainability.
Precedent Treatment: The Court applied settled procedural expectations without purporting to overrule any precedent-emphasising that a petition must disclose and annex the precise instrument impugned to enable judicial scrutiny.
Interpretation and reasoning: The Court found no copy of the Section 148 notice annexed to the petition and noted an inordinate delay (notice issued much earlier than petition). Absent the notice, the Court could not examine compliance with the precedents relied upon by the petitioner nor determine whether reasonable grounds were stated. The omission materially impaired the Court's ability to adjudicate the challenge.
Ratio vs. Obiter: Ratio - a writ challenging an assessment notice must ordinarily annex the notice; failure to do so and unexplained delay can render the writ unsuitable for adjudication. Obiter - observations as to counsel's explanations were accepted as factual narrative but did not alter the legal conclusion on maintainability.
Conclusions: The petition was procedurally deficient because it did not include the Section 148 notice and was filed after a long delay; this impeded judicial review of the asserted statutory compliance.
Issue 3 - Effect of final assessment order on the writ challenge to reopening
Legal framework: A writ challenging reopening may become academic or infructuous if a final assessment order has been passed and the statutory appellate remedies against that order are available and unexhausted.
Precedent Treatment: The Court applied the established principle that writ relief is inappropriate where an efficacious alternative remedy exists under the statute and where the contested action has been overtaken by a final order.
Interpretation and reasoning: The Court noted that a final assessment order (dated 31.12.2009) had been passed and produced in court; the petitioner had not challenged that order. In these circumstances, issuing relief directed at the earlier notice would be futile. The availability of statutory remedies against the final assessment order militated against entertaining the writ on merits.
Ratio vs. Obiter: Ratio - a writ becomes infructuous when a final assessment order has been passed and the petitioner has alternative efficacious statutory remedies; the writ court should decline to grant substantive relief and leave the petitioner to challenge the final order before the appropriate forum. Obiter - procedural directions given to appellate authority to decide independently if and when a challenge is filed.
Conclusions: The writ petition was dismissed as infructuous because the final assessment order had been passed and the petitioner retains statutory avenues of challenge against that order.
Issue 4 - Jurisdiction to probe disputed questions of fact in writ challenge to tax proceedings and direction as to alternative remedy
Legal framework: Writ jurisdiction does not ordinarily extend to re-appreciation of disputed questions of fact where a statute provides a remedy; courts exercising writ jurisdiction avoid venturing into factual controversies better suited to the statutory machinery of assessment and appeal.
Precedent Treatment: The Court applied the settled principle that writ courts refrain from entering into factual issues that are triable under the statutory scheme, particularly in tax matters where elaborate procedures and appellate forums are provided.
Interpretation and reasoning: The Court observed that adjudication of the petitioner's factual contentions (e.g., legitimacy of purchases, compliance with Section 40A(3), results of survey) would involve disputed fact-finding which is not appropriate in writ jurisdiction, particularly where a final assessment order exists and statutory remedies are available.
Ratio vs. Obiter: Ratio - writ courts should not adjudicate contested factual issues in tax assessment matters when alternative efficacious statutory remedies exist. Obiter - specific guidance that the appellate authority must decide any statutory appeal independently and not be influenced by court observations.
Conclusions: The Court declined to examine disputed factual contentions and directed the petitioner to pursue statutory remedies against the final assessment order; the writ was dismissed without costs and interim relief vacated.
Reopening of assessment -Reasons to believe - allegation of large-scale evasion of taxable income - Reliance on judgments in the case of Sabh Infrastructure Ltd. [2024 (2) TMI 168 - SC ORDER] and Sabh Infrastructure Ltd. [2017 (9) TMI 1589 - DELHI HIGH COURT] particularly to bolster his contention that the petitioner never suppressed anything during the assessment. The petitioner had candidly disclosed all material facts, but the Income Tax Department suspected evasion for the assessment year 2005-06, without any sufficient material facts and information as to how the petitioner had failed to disclose. Therefore, the Petitioner prays for setting aside the aforesaid notices.
HELD THAT:- This court finds no copy of notice issued under section 148 of the said Act annexed with the petition. Therefore, it is very difficult to find out whether it was issued without following the guidelines of the Hon’ble Court mentioned in the aforesaid judgements referred by the Petitioner.
Income Tax Department handed over a copy of the final assessment order dated 31.12.2009, whereby the concerned ITO assessed the taxable income, rounding off Rs. 38,46,690/- and asked to compute tax, surcharge, education cess and further interest etc.NIn the above backdrop, this court is of the opinion that the present writ petition ultimately becomes infructuous since the final assessment order has already been passed long back. The same has not been challenged as yet by the petitioner.
There is no scope to issue a writ of mandamus commanding the authority concerned to set aside the notice issued long back and when final assessment order has already been passed. A copy of the assessment order has already been handed over to the Learned counsel for the petitioner in court on 10.09.2025.
It is well settled that a writ Court cannot enter into the disputed question of fact involved in the matter. The writ petitioner has an alternative efficacious remedy under the provisions of the Income Tax Act, 1961 against the final assessment order. Therefore, no useful purpose would be served in keeping the writ petition pending for adjudication.
ISSUES PRESENTED AND CONSIDERED
1. Whether a notice under Section 148 issued in the name of a different entity with a different PAN and assessment year (due to an admitted clerical/error) is material and fatal to the reassessment proceeding when a contemporaneous order under Section 148A(d) names the correct assessee and PAN.
2. Whether reassessment proceedings initiated under the new Section 148/148A regime (post-amendment) are time-barred when an earlier notice under the old regime was treated as a deemed show-cause notice by higher judicial authority, and the surviving period computed under the Income Tax Act read with the temporary extension statute (TOLA) plus the exclusionary principles and post-deeming procedural timeline result in expiry of the surviving period before issuance of the Section 148 notice under the new regime.
3. Whether the statutory procedure required after receipt of the assessee's reply to a deemed show-cause notice (consideration under Section 149A(c), decision under Section 149A(d), and issuance of notice under Section 148) must be completed within the surviving time limit made available by the legal fiction and TOLA, and whether failure to do so vitiates jurisdiction.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Validity of notice where Section 148 notice incorrectly names a different entity
Legal framework: Notices under Section 148 must be addressed to the taxable person whose income is sought to be reopened; correspondence must correctly identify the assessee and PAN to confer clarity and jurisdictional notice.
Precedent Treatment: The Court recognized prior authority addressing materially identical discrepancies where such errors led to setting aside the impugned action. The present judgment notes that the respondents admitted the mistake and issued a corrected notice on the same date.
Interpretation and reasoning: The Court treated the admitted error as a clerical mistake corrected contemporaneously. The petitioner's reliance on an earlier decision addressing similar discrepancies was accepted as a relevant precedent, but because the respondents rectified the error by issuing a corrected notice along with the 148A(d) order on the same date, the mistake was characterized as inadvertent and curable.
Ratio vs. Obiter: The Court's remarks on the curability of contemporaneously corrected clerical errors in a 148 notice are obiter to the extent they do not form the primary basis for decision in this petition; the dispositive ground was limitation. However, the Court acknowledged that identical discrepancies have earlier led to setting aside in other proceedings.
Conclusion: The incorrect naming of the entity in the initial Section 148 notice, being an admitted mistake corrected on the same date, was not treated as the decisive ground to set aside the reassessment. The Court did not rely on this point to uphold relief; it proceeded to determine limitation issues which were dispositive.
Issue 2 - Time-bar and computation of surviving period under the legal fiction and TOLA
Legal framework: Amendments to reassessment provisions and a temporary extension statute (TOLA) altered limitation timelines. A higher judicial decision created a legal fiction treating certain notices issued under the old regime as deemed show-cause notices under the new regime. The surviving or balance time available to the Revenue to complete reassessment steps is calculated as the days between the date of issuance of the deemed notice and the last date extended by TOLA. Statutory exclusions apply: (a) period between deemed notice and supply of relevant information/material as directed by the Court creating the fiction; (b) the two-week period allowed to the assessee to reply (third proviso to Section 149); and (c) any additional time while the clock is stopped as per judicial directions.
Precedent Treatment: The Court relied on higher-court authority which held that the legal fiction must be given full operative consequences: the surviving time should be computed from the date of the deemed notice to the TOLA-extended cut-off; exclusions mandated by the higher authority must be deducted; and the assessing officer must complete post-reply steps within that surviving period. That authority also held reassessment notices issued beyond the surviving time limit are invalid for lack of jurisdiction.
Interpretation and reasoning: Applying the framework to the factual timeline submitted by the petitioner, the Court computed: deemed notice date = 08.06.2021; TOLA-extended cut-off = 30.06.2021; surviving days = 22. The assessee was supplied information post the higher-court judgment on 18.05.2022; replies were filed on 02.06.2022 and 16.06.2022. Excluding the period of deemed stay (08.06.2021 to 16.06.2022) and starting the clock from 16.06.2022, the assessing officer had 22 days (surviving period) - i.e., until 08.07.2022 - to issue notice under Section 148. The impugned Section 148 notice was actually issued on 25.07.2022, beyond the calculated last permissible date.
Ratio vs. Obiter: The holding that the surviving period must be strictly observed and that a notice issued beyond it is time-barred is ratio and dispositive. The calculation applying the exclusions and the legal fiction, as per the controlling precedent, constitutes binding reasoning in the present matter.
Conclusion: The reassessment notice under Section 148 dated 25.07.2022 was issued after the surviving period had expired and therefore is time-barred and invalid. The consequent order under Section 148A(d) and any assessment flowing therefrom lack jurisdiction and are liable to be set aside.
Issue 3 - Mandatory post-reply procedural steps and jurisdictional consequences of non-compliance with surviving time limit
Legal framework: After receipt of assessee's reply to a deemed show-cause notice, the assessing officer must (i) consider the reply under Section 149A(c), (ii) decide under Section 149A(d) whether the case warrants reassessment, and (iii) issue notice under Section 148 if fit. These steps must be performed within the surviving time limit made available by the legal fiction and TOLA, and prior approval requirements (Section 151) must also be satisfied before issuing reassessment notices.
Precedent Treatment: The Court followed higher-court authority that treated these post-reply obligations as part of the temporal jurisdictional fabric: the clock starts only after the Revenue receives the reply, and once it starts, the remaining procedures must be completed within the surviving period; failure to do so renders any later notice invalid for want of jurisdiction.
Interpretation and reasoning: Applying the above, the Court found that the assessing officer's window to perform the post-reply steps closed on 08.07.2022. Since the Section 148 notice was issued on 25.07.2022 and (as represented) the final assessment was passed subsequently, the statutory timeline for completing the mandated steps had expired; accordingly, the assessing officer lacked jurisdiction to validly issue the notice or pass consequent orders.
Ratio vs. Obiter: The conclusion that post-reply statutory steps are jurisdictional and time-bound under the surviving period is ratio and central to invalidating the later acts.
Conclusion: Non-completion of the mandated post-reply procedures within the surviving time rendered the Section 148 notice and subsequent assessment order void for lack of jurisdiction; accordingly both the order under Section 148A(d), the Section 148 notice dated 25.07.2022, and the assessment order passed pursuant thereto were set aside.
Relief and Disposition
Applying the legal framework, controlling precedents, the factual timeline, and the computed surviving period with required exclusions, the Court set aside the order under Section 148A(d), the notice under Section 148 dated 25.07.2022, and the assessment order passed pursuant thereto on the ground of being time-barred and without jurisdiction. The petition was disposed of accordingly.
Reopening of assessment u/s 147 - period of limitation to issue notice - validity of a notice issued u/s 148/148A - scope of Taxation and other laws (Relaxation and Amendment of certain provisions) Act, 2020 (TOLA) application - provisions of the new reassessment law introduced by the Finance Act, 2021 - calculating the surviving period - HELD THAT:- We find that the issue, which has been raised is covered by the judgment of Hon’ble Supreme Court of India in Union of India v. Rajeev Bansal [2024 (10) TMI 264 - SUPREME COURT (LB)] held that Income Tax Act read with TOLA extended the time limit for issuing reassessment notices u/s 148, which fell for completion from 20 March 2020 to 31 March 2021, till 30 June 2021. All the reassessment notices under challenge in the present appeals were issued from 1 April 2021 to 30 June 2021 under the old regime. Ashish Agarwal (supra) deemed these reassessment notices under the old regime as show cause notices under the new regime with effect from the date of issuance of the reassessment notices. The effect of creating the legal fiction is that this Court has to imagine as real all the consequences and incidents that will inevitably flow from the fiction.
The logical effect of the creation of the legal fiction by Ashish Agarwal [2022 (5) TMI 240 - SUPREME COURT] is that the time surviving under the Income Tax Act read with TOLA will be available to the Revenue to complete the remaining proceedings in furtherance of the deemed notices, including issuance of reassessment notices under Section 148 of the new regime. The surviving or balance time limit can be calculated by computing the number of days between the date of issuance of the deemed notice and 30 June 2021.
If this Court had not created the legal fiction and the original reassessment notices were validly issued according to the provisions of the new regime, the notices under Section 148 of the new regime would have to be issued within the time limits extended by TOLA. As a corollary, the reassessment notices to be issued in pursuance of the deemed notices must also be within the time limit surviving under the Income Tax Act read with TOLA. This construction gives full effect to the legal fiction created in Ashish Agarwal (supra) and enables both the assesses and the Revenue to obtain the benefit of all consequences flowing from the fiction.
To assume jurisdiction to issue notices under Section 148 with respect to the relevant assessment years, an assessing officer has to:
(i) issue the 204 notices within the period prescribed under Section 149(1) of the new regime read with TOLA; and
(ii) obtain the previous approval of the authority specified under Section 151. A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the assessing officer. Therefore, the reassessment notices issued under Section 148 of the new regime, which are in pursuance of the deemed notices, ought to be issued within the time limit surviving under the Income Tax Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time barred.
Thus, it is necessary to state at this stage, that the counsel for the respondents has informed us that the final assessment order has been passed on 22.05.2023. If that be so, the order passed under Section 148A(d) dated 25.07.2022, notice under Section 148 dated 25.07.2022 of the Act and the assessment order passed thereof are set aside.
ISSUES PRESENTED AND CONSIDERED
1. Whether the transfer-pricing adjustment to disallow/limit brand royalty payments (Vodafone / Essar) and adopt CUP comparables based on related-party agreements was sustainable.
2. Whether fees paid for acquisition/right to use 3G spectrum qualify as capital expenditure forming intangible asset eligible for depreciation under section 32, or are exigible to amortisation under section 35ABB / 35ABA.
3. Whether penalty paid to the licensing authority (Department of Telecommunication) for non-compliance of license terms is allowable as business/contractual expenditure (Section 37) or is disallowable under the Explanation to Section 37(1) as statutory penalty.
4. Whether estimated Asset Restoration Cost (ARC) obligation recorded and capitalized forms part of actual cost of a capital asset and is eligible for depreciation, or is an unascertained/ non-allowable expenditure.
5. Whether reversal/write-back of liabilities (relating to prior supply of capital equipment) gives rise to income taxable under section 41(1) or value of benefit/perquisite taxable under section 28(iv), and the effect on block WDV/depreciation.
6. Whether discounts extended to pre-paid distributors constitute "commission" attracting withholding obligation under section 194H and disallowance under section 40(a)(ia) for failure to deduct TDS.
7. Whether roaming charges payable to other operators are subject to withholding obligations and disallowance under section 40(a)(ia) for non-deduction of TDS.
8. Whether amounts described as license fee/license-maintenance payments (WPC-royalty / spectrum-related recurring payments) are revenue-deductible under section 37 or are capital in nature and to be capitalised.
9. Whether payments to IBM described/classified under accounts (finance lease / capitalised assets) are revenue deductible (lease rentals) or capitalisable and to be amortised; and whether accounting classification (AS-19) is determinative.
10. Whether an amount written off in post-merger accounting (miscellaneous expenditure arising from court-approved demerger schemes and subsequently aligned under AS-14) could be adjusted back for computation of book profits under section 115JB beyond items permitted by Explanation 1.
11. Whether certain other grounds (13-16) required remand for factual verification.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Transfer-pricing adjustment on brand/royalty payments
Legal framework: Chapter X (sections 92-92F) and Rules (Rule 10B) prescribe arms' length price determination and the sequence/selection of most appropriate method (CUP, TNMM, etc.).
Precedent treatment: Coordinate tribunal decisions (Ahmedabad bench and others) hold that CUP requires comparable uncontrolled transactions (not internal/related-party agreements) and that TNMM may be appropriate where direct CUP comparables are absent; prior decisions of the assessee's group were cited in favour of the assessee.
Interpretation and reasoning: The Tribunal found the TPO/AO relied on controlled related-party agreements (or internal comparables) to adopt CUP or to select a particular related-party comparable (Virgin), contrary to Rule 10B requirement that CUP comparables be uncontrolled transactions between independent parties. The revenue failed to distinguish facts from cases where CUP can legitimately be applied; coordinate Bench precedent and group rulings supported treating the TNMM/other methods as appropriate and rejecting internal controlled comparables.
Ratio vs. Obiter: Ratio - where CUP is applied, the comparable must be an uncontrolled transaction; internal/related party agreements cannot be used as CUP comparables. Obiter - factual comments on identity of specific comparables.
Conclusion: Transfer pricing adjustment of Rs. 1,20,54,47,020 was directed to be deleted; royalty payments accepted (i.e., no upward adjustment) following tribunal precedent and methodological rules.
Issue 2 - Depreciation on 3G spectrum fees
Legal framework: Section 32 allows depreciation on assets owned by the taxpayer; section 35ABB / 35ABA (as introduced later) deal with amortisation of license fees for telecommunication - applicability depends on statutory insertion dates. Accounting classification as intangible asset is relevant for accounts but tax treatment governed by the Act.
Precedent treatment: Tribunal decisions in group cases (consolidated orders for erstwhile group entities and other ITAT/HC orders) decided in favour of allowing depreciation/amortisation as claimed by the assessee for relevant years.
Interpretation and reasoning: The Tribunal noted spectrum fees were treated as capital expenditure and shown as intangible asset in audited financials; provisions providing for amortisation of licence fees (section 35ABA) were not in force for the year under consideration. Following group precedents and facts, the Tribunal found disallowance was not sustainable.
Ratio vs. Obiter: Ratio - where statutory amortisation provisions are not in force and the fee is capital in nature and recorded as intangible asset, depreciation claim under section 32 is allowable as per precedent. Obiter - observations on future statutory amendments.
Conclusion: Disallowance of depreciation of Rs. 12,47,17,47,967 was overturned; ground allowed in favour of the taxpayer.
Issue 3 - Penalty paid to licensing authority (DOT)
Legal framework: Section 37(1) disallows expenditures which are capital or personal; Explanation to section 37(1) excludes statutory penalties from allowance. Distinction between contractual liability and statutory penalty determines deductibility.
Precedent treatment: Tribunal and High Court precedents in group cases supported allowability where payments are contractual liabilities and not statutory penalties; decisions cited (group precedents) favored assessee.
Interpretation and reasoning: The Tribunal accepted that the payment arose under contractual liability under licence agreements and was incurred as a business/contractual expense necessary for conduct of business. Reliance on group precedents led to treating the expense as allowable under section 37 rather than falling within Explanation to section 37(1).
Ratio vs. Obiter: Ratio - contractual penalties/compensations payable under agreements may be deductible if not statutory penalties; assessing officer must distinguish statutory fines from contractual obligations. Obiter - factual dependency on nature of licence and enforcement mechanism.
Conclusion: Disallowance of Rs. 21,39,94,348 was reversed; ground allowed.
Issue 4 - Asset Restoration Cost (ARC) capitalisation and depreciation
Legal framework: AS-29 (Provisions, Contingent Liabilities and Contingent Assets) requires recognition of provision where obligation exists; section 43(1) defines actual cost; section 32 allows depreciation on assets owned. Whether ARC forms part of cost of a capital asset depends on attribution and legal/contractual obligation.
Precedent treatment: Accounting standards/case law accept that where a restoration obligation is directly attributable to acquisition/bringing asset into use, the estimated cost/provision may form part of cost; tribunal precedents and group HC decisions addressed similar facts.
Interpretation and reasoning: The Tribunal found lease agreements created a present legal obligation to restore sites; AS-29 compels making provision; the ARC is directly attributable to the cost of acquiring/creating the asset (installation of cell sites) and therefore could be capitalised and depreciated. Alternate plea as revenue was also acceptable if not capitalised.
Ratio vs. Obiter: Ratio - where a legal/contractual restoration obligation exists and the cost is directly attributable to bringing the asset into use, the ARC provision may be capitalised and depreciation allowed. Obiter - remarks on timing of actual cash outflow.
Conclusion: Disallowance of depreciation of Rs. 2,36,69,878 on ARC was reversed; ground allowed.
Issue 5 - Written-back liabilities (capital creditors) and taxability under section 41(1) / 28(iv)
Legal framework: Section 41(1) taxes escapements where allowed deduction in earlier years is recovered; section 28(iv) taxes value of benefits/perquisites arising from business. Whether reversal of capital creditors (previously capitalised) generates taxable income depends on nature of original liability and use of assets.
Precedent treatment: Authorities relied on Binjrajka and other decisions distinguishing reversal of capital liabilities (capital creditors) from trading liabilities; Supreme Court precedent (Mahindra & Mahindra) on waiver of loan for capital assets was discussed and found distinguishable.
Interpretation and reasoning: The Tribunal found the written-back liabilities related to supply of capital equipment that had been capitalised and used; reversal of such capital creditor does not fall within section 41(1) (which refers to loss/expenditure/trading liabilities) and is not a benefit/perquisite under section 28(iv) in the absence of consideration for rendering business/professional services. However, the DRP directed AO to recompute WDV to disallow depreciation previously claimed; Tribunal analyzed facts and distinguished Supreme Court loan-waiver authority.
Ratio vs. Obiter: Ratio - reversal of capital creditors for capitalised assets is not taxable under section 41(1); impact on depreciation and WDV requires adjustment under normal block provisions rather than immediate taxation as business income. Obiter - distinguishing facts from loan-waiver jurisprudence.
Conclusion: Claim that amount cannot be taxed under section 41(1) accepted in principle; the addition under section 28(iv) dismissed; necessary recomputation/directional adjustments to WDV addressed as per DRP guidance and law; assessee's ground in this respect succeeded in part (DRP direction on WDV noted but section 41(1) taxation rejected).
Issue 6 - Discounts to prepaid distributors and withholding under section 194H / disallowance under section 40(a)(ia)
Legal framework: Section 194H imposes TDS on commission and brokerage; section 40(a)(ia) disallows expenditure where TDS obligations are not complied with.
Precedent treatment: Apex Court and coordinate bench decisions (Bharti Cellular Ltd. and group precedents) clarified scope of "commission" and applicability of withholding obligations to distributor discounts in telecom context.
Interpretation and reasoning: Tribunal relied on Supreme Court and appellate precedents holding that distributor discounts of the character involved do not constitute commission attracting section 194H, and thus failure to deduct TDS does not attract disallowance under section 40(a)(ia).
Ratio vs. Obiter: Ratio - where discount to distributors is not in nature of commission, section 194H/TDS obligations do not arise and section 40(a)(ia) cannot be invoked. Obiter - fact-sensitive characterisation.
Conclusion: Disallowance of Rs. 6,6,47,91,228 under section 40(a)(ia) was reversed; ground allowed.
Issue 7 - Roaming charges and withholding (section 40(a)(ia))
Legal framework: Same as Issue 6 - withholding obligations depend on nature of payment; prior DRP and tribunal orders in related assessment years considered.
Precedent treatment: Coordinate benches and jurisdictional High Court orders (Tata Teleservices and others) have ruled in favour of assessees on identical facts; the assessee's subsequent practice of deducting TDS in later years is noted.
Interpretation and reasoning: Tribunal followed earlier DRP/tribunal conclusions for identical factual matrix, and applied consistent precedent reasoning to hold that disallowance was not sustainable.
Ratio vs. Obiter: Ratio - identical factual issues previously adjudicated in favour of a taxpayer bind the present decision absent distinguishing facts. Obiter - comments on later compliance practice.
Conclusion: Disallowance of Rs. 4,54,75,74,959 under section 40(a)(ia) was reversed; ground allowed.
Issue 8 - Capitalisation of license fees (WPC-royalty) claimed as revenue under section 37
Legal framework: Distinction between capital and revenue expenditure; section 37 permits revenue deductions; Supreme Court authority (Bharti Hexacom) clarifies capital/revenue treatment of license-related payments and consequences.
Precedent treatment: Supreme Court decision favoured revenue/capital characterisation that in similar facts required capitalisation; tribunal precedent allowed amortised deduction to extent attributable to the year.
Interpretation and reasoning: Having regard to Supreme Court authority, the Tribunal held the payment to be capital in nature and therefore confirmed the addition of the full claimed sum; however, the assessee is entitled to deduction to the extent of amortised amount pertaining to the year as permitted by precedents.
Ratio vs. Obiter: Ratio - where higher court has held license payments capital in nature, assessing authority must treat them as capital; annual amortisation deduction may be allowed to extent provided by law/precedent. Obiter - allocation mechanics.
Conclusion: Addition of Rs. 9,31,78,54,060 was confirmed (ground dismissed), subject to allowance of amortised deduction for the year per applicable law.
Issue 9 - Payments to IBM (finance lease / capitalisation v. revenue deduction)
Legal framework: AS-19 classification of leases vs tax law where ownership, contractual terms and substance determine tax treatment; CBDT circular and case law hold accounting classification not determinative of tax consequence; lessee may not be entitled to depreciation; lease rentals may be revenue deductible under section 37.
Precedent treatment: Tribunal, High Court decisions (Minda Corporation, Rajshree Roadways, other coordinate decisions) hold that even finance lease payments may be revenue deductible depending on substantive ownership and contractual rights.
Interpretation and reasoning: Tribunal examined substance over form: IBM retained legal/beneficial ownership; payments essentially for use of hardware; accounting finance-lease classification did not mandate capitalisation for tax purposes. Following coordinate precedent, the Tribunal treated the payments as revenue deductible lease rentals.
Ratio vs. Obiter: Ratio - accounting characterisation as finance lease does not conclusively determine tax treatment; where beneficial ownership remains with lessor, lease payments are revenue deductible. Obiter - emphasis on detailed factual assessment of ownership rights.
Conclusion: Disallowance of Rs. 77,37,57,192 (net) was reversed; finance lease payments to IBM to be allowed as revenue expenditure (ground allowed).
Issue 10 - Upward adjustment to book profits under section 115JB for miscellaneous expenditure written off post-merger
Legal framework: Section 115JB (MAT) and Explanation 1 prescribe limited adjustments to accounting profits; Supreme Court authorities (Apollo Tyres, HCL Comnet) restrict AO's power to modify net profit beyond specified adjustments where accounts are certified under Companies Act; AS-14 requires uniform accounting policies on amalgamation.
Precedent treatment: Supreme Court authorities clearly limit AO to Explanation-listed adjustments; group facts showed court-approved demerger/amalgamation schemes specifying accounting treatment adopted in audited statements.
Interpretation and reasoning: The Tribunal found that the write-off arose from court-approved demerger schemes and later alignment under AS-14 during amalgamation; the amount debited to P&L was in line with approved accounting policies and audited financials. Since the adjustment did not fall within Explanation 1 to section 115JB(2), AO/DRP lacked jurisdiction to make the MAT addback.
Ratio vs. Obiter: Ratio - MAT book profit computation cannot be adjusted by AO beyond the statutory list in Explanation 1 where accounts are certified; adjustments to accounting treatment arising from court-approved schemes and AS-14 alignment are to be respected. Obiter - fact dependence on nature of scheme and certification.
Conclusion: Upward addition of Rs. 18,79,70,00,000 to book profits under section 115JB was disallowed; ground allowed in favour of the assessee.
Issue 11 - Grounds 13-16 (remand for factual verification)
Legal framework: Where issues are fact-sensitive and require fresh evidence/verification, remand to assessing officer for adjudication on facts and application of law is appropriate.
Interpretation and reasoning: Tribunal found these grounds required further factual enquiry and therefore remitted them to the AO for verification and decision according to law.
Conclusion: Grounds remitted to AO for factual verification and adjudication; allowed for statistical purpose.
TP Adjustment - Payment of brand to royalty made for obtaining the right to use of 'Vodafone' and 'Essar' trademarks and trade names - upward adjustment on the basis of related party transactions after adopting CUP method instead of TNMM -HELD THAT:- We observed that ITAT Ahmedabad Bench [2016 (11) TMI 1544 - ITAT AHMEDABAD] held a comparable un-controlled transaction instead of a controlled forms sine qua non for determining ALP of an international transaction between two associate enterprises leaving behind no scope of application of estoppel principle or acceptance of agreed prices in absence of an comparable un-controlled transaction. Revenue's vehement contentions advanced in the course of hearing seeking to invoke estoppel principle fails to convince us.
We further deem it appropriate to observe at this stage that the impugned assessment year 2002-03 is the first full fledged business of year after introduction of chapter X transfer pricing provision incorporated in the act.
TPO's order does not even issue a show cause notice disagreeing with assessee's TNMM method. He has rather proceeded to adopt CUP method(supra) again by ignoring the fundamental condition of applying the same. Same is the case with CIT(A) who has proceeded on revenue neutral implication without even taking into section 92(1) r.w.s. 92C and 92C(4) proviso along with rules discussed hereinabove at length. There is hardly any dispute that this chapter and the rules notified thereunder prescribe that an arms length price is not the price an assessee is charging or paying for being a party in the international transaction in question but it is the price i.e. to be paid or charged in such a comparable controlled transaction in comparison to a comparable un-controlled transaction. We repeat that the TPO has not kept in mind this fine distinction. We accordingly reverse his action on this sole legal principle CIT(A) has already deleted the impugned adjustment. We find no reason to interfere in the lower appellate order albeit on a different score as enumerated hereinabove. This Revenue's ground is declined accordingly. Thus, we direct the Learned TPO / AO to delete the transfer pricing adjustment made in respect of international transaction towards payment of royalty.
Disallowance of depreciation in respect of right to use 3G Spectrum - AO disallowed the claim of depreciation and amortized the same u/s 35ABB as upheld by DRP - HELD THAT:- We find that similar issues was already considered by the ITAT Mumbai in the group case and decided the issues in favour of the assessee.
Disallowance of penalty imposed by the Department of Telecommunication - AO observed that penalty is on account of non-adherence to law and not on account of contractual violation, thus disallowed the same in terms of Explanation to section 37(1) of the Act - HELD THAT:- We find that similar issues was already considered by the ITAT Mumbai in the group case and decided the issues in favour of the assessee.
Disallowance of depreciation claimed on the addition to fixed assets on account of Asset Restoration Cost (“ARC”) obligation - AO rejected the contention of the Assessee and held that there was no legal obligation on the Assessee to incur the ARC and hence, the same is neither allowable u/s 37 of the Act nor it can be capitalized under the provisions of the Act - HELD THAT:- Decision of DCIT v/s. Erstwhile Vodafone Essar Digilink Ltd [2018 (6) TMI 1029 - ITAT DELHI] was appealed by the Assessee in the Hon’ble Delhi High Court [2025 (3) TMI 659 - DELHI HIGH COURT] titled Vodafone Mobile Services Ltd. v. DCIT / (Assessment Year 2009-10) and the Hon’ble High Court has, vide order dated 11.03.2025, held that the said expenses are allowable u/s 37 of the Act. Therefore, this issue stands covered in favour of the assessee by the decision of the Tribunal in the assessee’s group company’s case i.e. erstwhile “Vodafone India Limited.
Disallowance in respect of liabilities written back - AO rejected the claim of the Assessee alleging that Assessee has not established that the liability was capital in nature and even if it was capital, expenditure would have been claimed in terms of depreciation - HELD THAT:- As observed from the submissions that the liability pertains to the supply of capital equipment during the years 2004 and 2008. It was agreed between the parties that the liability shall no longer be payable, therefore, the assessee written back the same.
Assessee had purchased the capital equipment and capitalized the same, also utilized the same for the purpose of business during the period 2004 to 2008. Once the assessee recognizes the assets in their books, it becomes business assets. Therefore, as per the provisions of section 28(iv) of the Act, this liability is arising from business. Therefore, the submission of the LdAR is not acceptable. With regard toreliance in the case law Mahindra & Mahindra Ltd [2018 (5) TMI 358 - SUPREME COURT] the facts are, the loan was waived for acquiring the capital assets. The facts are distinguishable to the facts of the present case, in the given case, the assets were purchased and capitalized, this will not take the character of loan transactions rather it is business liability. Therefore, the ground raised by the assessee is dismissed.
Disallowance of discount extended to pre-paid distributors under section 40(a)(ia) - Non deduction of TDS u/s 194H - HELD THAT:- This issue is squarely covered in favour of the assessee in Bharti Cellular Ltd. [2024 (3) TMI 41 - SUPREME COURT] and Appellant’s own case for A.Y. 2012-13 [2024 (6) TMI 1433 - ITAT DELHI]
Disallowance of roaming charges u/s 40(a)(ia) - non deduction of TDS - HELD THAT:- This issue is squarely covered in favour of the assessee in Vodafone South Ltd. [2016 (8) TMI 422 - KARNATAKA HIGH COURT] Appellant’s own case for A.Y. 2012-13 [2024 (6) TMI 1433 - ITAT DELHI] AND M/s Tata Teleservices [2022 (6) TMI 129 - DELHI HIGH COURT].
Disallowance on account of capitalization of license fees u/s. 37(1) - We find that this issue is decided against the assessee by the decision of CIT Vs. Bharti Hexacom Ltd. [2023 (10) TMI 786 - SUPREME COURT].
Disallowance in respect of payments made to IBM - We observed that the assessee no doubt pays lease rent as finance lease and accordingly capitalized the same by following the AS 19, we observed that the various precedents of this issue indicate that as far as Income Tax is concerned, the lease payments are considered as revenue expenditure whether they are operating or finance lease, they are allowed as revenue expenditure. Thus, we direct the AO to allow the finance lease paid by the assessee on the assets acquired from IBM as revenue expenditure.
Disallowance on account of capitalisation of royalty – WPC expenses - This issue is squarely covered in favour of the assessee by the decision of Vodafone West Limited” (earlier known as Fascel Limited”) by the Hon’ble Delhi High Court [2008 (12) TMI 743 - DELHI HIGH COURT]. This issue has also been decided in favour in the assessee own case by the Hon’ble Delhi High Court [2016 (11) TMI 1702 - DELHI HIGH COURT].
Upward adjustment on account of Miscellaneous expenditure written off for computing book profits u/s 115JB - Assessee (along with its erstwhile entities except one entity) had filed a demerger scheme ("Demerger Scheme") for transfer of their Passive Infrastructure ('PI') assets to Vodafone Infrastructure Limited ('VInfL') with effect from 01.04.2009 - Hon’ble Supreme Court in the case of HCL Comnet Systems and Services Ltd [2008 (9) TMI 18 - SUPREME COURT] has again held that the Assessing Officer only has power to examine whether the books of accounts are duly certified by the authorities under the Companies Act and does not have jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent of the explanation. It is relevant to observe that the DRP accepted that the subject adjustment made in the instant case does not fall under any of the clauses of Explanation 1 to Section 115JB of the Act, yet it preceded to uphold the action of the AO. Therefore, in our considered view, the miscellaneous expenses carried forward in the erstwhile balance sheet of the merged entities are properly written off by the assessee by following and aligning the accounting standard regularly followed by it and which was also declared in their financial statement. Further, the relevant amount written off by the assessee does not fall any of the clauses of adjustments mentioned under explanation 1 to the section 115JB of the Act. Therefore, we are inclined to allow the ground raised by the assessee in this regard.
Issues: (i) Whether the additions made under section 68 of the Income-tax Act, 1961 in respect of cash deposits in the two proprietary business concerns were sustainable when the cash book was audited and the books of account were not rejected; (ii) whether the cash deposit in the assessee's personal bank account was fully explained or only partly explainable; (iii) whether the higher rate provision under section 115BBE of the Income-tax Act, 1961 could be applied to Assessment Year 2017-18.
Issue (i): Whether the additions made under section 68 of the Income-tax Act, 1961 in respect of cash deposits in the two proprietary business concerns were sustainable when the cash book was audited and the books of account were not rejected.
Analysis: The cash deposits in the two business concerns were found to have been made out of the closing cash balance reflected in the duly audited cash books as on 08.11.2016. The books of account for both concerns were produced, and the revenue authorities did not dispute the sales, purchases, or expenditure. Since the books were not rejected in the manner known to law and no concrete basis was shown to disbelieve the closing cash balance, the addition could not stand on the footing of unexplained cash credit.
Conclusion: The addition relating to cash deposits in the two business concerns was deleted in favour of the assessee.
Issue (ii): Whether the cash deposit in the assessee's personal bank account was fully explained or only partly explainable.
Analysis: For the personal account deposit, the assessee did not produce cogent evidence or bank statements to substantiate the explanation for the entire cash deposit. In the absence of supporting material, the explanation was accepted only to a limited extent, and the remaining portion was treated as not satisfactorily explained.
Conclusion: The addition was sustained to the extent of Rs. 3,75,000 and deleted for the balance, partly in favour of the assessee.
Issue (iii): Whether the higher rate provision under section 115BBE of the Income-tax Act, 1961 could be applied to Assessment Year 2017-18.
Analysis: The provision was held to apply only to transactions occurring on or after 01.04.2018. As the year under consideration was Assessment Year 2017-18, the provision could not be applied to the assessee's case for that assessment year.
Conclusion: The higher rate provision was held inapplicable to Assessment Year 2017-18 and relief was granted to the assessee on this issue.
Final Conclusion: The additions relating to the two business concerns were deleted, the personal account deposit was sustained only partly, and the higher rate provision was held inapplicable, resulting in partial relief to the assessee.
Ratio Decidendi: Where audited books of account are not rejected and the revenue disbelieves only the closing cash balance without concrete , additions for cash deposits routed through business concerns cannot be sustained under section 68; a separate personal cash deposit may be sustained only to the extent left unexplained; and the enhanced taxing provision under section 115BBE cannot apply retrospectively to an earlier assessment year.
Addition u/s 68 - Cash deposited during demonization period - HELD THAT:- AO has doubted only closing cash in hand as on 08/11/2016 without their being any concrete basis. AO committed grave error in estimating the interest under the head of profit and gain of business and profession without rejecting the books of accounts in the manner known to the law. Therefore, in our considered opinion, the said addition deposited in the account maintained in the name of M/s Anmol Rang and Rasayan Kendra and M/s Zensons and Company respectively is hereby deleted.
Cash deposited in HDFC Bank Account (current) maintained in Assessee’s personal name, the Assessee contended before the Lower Authorities that the parties to whom the assessee had advanced monies through his personal bank account maintained with HDFC Bank some time ago during the same year, had left the old currency notes with the assessee, immediately after announcement of demonetization by Govt. of India; and (ii) the assessee had deposited such cash (left by the agents, as explained earlier) as well as the surplus cash arising out of his activities relating to cloth odd-lots, in his personal bank account maintained with HDFC Bank during the demonetization period.
It is found that the Assessee has not provided any cogent evidence or even the bank statement in support of his claim. However, in the absence of any material we deem it fit to sustained he addition of Rs. 3,75,000/- and remaining addition of Rs. 3,75,000/- is hereby deleted.
Higher interest u/s 115BE - As in the case of Smile Microfinance Ltd. [2024 (11) TMI 1444 - MADRAS HIGH COURT] held that the above said provision of law applies to transaction occurred on or after 01/04/2018, accordingly, the same cannot be applied to the year under consideration i.e. Assessment Year 2017-18.
ISSUES PRESENTED AND CONSIDERED
1. Whether additions under section 69A (unexplained money) can be sustained where alleged entries arise from a seized diary found at a third-party's premises and no cash or assets were found in the assessee's possession or premises.
2. Whether a non-speaking seized document ("dumb document") comprising rough jottings, without independent corroborative material, can by itself establish ownership/possession of unaccounted money so as to attract section 69A.
3. Whether entries in a seized diary that appear to relate to company transactions can be the basis for additions against an individual assessee (director), rather than against the company, where the diary was recovered from the company's premises and the entries are not matched in the assessee's books.
4. Whether alleged cash receipts evidenced by a seized notings can be treated as income under section 69A where an alternate explanation (loan/charitable expenditure) has been offered and where relevant books of account or documentary evidence are absent.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Applicability of section 69A where no cash is found in the assessee's possession
Legal framework: Section 69A treats money, bullion, jewellery or other valuable articles as deemed income where the assessee is "found to be the owner" of such unaccounted items and the same are not recorded in books of account (if any) and explanation is not satisfactory.
Precedent treatment: Coordinate decisions (referred to by the Tribunal) hold that invasion of section 69A requires that the unaccounted money be found in the possession of or be shown to be owned by the assessee; mere presumption or inference from third-party seized material is insufficient to satisfy the prerequisites of the provision.
Interpretation and reasoning: The Tribunal emphasized the sine qua non of "ownership" or possession of money for invoking section 69A. Where no cash or valuables were recovered from the assessee's premises and ownership was not otherwise established by independent evidence, invoking section 69A rested on presumption alone. The seized diary was located at the company premises and belonged to a third person; it did not show cash physically belonging to the assessee. The Tribunal followed coordinate authority that rejected additions made by presuming availability/ownership without supporting material.
Ratio vs. Obiter: Ratio - section 69A cannot be applied without evidence of the assessee's possession/ownership of the alleged unaccounted money; presumption from third-party seized notes without corroboration is insufficient. Obiter - explanatory remarks regarding the phrase "ownership" (reference to Black's Law Dictionary) are illustrative but not determinative.
Conclusion: Additions under section 69A could not be sustained to the extent they rested solely on diary notings recovered from third-party premises without proof of possession/ownership by the assessee; the Tribunal allowed the assessee's appeal on this basis.
Issue 2 - Evidentiary value of "dumb documents" (non-speaking seized jotting) and requirement of corroborative material
Legal framework: Evidence law and tax jurisprudence require that a non-speaking seized document (loose jottings, rough notes) be treated with caution; tax charge cannot rest on such material unless it is "speaking" by itself or becomes speaking when read with corroborative evidence discovered during search or post-search investigation.
Precedent treatment: The Tribunal relied on multiple precedents which hold that rough, undated, unsigned, and unsigned-by-the-assessee scribbles are "dumb documents" and cannot, without corroboration, form the sole basis for assessing undisclosed income; such documents have been held inadmissible as standalone proof in prior decisions.
Interpretation and reasoning: The Tribunal examined the diary entries and the record of correspondence and found that most jottings lacked intelligible narration (no dates, no units stated as lacs/crores, no signatures), and were not corroborated by matching bank/book entries. Only one cheque entry coincided with the assessee's bank record and that transaction itself was explained as a loan. The Tribunal held that extrapolating from one matched item to validate all other rough entries was impermissible; absent independent corroboration the seized jottings could not be elevated to substantive evidence of undisclosed income.
Ratio vs. Obiter: Ratio - non-speaking seized documents cannot be the exclusive basis for additions; corroborative material is necessary to convert such documents into admissible evidence of undisclosed income. Obiter - discussion of various appellate authorities and the characterization of seized pages as "dumb documents" contextualizes but does not add new law beyond the ratio.
Conclusion: The diary entries being non-speaking and uncorroborated, could not sustain additions except where independent evidence (matching cheque entry) existed; even the single matched transaction was satisfactorily explained as a loan, undermining its use to validate the rest of the jottings.
Issue 3 - Proper party for assessment where seized entries indicate company transactions
Legal framework: Tax additions must be directed to the person shown by evidence to have received/unaccounted for the money; documents recovered from a company's premises and relating to company disbursements ordinarily bear on the company's tax liability unless independent evidence establishes that the individual assessee owned or possessed the amounts.
Precedent treatment: Prior rulings (cited by the Tribunal) support the proposition that where seized material pertains to company affairs and no evidence establishes personal receipt or possession by an individual, additions should be made in the hands of the company rather than against an individual.
Interpretation and reasoning: The Tribunal noted the diary was seized at the corporate office and the diary owner attributed the entries to company payments; most transactions in the diary did not match the assessee's bank or books. Given the absence of evidence that the alleged cash belonged to the individual, the Tribunal concluded that any liability arising from those entries, if at all, would more properly lie with the company. Consequently, sustaining additions in the individual's hands was not justified.
Ratio vs. Obiter: Ratio - where seized material originates from company premises and relates to company transactions, and no proof demonstrates individual ownership/possession, the individual cannot be held liable under section 69A on that material alone. Obiter - remarks about coordinating concurrent findings in the company's assessment are contextual.
Conclusion: The Tribunal held that the impugned entries primarily related to the company; absent proof of individual ownership/possession, additions against the individual were unsustainable and were therefore deleted.
Issue 4 - Effect of alternate explanation (loan/charitable purpose) and absence of books of account
Legal framework: Section 69A applies when the assessee is the owner of unaccounted money not recorded in books, and explanation is unsatisfactory. If the assessee offers a plausible explanation supported by evidence (e.g., loan transaction, charitable disbursement), the presumption of unexplained money can be rebutted. The existence of books of account may be material where section 69A refers to "books of account, if any".
Precedent treatment: Authorities have taken the view that where an alternate explanation is offered and documentary evidence supports it, additions under section 69A should not be made; some courts have observed that the phrase "if any" in relation to books of account may limit application in certain contexts.
Interpretation and reasoning: The Tribunal found that a substantial matched transaction was shown on record to be a loan with ledger evidence, and that the assessee (and the company/diary owner) offered explanations (charitable expenditure/loan) for the jottings. The absence of books or corroborative documents to establish that the diary figures represented undisclosed income meant that the explanations could not be rejected merely on conjecture. The Tribunal accepted that where books are not maintained or where alternative documentary explanation exists, invoking section 69A is improper without further material.
Ratio vs. Obiter: Ratio - plausible alternative explanations supported by evidence rebut the presumption of undisclosed income and preclude additions under section 69A absent contrary corroboration. Obiter - commentary on the breadth of "if any" in section 69A and reference to higher court dicta was noted but not treated as novel law.
Conclusion: The Tribunal accepted the alternative explanations and the lack of corroboration, further weakening the basis for additions; accordingly, the majority of the addition was deleted and the appeals allowed.
Addition u/s 69A - Addition as unaccounted income - Document found during the search at the premises of the company - Reliance merely on the basis of jotting made in the diary allegedly belonging to third person - HELD THAT:- As per the diary, assessee was given Rs. 450 lakhs during the period and Rs. 150 lakhs by cheque and Rs. 300 lakhs by cash. Out of the cheque payment in three transactions, one transaction of Rs. 50 lakhs was matching with books of account maintained by the assessee. Other payments were not matching. It is also fact on record that the information was found at the premises of the company and not at the place of residence of the assessee and no cash was found at the premises of the assessee nor at the premises of the company. The addition was made in the hands of the assessee on the basis of noting in the diary.
Lower authorities have proceeded to make addition u/s 69A of the Act. On the issue of addition made u/s 69A of the Act for the information found from their party place, in the similar facts on record, we observe that coordinate Bench in [2023 (11) TMI 1297 - ITAT DELHI] as held to attract the provisions of section 69A sine qua non is “ownership” of money etc. which has not been recorded in the books of account. AO has made only presumption that the said cash was ‘available with the assessee’ without bringing on record any material in support thereof.
We are of the view that no cash was found at the possession of the assessee and the ownership of the same was presumed to be the assessee by the lower authorities. Therefore, without proving the possession and ownership of the same, the addition u/s 69A of the Act cannot be invoked as per the facts available on record.
Diary was found with the employee of the company and at the premises of the company. The payments were received by the assessee from the company, in fact one cheque payment was matching with the diary found during the search, other payments were not matching neither recorded in the books of the assessee nor in the books of the company. Therefore, from the notings of the diary, all these transactions are relating to the company. If at all, any addition has to be proposed, it should be in the hands of the company not in the hands of the assessee.
Document found during the search at the premises of the company and no cash was found in possession of the assessee nor the ownership of the cash was established with the assessee, therefore, addition cannot be made u/s 69A of the Act - Assessee appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether the transfer pricing bench-marking must be conducted on an entity-level using TNMM or on a transaction/segment basis after carving out the trading and service segments.
2. Whether the trading and service activities of a limited risk distributor that imports products from an associated enterprise and provides after-sales/customer services are inextricably linked such that separate benchmarking is impermissible.
3. Whether allocation of common/indirect expenses between carved-out trading and service segments on the basis of revenue is appropriate or whether alternative allocation keys (e.g., gross profit or manpower allocation) should be employed.
4. Whether reliance on the Revenue's segmentation, allocation methodology and comparable selection by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) produced an arm's length result; and whether adjustments made by the TPO (as modified by DRP on working capital) should stand.
5. Ancillary: Whether other grounds raised (choice of RPM, risk adjustment under Rule 10B, initiation of penalty under section 270A) require adjudication at this stage.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Entity-level TNMM vs. Segment/Transaction-level Benchmarking
Legal framework: Transfer pricing regulations require determination of arm's length price and prescribe that benchmarking should generally be transaction-to-transaction unless transactions are so closely interlinked that separate evaluation is not possible; the Transactional Net Margin Method (TNMM) is an accepted method when appropriate.
Precedent treatment: The Tribunal followed the principle that benchmarking is to be done transaction by transaction unless integration of functions, assets and risks makes separate evaluation impossible; DRP and TPO had applied transaction/segment level analysis by carving trading and service segments.
Interpretation and reasoning: The Court examined the contractual terms and revenue recognition policy which identify performance obligations combining hardware/software and post-contract support where maintenance updates are critical to functionality. The Tribunal found that the service obligations (warranty, maintenance, professional/resident engineering, training) are functionally interwoven with the sale of products and that the service segment largely exists because of the trading activity. The Tribunal held that mere presence of a service facility does not justify segmentation without analysis of interdependence; where elements are integrated contractually and operationally, entity-level TNMM is appropriate.
Ratio vs. Obiter: Ratio - the Tribunal's holding that where product sales and customer services form combined performance obligations under contracts and are operationally interdependent, benchmarking must be done at entity level; carving out segments without functional analysis is impermissible. Obiter - illustrative remarks on "egg or chicken" dependency metaphor.
Conclusions: The Tribunal allowed the appeal on this ground, directing that the TNMM at entity level (i.e., without carving out trading and service segments) is to be accepted for arm's length determination. This disposes of the segmentation adopted by TPO/DRP.
Issue 2 - Whether the trading and service activities are inextricably linked
Legal framework: Transfer pricing requires functional analysis (Functions, Assets, Risks - FAR) to determine whether separate transactions can be compared independently; contract terms and performance obligations guide FAR assessment.
Precedent treatment: Lower authorities recorded separate functions and viewed trading and service as different classes of transactions with different risks; TPO carved out trading results and allocated costs; DRP sustained TPO except for working capital adjustment.
Interpretation and reasoning: The Tribunal reviewed the mutual agreement and the definition of "Customer Services" which encompassed product maintenance, software updates, professional and resident engineering services, and training. The assessee's revenue recognition policy combined certain software licenses with post-contract support into single performance obligations when updates are critical. The Tribunal concluded these contractual and accounting provisions demonstrate intertwined performance obligations; the service element facilitates and preserves product functionality and thus cannot be treated as an independent transaction stream for benchmarking without detailed FAR that shows separability. The Tribunal also noted that much of the service is provided with the assistance of the associated enterprise, underscoring interdependence.
Ratio vs. Obiter: Ratio - where contracts and revenue recognition combine product and service obligations (and services are necessary for product functionality), the transactions are inextricably linked and cannot be segregated for TP benchmarking absent cogent FAR demonstrating separability. Obiter - remarks on appropriate allocation keys if segmentation were permissible.
Conclusions: The Tribunal held the activities are inextricably linked and overturned the TPO/DRP decision to carve out trading and service segments; Ground No. 3 of the appeal allowed.
Issue 3 - Allocation of common/indirect expenses between segments (revenue vs. gross profit/manpower keys)
Legal framework: Allocation of common costs for segmental profit computation must follow a reasonable allocation key reflecting the underlying drivers of costs (e.g., functions, manpower, gross margin) and be consistent with FAR and accounting practices.
Precedent treatment: TPO allocated employee and other common expenses in proportion to segmental revenue; assessee contended allocation should be based on gross profit or other keys (e.g., manpower) and argued that TPO's revenue allocation was arbitrary.
Interpretation and reasoning: The Tribunal observed that even assuming segregation were permissible, the TPO simply divided costs by revenue without analyzing the functional basis for expense incurrence; given that service functions are after-sales support largely dependent on product sales, allocation based solely on revenue fails to reflect underlying resource consumption. Tribunal suggested an 80:20 manpower/cost split would be more appropriate if segmentation were accepted, indicating that revenue-based allocation understates the service cost and distorts margins. However, because segmentation itself was rejected, detailed allocation adjustments were not finally adjudicated.
Ratio vs. Obiter: Predominantly obiter - the Tribunal's criticism of revenue-based allocation and suggestion of alternative keys (80:20 manpower split) are advisory given the primary conclusion that segments cannot be carved out; the observation guides future allocations if segmentation is ever supported by evidence.
Conclusions: Allocation on revenue basis was rejected as inappropriate in the circumstances; no further allocation order issued because segmentation was disallowed. This ground was accepted in substance but not finally quantified.
Issue 4 - Appropriateness of TPO/DRP comparable selection, margin computation and ALP adjustments
Legal framework: The ALP is determined by applying the most appropriate method and selecting comparables according to prescribed filters; working capital and other adjustments are to be made in accordance with accepted guidelines (e.g., OECD) where relevant.
Precedent treatment: TPO applied TNMM to the carved-out trading segment, selected comparables and determined a median operating margin leading to a substantial adjustment; DRP allowed only working capital adjustment which altered comparable margins and resulted in the TPO finding assessee's margin to be within ALP.
Interpretation and reasoning: Having held that segmentation was improper and that TNMM at entity level should be applied, the Tribunal implicitly rejected the basis for the TPO's standalone trading-segment comparable analysis. The DRP's concession on working capital adjustment and resultant recalculated median (8.12%) led TPO to conclude no adjustment was necessary; however, because Tribunal restored entity-level benchmarking, the specific comparable selection and segmental margin determination by TPO/DRP are not sustained as the basis for adjustment. The Tribunal left other grounds (choice of RPM, risk adjustment under rules, penalty under section 270A) open for adjudication later.
Ratio vs. Obiter: Ratio - TPO/DRP's segmental benchmarking result cannot stand because the premise of segmentation is reversed. Obiter - comments on DRP allowing working capital adjustment per OECD guidelines and the procedural history.
Conclusions: The proposed TP adjustment (as based on carved-out trading segment) is set aside; following entity-level approach the TPO's adjustment is rendered unsustainable. Other TP issues (choice of RPM, risk adjustment) and penalty proceedings were left open for adjudication at a later stage.
Issue 5 - Ancillary grounds (RPM as most appropriate method; risk adjustment under Rule 10B; initiation of penalty under section 270A)
Legal framework: Rules prescribe selection of most appropriate method and allow for risk adjustments where warranted; penalty provisions require separate consideration based on culpability and misreporting.
Precedent treatment: Assessee raised objections on RPM vs. TNMM, risk adjustments per Rule 10B, and initiation of penalty proceedings; lower authorities did not decide these in assessee's favour at the stage under challenge.
Interpretation and reasoning: The Tribunal did not adjudicate these grounds on merits because its primary conclusion on segmentation and acceptance of entity-level TNMM rendered detailed consideration of these issues premature. The Tribunal expressly kept other grounds open for future adjudication.
Ratio vs. Obiter: Obiter - non-adjudication is procedural; no ratio on substantive merits of RPM applicability, Rule 10B risk adjustment, or section 270A penalty.
Conclusions: Ancillary grounds reserved; no decision on RPM selection, Rule 10B risk adjustment entitlement, or penalty initiation at this stage.
Final Disposition
The Tribunal allowed the appeal on the central question of segmentation and benchmarking, holding that the trading and service transactions are inextricably linked by contractual and accounting performance obligations; therefore, TNMM at entity level is appropriate and the segmental ALP adjustment based on carved-out trading results is set aside. Other issues were left open for adjudication later.
TP Adjustment - functions of the assessee company are intertwined with the trading segment - dividing nature of the trading business of the assessee with the services provided by it to the Indian customers with the assistance of its AE - HELD THAT:- We observed that considering the fact that the assessee is involved in the trading of the products supplied by the AEs and also having service facility’ the tax authorities divided the business of the assessee in two segments and reworked the segmental results by allocation on the basis of revenue factor. In our view’ they have completely overlooked the fact that the core business is trading and the customer services are interconnected to it.
Most of customer services are provided with the assistance of AEs. In case the trading results has to be bench marked when the trading is complete as soon as the products are sold to the Indian customers whereas it is inter connected with the after sales customer services as defined in the clause of 1.4 of the mutual agreement. Merely because the assessee has facility to provide customer services’ it cannot be segregated without analysing the key functions which are inter dependent on each other. In our view’ the sole existence of the assessee company depends upon the trading activities without that there is no business for the service segment. It is like egg or chicken story.
Even for the argument’ if we segregate the segments on the basis of activities’ we observed that the TPO had simply divided on the basis of revenue without considering the fact that the majority of the service segment is established only for the purpose of dealing with the after sales services. If that be the case’ at least he should have considered for allocating the manpower and other cost on the basis of 80:20. This would have given the result appropriate.
Identification of the performance obligations in the contract’ it says “Product performance obligations include hardware and software licenses’ and service performance obligations include maintenance’ software post-contract’ training and professional services. Certain software licenses and related post-contract support are combined into a single performance obligation when the maintenance updates are critical to the continued functionality of the software.”
Revenue recognition - Revenue from contracts with customers - From the above revenue recognition of the assessee company indicate that the trading and services performances are intertwined and cannot be separated. The action of the revenue is wrong to divide the segments into two and allocate the cost on the basis of revenue of segment without properly analysing the nature of functions and intertwined services transaction with the products marketed by the assessee with the assistance of original manufacturer and actual services provider’ in this case’ JNI BV’ Netherland. Therefore’ we are in agreement with the submissions of the assessee in this case and you cannot divide the peculiar nature of the trading business of the assessee with the services provided by it to the Indian customers with the assistance of its AE. In the result’ ground no 3 raised by the assessee is allowed in its favour.
ISSUES PRESENTED AND CONSIDERED
1. Whether interest income earned by a primary agricultural credit co-operative society from investments with other co-operative societies, including interest on statutory reserve funds, is deductible in full under section 80P(2)(a)(i) of the Income-tax Act or is subject to proportionate disallowance by the Assessing Officer.
2. Whether gross profit arising from sale of fertilisers and PDS articles to non-members qualifies for deduction under section 80P(2) and, if not, whether the Assessing Officer's addition of gross profit without examining attributable operating expenses is justified.
3. Whether the revenue authorities can go behind the registration of a co-operative society to inquire into factual compliance with its bye-laws and the character of its activities for the purpose of allowing deduction under section 80P(2)(a)(i), and the extent to which precedents limit or permit such inquiry.
4. Admissibility and consideration of additional documentary evidence (interest certificates) not placed before lower authorities and the appropriate forum for their evaluation.
ISSUE-WISE DETAILED ANALYSIS - Interest Income Deduction under Section 80P(2)(a)(i)
Legal framework: Section 80P(1)-(2) provides deductions in respect of specified incomes of co-operative societies; clause (2)(a)(i) covers societies "carrying on the business of banking or providing credit facilities to its members"; clause (2)(d) separately allows deduction for interest/dividends from investments with other co-operative societies; subsection (4) excludes "co-operative bank" (except PACS/PCARDB) from the benefit.
Precedent treatment: The Court relied on the Supreme Court decisions construing section 80P broadly (including Kerala State Cooperative Marketing Federation and Mavilayi Service Cooperative Bank). The decision in Citizen Cooperative Society was analyzed to extract its ratio (liberal construction; assessment of facts to determine "engaged in" providing credit), while factual conclusions in that case were distinguished as not forming binding ratio where based on specific findings.
Interpretation and reasoning: The provision is benevolent and must be read liberally. A registered co-operative society engaged in providing credit facilities to members is entitled to deduction for profits attributable to that activity; interest income from investments with other co-operative societies (and interest on reserve funds maintained as required by statute) falls within the ambit of s.80P(2) (either under (a)(i) as business income attributable to credit activity or under (d) for interest from investments with co-operatives). Sub-section (4) is a proviso limited to co-operative banks as defined under the Banking Regulation Act and does not cut down the clear language of the main provision where the society is not a co-operative bank. The AO's mechanical proportionate disallowance (10.86%) was unsustainable where the majority of the deduction had already been accepted and where particular interest (reserve fund interest) is statutory business income; there was no justification to disallow the remaining portion.
Ratio vs. Obiter: Ratio - section 80P is to be construed liberally; interest/dividend income from investments with other co-operative societies and interest on statutory reserve funds are deductible where the society qualifies under s.80P(2). Obiter - detailed discussions about varied byelaws and illustrative extracts from other statutes that do not alter the central principle.
Conclusion: Interest income of Rs. 12,05,115 (including interest on reserve fund required by the State Act) is deductible under section 80P(2)(a)(i) (and/or clause (d) as applicable). The AO is directed to grant the deduction in full; the prior proportional disallowance is set aside.
ISSUE-WISE DETAILED ANALYSIS - Profit from Sale of Fertilisers/PDS to Non-members
Legal framework: Section 80P(2) provides deduction for profits and gains attributable to specified activities; clause (a)(iii) covers marketing of agricultural produce of members; clause (c) and clause (d) also address other residual incomes; income from activities vis-à-vis non-members is not automatically deductible to the extent profits are attributable to non-member business.
Precedent treatment: Mavilayi and Kerala State Cooperative Marketing Federation explain that exemption applies to marketing of agricultural produce "belonging to" members; Citizen Cooperative and other authorities emphasize attributability and the need for factual enquiry to determine whether activities and profits relate to member business.
Interpretation and reasoning: The Court accepted that profits from sales to non-members would not qualify to the extent attributable to non-member transactions. However, the AO's addition of gross profit without accounting for operating and other attributable expenses (claimed salary and other expenditure) cannot be sustained without factual verification. The assessee asserted operative expenses exceeding the gross profit producing a net trading loss; such evidence was not before lower authorities and requires adjudication by the AO on factual material.
Ratio vs. Obiter: Ratio - profits attributable to non-member transactions are not deductible under s.80P; where additions are made based on gross figures, the AO must consider attributable expenses before determining net taxable profit. Obiter - references to how different State Acts treat loans to non-members and "nominal members" are contextual but not determinative of this specific factual issue.
Conclusion: The matter of gross profit of Rs. 4,36,689 is remitted to the AO to examine claimed expenses and determine net profit attributable to sale of fertiliser/PDS to non-members; AO to decide deduction under section 80P accordingly. The appellate findings disallowing deduction on lacking documents are set aside for fresh adjudication on production of relevant evidence.
ISSUE-WISE DETAILED ANALYSIS - Authority to Examine Registration and Factual Compliance; Scope of Fact-Finding
Legal framework: Eligibility under s.80P requires the assessee to be a "co-operative society" (registered under applicable law) and to have gross total income including heads referred to in sub-section (2); the expression "engaged in" requires factual determination of activities (Ponni Sugars, Ponni Sugars & Chemicals Ltd. authority cited).
Precedent treatment: The Court analyzed Citizen Cooperative Society to separate its ratio (legal principles) from its fact-specific conclusions; precedents confirm that assessing authorities may examine facts (and go behind mere registration) to determine whether activities claimed are actually carried on and attributable to members.
Interpretation and reasoning: It is permissible and necessary for tax authorities to examine the facts (memorandum, bye-laws, returns, accounts) to determine whether the society is engaged in the qualifying activities and whether profits are attributable to member-related activities. However, findings of fact adverse to the assessee must be supported by evidence and cannot be invoked to deny a statutory deduction where the law's language and facts established show entitlement. The Court rejected any overbroad reading that factual inquiries are impermissible or that registration alone conclusively establishes entitlement.
Ratio vs. Obiter: Ratio - authorities may examine and evaluate factual compliance; the benevolent character of s.80P requires liberal construction but not blind acceptance of registration as conclusive. Obiter - extended commentary on proviso interpretation and historical legislative intent.
Conclusion: Assessing authority can inquire into factual compliance with bye-laws and activities, but must base conclusions on evidence; legal principles from precedents (liberal construction; burden on assessee to prove entitlement) govern such inquiries.
ISSUE-WISE DETAILED ANALYSIS - Admissibility of Additional Evidence
Legal framework: Procedural rules permit admission of additional evidence under Tribunal rules (Rule 29 ITAT Rules referenced in submissions) where evidence was not before lower authorities and has been recently obtained.
Precedent treatment: The judgment directs evidentiary matters appropriately back to the AO for factual determination; authorities generally permit remand where new material requires fact-finding.
Interpretation and reasoning: The paperbook and interest certificates submitted on appeal were not before lower authorities. Rather than making a conclusive finding on such documents at appellate stage, the Court directed that relevant documentary claims (including interest certificates and trading expenses) be placed before the AO for examination and determination of amounts truly attributable and deductible under s.80P.
Ratio vs. Obiter: Ratio - newly produced documentary evidence that bears on quantification and attributability should be considered by the AO on remand; appellate tribunal may remit for factual adjudication. Obiter - procedural guidance on handling such evidence in similar contexts.
Conclusion: Additional documentary evidence is to be considered by the AO in the remand proceedings; AO to examine interest certificates and claimed expenses and determine entitlement and quantum of deduction accordingly.
FINAL OUTCOME ON THE CONSIDERED ISSUES
The appeal was partly allowed: the AO is directed to grant the deduction for the interest income of Rs. 12,05,115 under section 80P(2)(a)(i) (and/or clause (d) as applicable); the addition of gross profit from fertiliser/PDS sales is remitted to the AO to determine net profit after allowable expenses and to decide deduction under section 80P accordingly; remaining grounds are restored to the file of the AO for fresh adjudication in light of the directions above.
Deduction claimed u/s. 80P - Interest income earned on reserve fund - HELD THAT:- The issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. [2021 (1) TMI 488 - SUPREME COURT]
AO to grant deduction of interest income earned of Rs. 12,05,115 u/s. 80P(2) (a) (i) of the Act. Even otherwise, it is seen that the AO himself has allowed 89.14% of the deduction holding it to be allowable, there is no justification to disallow the balance sum of 10.86% of the total deduction.
Disallowance of Gross Profit earned by the assessee for the reason that the assessee has earned profit of the above sum from its activities with the non-members - It is specifically held that the case of Mavilayi Service Cooperative Bank in the decision of Hon’ble Supreme Court that the activity of non-members would not be eligible for deduction u/s. 80P of the Act. However, what would not be eligible is the profits & gains. It is the claim of assessee that the ld. AO has made addition of Gross Profit of Rs. 4,36,689, but has not considered the operative expenditure such as salary to godown employees etc. The assessee has stated that the expenses are Rs. 4,60,800 and thus there is a net trading loss.
We do not find that this information was available with the lower authorities. Accordingly direct the assessee to show before the AO about what is the profit earned by the assessee from the above activity. The ld. AO after examination of the same may determine the amount of profit earned by the assessee from the sale of fertiliser and PDS and then decide the sum of deduction u/s. 80P of the Act.
ISSUES PRESENTED AND CONSIDERED
1. Whether the Comparable Uncontrolled Price (CUP) method adopted by the assessee is an appropriate and acceptable method to determine Arm's Length Price (ALP) for import purchases of commodities listed on a commodity exchange.
2. Whether price quotes from a private broker/publisher based on commodity exchange quotations can constitute reliable external CUP data under Rule 10D(3) and be used to benchmark international transactions.
3. Whether the Transfer Pricing Officer (TPO) erred in rejecting the CUP method without specific findings demonstrating why the broker/exchange-based comparables were not comparable or contemporaneous.
4. Whether Rule 10B(1)(a) and the requirement that a CUP reflect an "actually occurred" transaction preclude reliance on exchange-quoted prices or broker quotes that are not direct invoices of third-party transactions.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Appropriateness of CUP method for commodity import purchases
Legal framework: Section 92C read with Rule 10B and Rule 10D require application of the most appropriate transfer pricing method; Rule 10D(3)(c) explicitly recognises "price publications including stock exchange and commodity market quotations" as authentic documents for comparability.
Precedent treatment: The Tribunal relied upon prior judicial authorities and guidelines which have accepted exchange-quoted prices and broker publications as valid sources for CUP in commodities trading. These authorities emphasise that where CUP can reasonably be applied it should be preferred over other methods.
Interpretation and reasoning: The Tribunal observed that commodities traded on recognised exchanges have market-determined prices reflective of transactions between independent parties. Given that crude palm oil is listed and traded on the relevant exchange, exchange-quoted prices (and contemporaneous broker quotes reflecting those exchange prices) represent market prices at which unrelated parties would transact. The Tribunal noted that the TPO did not identify specific infirmities in the appellant's CUP analysis; instead, the TPO applied reasoning relevant to an unrelated industry (IT/ITeS), thereby misapplying the CUP analysis to a dissimilar fact pattern.
Ratio vs. Obiter: Ratio - where the commodity is exchange-traded, CUP using exchange-quoted prices (or reliable broker quotes based on such exchanges) is an appropriate method and should not be rejected absent specific, case-focused findings showing non-comparability or lack of reliability.
Conclusion: CUP method was appropriately applied for the commodity import transactions; the CUP-based ALP stands.
Issue 2 - Reliance on broker/publisher (private) quotations as external CUP data under Rule 10D(3)
Legal framework: Rule 10D(3) lists acceptable supporting documents for transfer pricing documentation, including price publications and commodity market quotations. Rule 10D(4) requires that documentation be, as far as possible, contemporaneous.
Precedent treatment: Earlier judicial decisions and tribunal orders (as relied upon by the first appellate authority) have accepted broker/publisher quotations that are shown to be based on exchange prices as reliable external CUP data for commodity transactions, provided authenticity and reliability are proved.
Interpretation and reasoning: The Tribunal accepted the assessee's evidence that the broker's quotes were derived from the commodity exchange and noted supporting certification from the broker/publisher. The Tribunal found there was no material placed by the TPO to demonstrate defects in the broker quotations and observed judicial authority that mere absence of an actual third-party invoice does not render broker/exchange quotes unusable where Rule 10D(3)(c) contemplates such sources. The Tribunal further noted OECD guidance endorsing reliance on exchange-quoted prices for commodities.
Ratio vs. Obiter: Ratio - broker/publisher quotations that demonstrably reflect exchange-quoted prices constitute admissible and reliable external CUP data under Rule 10D(3)(c) for commodities, unless specific defects in those quotations are shown.
Conclusion: Broker/publisher quotations (here, the broker's price notes based on exchange prices) were reliable and admissible for CUP benchmarking; their use to establish ALP was justified.
Issue 3 - Adequacy of TPO's reasons for rejecting CUP and requirement for speaking order
Legal framework: Administrative orders affecting transfer pricing adjustments must be reasoned; where a taxpayer provides comparability analysis and documentary support in accordance with Rule 10D, the TPO/AO must address and rebut that analysis by specific findings.
Precedent treatment: Authorities require that tax authorities issue speaking orders addressing the taxpayer's comparability claims and documentary evidence; summary rejection without targeted analysis is impermissible.
Interpretation and reasoning: The Tribunal found the TPO's order lacked specific findings addressing why the exchange-based and broker-based comparables were unsuitable. Instead, the TPO's analysis invoked inapposite comparisons (e.g., hourly rates in IT services) and general reference to OECD para regarding adjustments, without demonstrating how such factors render the CUP data non-comparable in the commodity purchase context. The Tribunal concluded that absence of targeted, factual findings amounted to failure to appreciate the taxpayer's evidence and methodology.
Ratio vs. Obiter: Ratio - TPO must give specific, transaction-focused reasons when rejecting CUP benchmarks; generic or industry-misdirected reasoning is inadequate.
Conclusion: The TPO's rejection was unsustainable for lack of specific findings; the first appellate authority correctly set aside the adjustment.
Issue 4 - Requirement that a CUP reflect an "actually occurred" transaction and contemporaneity of third-party quotations
Legal framework: Rule 10B(1)(a) and related guidance emphasize that CUP should reflect uncontrolled transactions; Rule 10D requires documentation to be supported by authentic documents and be contemporaneous as far as possible.
Precedent treatment: Judicial authorities have held that exchange-quoted prices and price publications can represent prices in uncontrolled transactions even where they are not identical to a particular third-party invoice, provided authenticity and contemporaneity are established.
Interpretation and reasoning: The Tribunal interpreted the "actually occurred" requirement in light of Rule 10D(3)(c) and OECD guidance: market/exchange prices are representative of transactions between unrelated parties and can therefore satisfy the CUP requirement. The Tribunal found that the broker quotes were contemporaneous and attested to be based on exchange prices; no contrary contemporaneity challenge was substantiated by the TPO.
Ratio vs. Obiter: Ratio - CUP need not be limited to a single third-party invoice if exchange-quoted prices or authentic contemporaneous publications adequately represent prices at which independent parties transact; absence of a specific third-party invoice does not automatically invalidate CUP evidence.
Conclusion: The contention that CUP must be a record of an actual third-party invoice was rejected in circumstances where exchange/broker quotations demonstrably reflect market transactions and are contemporaneous and authenticated; the CUP evidence was acceptable.
TP adjustment u/s 92CA -CIT(A) upholding the CUP method adopted by the assessee for the justification of the Arm’s Length Price of the transactions entered into by the Assessee with its AEs - HELD THAT:- As could be seen from the order of the CIT(A), CIT(A) being the first appellate authority, found that the TPO did not provide any specific finding to reject the CUP method and has also failed to appreciate the facts of the Assessee and tried to co-relate the man month rate under the CUP method in off-shore software service which is not relevant to the Assessee who has undertaken the transactions of purchase. This clearly brings out that the TPO failed in appreciation of the facts or has resorted to incorrect or misconceived facts about the Assessee. Revenue failed to rebut or to bring contrary material before us to the said findings of facts recorded by the Ld. CIT(A).
CIT(A) has relied on plethora of judicial precedents in so far as authenticity of prices published by ‘SUNVIN’ and also relied on the OECD guidelines 2017, wherein at para 2.18 the price quotes of commodity exchanges are accepted in CUP method.
CIT(A) has also relied on the Judgment of Noble Resources & Trading India (P.) Ltd. [2016 (7) TMI 248 - ITAT DELHI] In view of the above, we find no reason to interfere with the findings and the conclusion of the Ld. CIT(A) in deleting the addition made by the A.O. Finding no merits in the Grounds of Appeal of the Revenue, the Grounds of Appeal No. 1 to 8 are dismissed.
ISSUES PRESENTED AND CONSIDERED
1. Whether additions under section 68 of the Income Tax Act can be sustained where issued shares subscribed at high premium by multiple companies are not satisfactorily explained as to identity, genuineness and creditworthiness of the subscribers.
2. Whether reliance on notices under section 133(6) and section 131 returned unserved, together with bank statements and investigations by the Assessing Officer, suffices to shift the onus onto the assessee to prove existence, genuineness and creditworthiness of the subscribing companies.
3. Whether the Commissioner (Appeals) erred in deleting additions when no new evidence was placed before him and he did not make independent inquiries into the credibility of the confirmations and documents produced by the assessee.
4. Whether the matter should be remanded to the first appellate authority for further verification and appropriate exercise of fact-finding and discretion in accordance with law.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of addition under section 68 where share subscription at high premium is unexplained
Legal framework: Section 68 treats unexplained cash credits as assessable income unless the assessee satisfactorily explains the nature and source of the credit, establishing identity and genuineness of the creditor and the transaction and the creditor's creditworthiness.
Precedent Treatment: The Revenue relied on several judicial decisions (listed in the record) that underscore the requirement that identity, genuineness and creditworthiness must be proved and that sham or paper companies cannot be accepted as genuine sources.
Interpretation and reasoning: The Assessing Officer obtained bank statements, issued statutory notices under sections 133(6) and 131 which were returned unserved, and observed immediate onward transfers from subscriber accounts and negligible declared income in those companies' financials. These facts indicated lack of creditworthiness and possible diversion/transit of funds. Mere production of confirmations, PAN and bank details by the assessee, without independent verification of the principal officers or fresh evidence, did not discharge the onus cast on the assessee under section 68.
Ratio vs. Obiter: Ratio - Where investigative material shows non-existence or lack of substance in subscriber companies (unserved statutory notices, bank transaction patterns, negligible declared income vis-à-vis large investments), addition under section 68 is sustainable unless the assessee produces cogent, verifiable evidence to rebut the findings. Obiter - Observations on the types of documents that may or may not be sufficient in other fact patterns.
Conclusions: The Tribunal found the AO's reasons to be prima facie plausible, and that the assessee had not satisfactorily explained the credits. Therefore, the addition under section 68 was sustainable on the record before the AO.
Issue 2: Effect of unserved statutory notices and the resulting burden on the assessee to prove existence and genuineness
Legal framework: Sections 133(6) and 131 empower the AO to summon persons and obtain information; non-service/return of such notices may constitute material indicating inaccessibility or non-existence of alleged creditors; once AO adduces such material, the evidentiary onus shifts to the assessee.
Precedent Treatment: The Revenue cited judicial authorities recognizing that when statutory inquiries are unsuccessful and material suggests sham transactions, the burden lies on the recipient to substantiate the transaction.
Interpretation and reasoning: In this case notices to subscriber companies and their principal officers were returned unserved; AO's bank enquiries showed immediate transfer of funds and lack of corresponding income or dividends; these circumstances justify requiring the assessee to produce principal officers or other direct evidence of the subscribers' existence and creditworthiness. The mere filing of confirmations and financial statements, without opportunity for cross-verification of the alleged subscribers, is not adequate to rebut the AO's prima facie findings.
Ratio vs. Obiter: Ratio - Returned statutory notices combined with transactional and financial indicia of sham subscriptions shift the evidentiary burden onto the assessee. Obiter - The particular adequacy of different kinds of secondary documents may vary with facts.
Conclusions: The Tribunal agreed with the AO that the onus had shifted to the assessee and that the assessee failed to discharge it on the basis of the material then available to the AO.
Issue 3: Appellate authority's deletion of additions without fresh inquiry or discussion of relied precedents
Legal framework: An appellate authority must independently examine the material placed before the AO, consider whether fresh evidence is produced, and address relevant precedents relied on by the Revenue; findings of fact that rely on investigation may require further verification rather than mere acceptance of documentary assertions.
Precedent Treatment: The record records that the appellate bench (CIT(A)) relied on details filed by the assessee that had already been considered and rejected by the AO; the CIT(A) did not critically engage with authorities relied upon by the AO but stated they were distinguishable without analysis.
Interpretation and reasoning: The Tribunal found that the CIT(A) deleted additions by accepting the same documents the AO had examined, without calling for the principal officers or making independent verifications. The appellate order did not explain why the AO's inferences from unserved notices, bank transaction patterns and low declared incomes were incorrect; nor did it discuss or distinguish the precedents relied upon by the Revenue in a reasoned manner. In such circumstances, a remand for further verification and application of mind was warranted.
Ratio vs. Obiter: Ratio - Where appellate authority reverses an assessing officer's fact-based addition without fresh evidence or reasoned analysis, the appropriate course is remand for verification and proper adjudication. Obiter - The extent of enquiries necessary in different cases depends on the evidentiary matrix.
Conclusions: The Tribunal concluded that CIT(A)'s deletion was unsustainable on the record and directed remand for further verification and appropriate orders in accordance with law, ensuring the assessee an opportunity to be heard.
Issue 4: Appropriateness of remand to the appellate authority for verification and further proceedings
Legal framework: Remand is appropriate where material facts require fresh verification or where the appellate authority has not properly considered or tested the evidence; principles of natural justice require an opportunity to be given to the assessee to produce or corroborate evidence before final adverse findings.
Precedent Treatment: The Tribunal noted that the AO had conducted investigations and the appellate authority had not made further inquiries; rather than decide definitively on the addition, remand permits focused verification (e.g., service/attendance of principal officers, fresh enquiries with banks or with subscribers) and a reasoned decision thereafter.
Interpretation and reasoning: Given (a) statutory notices returned unserved, (b) bank transaction evidence indicating immediate onward transfers, (c) financial statements showing low declared income vis-à-vis large investments, and (d) absence of oral testimony or attendance by principal officers, the Tribunal found remand necessary to permit the CIT(A) to carry out the directed verifications and pass an order in accordance with law after affording opportunity to the assessee.
Ratio vs. Obiter: Ratio - Where questions of existence/genuineness/creditworthiness hinge on verifiable factual inquiries not conducted at appellate stage, remand for enquiry and decision is appropriate. Obiter - The Tribunal's directions as to what specific verifications may be undertaken are procedural guidance rather than binding standards.
Conclusions: The Tribunal set aside the appellate order deleting the addition and remanded the matter to the appellate authority with directions to verify subscriber companies and pass an appropriate order in accordance with law, while ensuring the assessee is given opportunity to represent its case.
Addition u/s 68 - unexplained cash credit - main contention of DR is that the assessee has failed to prove the identity, genuineness and creditworthiness of the subscriber companies - mere furnishing the confirmations, PAN, bank account No. etc. is not sufficient to prove genuineness, more particularly, when the notices issued by AO u/s 133(6) and 131 were returned unserved thus, it could be presumed that the companies are non-existent and the papers companies
HELD THAT:- As observed by the AO that all these companies are having NIL or very low income as compared to the amount of investments made in the share capital of various companies and all the funds were invested in various entities including the assessee where shares were purchased by those companies at a high premium. It is also observed by the AO that none of the company is receiving any income in the shape of dividend etc. from such investment though all the funds were utilized in such investments. AO has made all the plausible investigation and once it is found that these companies are not having sufficient creditworthiness, the additions were made.
The assessee has not discharged the burden casted upon it by producing the Principal Officer of the companies and merely filed the confirmations of these companies. CIT(A) while deleting the additions, had placed reliance on the details filed by the assessee which were already examined by the AO and no new evidences were submitted before CIT(A). The judgements which are relied upon by AO for making additions were not discussed by CIT(A) and simply stated that these judgements are distinguishable on facts.
We hereby set aside the order of CIT(A) and remand the case to the file of CIT(A) with the directions to carry out necessary verification from the shares subscriber companies and pass the appropriate order.
ISSUES PRESENTED AND CONSIDERED
1. Whether a cash receipt recorded as sale of gold (350 grams) supported by invoice, bank payment through RTGS, bank statements, buyer's ledger and stock statements can be treated as an accommodation entry and subjected to addition under Section 69A of the Income Tax Act in absence of incriminating material from the alleged buyer.
2. Whether non-filing of a reply to a notice issued under Section 133(6) per se justifies treating a documented transaction as bogus/accommodation entry.
3. Whether reliance by assessing authority and first appellate authority on information from investigation/intelligence wings and on judicial authorities holding entire entries as bogus, without independent contrary evidence on record, suffices to sustain an addition under Section 69A.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Genuineness of the sale transaction v. accommodation entry - Legal framework
Legal framework: Section 69A permits assessment of unexplained money, etc., where cash credits or unexplained investments are brought to tax as income. Section 133(6) empowers inquiry from third parties. Generally, the Revenue must establish that the entries are unexplained/ accommodation or that the assessee failed to account satisfactorily for the receipts.
Precedent Treatment: Lower authority relied on various High Court decisions which hold that bogus/accommodation entries must be disallowed and that estimating a percentage of bogus claims may be impermissible. Those authorities sometimes sustain additions where the assessee's proofs are found inadequate or investigation disclosures indicate accommodation entries.
Interpretation and reasoning: The Tribunal examined the contemporaneous documentary evidence - sales invoice, bank realization via RTGS, bank statements, buyer's ledger and stock statement - and observed that the transaction was routed through banking channels and supported by normal commercial documents. No incriminating document or statement was produced by the investigating authority against the assessee to rebut these documents. In those circumstances the Tribunal held that mere information from investigation/intelligence without concrete contrary material on record does not suffice to classify the transaction as an accommodation entry and to sustain an addition under Section 69A.
Ratio vs. Obiter: Ratio - where an alleged accommodation entry is supported by contemporaneous commercial documents and bank receipts and there is no contrary material or incriminating evidence from the alleged buyer or investigation, the Revenue's mere reliance on information from investigative wings is insufficient to invoke Section 69A and make an addition. Obiter - general observations on the distinction between estimating percentages of bogus entries and disallowing entire entries as per various High Court rulings (as discussed by the lower authority) are not applied as binding in the facts.
Conclusion: The Tribunal concluded that the addition under Section 69A was unjustified and allowed the appeal, holding that the transaction was genuine on the available evidence.
Issue 2: Effect of non-response to Section 133(6) notice on treatment of transaction
Legal framework: Section 133(6) is a procedural device to obtain information; absence of reply may be a factor but does not by itself prove that a transaction is bogus. The onus remains on the Revenue to establish the claim of accommodation/ unexplained income.
Precedent Treatment: Assessing officers may treat non-furnishing of information as adverse, but appellate and judicial authorities require corroborative or independent material to sustain substantive additions.
Interpretation and reasoning: The Tribunal noted that the assessing officer made the addition partly because no reply to the Section 133(6) notice was filed. However, in appellate proceedings the assessee produced documentary evidence showing receipt through banking channels and commercial documentation. The Tribunal emphasized that failure to respond to a 133(6) notice cannot overcome positive documentary proof establishing the genuineness of the transaction, absent countervailing material from Revenue.
Ratio vs. Obiter: Ratio - non-compliance with a 133(6) notice cannot, standing alone, justify treating a documented transaction as bogus when the assessee subsequently produces credible documentary evidence showing genuineness and there is no contrary evidence on record. Obiter - procedural strictures or admonitions regarding cooperation with inquiries.
Conclusion: The Tribunal rejected non-response to 133(6) as a sufficient basis for sustaining the addition in the facts of the case.
Issue 3: Reliance on investigation/intelligence inputs and judicial authorities in absence of contrary evidence
Legal framework: Information from investigative/intelligence wings can be relevant but must translate into admissible material or evidence on record to negate the assessee's documentary proof. Judicial precedents disallowing alleged bogus entries often depended on facts showing collusion, lack of banking trail, forged documents or adverse statements.
Precedent Treatment: The first appellate authority relied on recent High Court decisions holding that entire bogus entries must be disallowed and that percentage additions are impermissible. Those decisions address scenarios where material on record established the entries to be sham. Such precedents do not apply if the assessee has verifiable bank receipts and documentation and there is no incriminating material.
Interpretation and reasoning: The Tribunal distinguished the reliance placed by the lower authority on broad judicial pronouncements and on information from investigation/intelligence because, in the present facts, the Revenue brought no specific contradictory evidence - for example, no statement, no bank evidence of the buyer to contradict the assessee's receipts, and no incriminating document from Vico Enterprise. The Tribunal treated the lower authorities' reliance on third-party information and on cases with different facts as insufficient to overturn the documentary proof of genuineness.
Ratio vs. Obiter: Ratio - investigative/intelligence inputs must be supported by material evidence on record to negate prima facie documentary proof; reliance on judicial rulings from dissimilar factual matrices cannot supplant the requirement for case-specific contrary evidence. Obiter - discussion of proportionality of disallowance and judicial approaches to estimating bogus entries.
Conclusion: The Tribunal held that reliance solely on investigative inputs and precedent without specific contradictory material was insufficient; hence the addition could not be sustained.
Ancillary Point - Burden of Proof and Standard of Examination
Legal framework and reasoning: The Tribunal reiterated the practical principle that once the assessee produces contemporaneous commercial documents and banking evidence showing a receipt arose from a sale, the onus shifts to the Revenue to produce material to show that the transaction was a sham. Absent such material, the transaction must be accepted as genuine.
Ratio vs. Obiter: Ratio - evidentiary burden and standard applied in the decision: documentary proof plus banking channel receipts, when uncontradicted, are sufficient to discharge the assessee's burden on genuineness. Obiter - remarks on natural justice raised by the assessee were not addressed in detail because the Tribunal decided on substantive evidence.
Conclusion: The Tribunal allowed the appeal and set aside the addition, applying the above evidentiary principle.
Addition u/s 69A - treating Actual / Real transaction of Sales of Gold Bar as accommodation Bill, Undisclosed income - HELD THAT:- It is observed that the assessee has duly established the genuineness of the transaction. The transactions have been routed through banking channels, and the genuineness has been satisfactorily explained. In the absence of any contrary evidence brought on record by the Revenue, we are of the considered opinion that the addition sustained by the Ld. CIT(A) is not justified. Appeal of the assessee is allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether reopening of assessment under section 147/issuance of notice under section 148 was validly effected within the statutory time limit for the relevant assessment year when the assessee had not filed a return for that year.
2. Whether the Assessing Officer's invocation of section 50C to compute long-term capital gains by adopting the stamp-duty (jantri) value and disallowing the sale consideration declared by the assessee was sustainable where: (a) the Assessing Officer himself referred the matter to the District Valuation Officer (DVO), (b) the assessee produced agreements and evidence of receipt of consideration claimed, and (c) revenue did not demonstrate receipt of higher consideration by the assessee.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Validity and timeliness of reopening under section 147/notice under section 148
Legal framework: Reopening under section 147 and issuance of notice under section 148 require recording of reasons and compliance with statutory time limits measured from the end of the relevant assessment year; special consideration attaches where no return was filed under section 139 for the year in question.
Precedent Treatment: The Tribunal considered the procedural requirement of recording reasons and obtaining prior approval for reopening; reliance was placed on the statutory scheme rather than overruling or distinguishing any specific case law in the reasons recorded.
Interpretation and reasoning: The Court observed that (i) proper reasons were recorded and prior approval obtained before reopening; (ii) notice under section 148 was served on 13-03-2019 for assessment year 2014-15; and (iii) the assessee had not filed a return under section 139 for that year, making reopening permissible in the manner undertaken. The Tribunal rejected the appellate authority's finding that the notice was issued beyond four years, holding that the Assessing Officer's action complied with the statutory timelines applicable to a case where no return was filed.
Ratio vs. Obiter: Ratio - reopening was valid where reasons were recorded and prior approval obtained and the statutory limitation was correctly applied to a case with no filed return. Obiter - none material beyond application of statutory timeline principles.
Conclusion: The Tribunal allowed the revenue's ground challenging the CIT(A)'s view and held the reopening/notice under section 148 to be valid and within time.
Issue 2 - Applicability of section 50C and correctness of addition based on stamp-duty (jantri) valuation
Legal framework: Section 50C applies to transfer of immovable property and deems sale consideration to be the stamp-duty (circle/jantri) value where that value exceeds the declared consideration; the Assessing Officer may refer valuation questions to the DVO under the statutory scheme; parties' burden to demonstrate actual consideration received and documentary evidence is relevant.
Precedent Treatment: The assessee relied on a higher court decision supporting acceptance of declared consideration where evidence and DVO findings align; the Tribunal treated that precedent as persuasive to the extent it supported reliance on DVO report and documentary proof of receipt. The Tribunal did not distinguish or overrule precedent but applied the principles of evidentiary reliance on DVO findings and parties' proofs.
Interpretation and reasoning: The Tribunal noted these facts: (a) the assessee produced notarized/agreement documents and contemporaneous evidence of receipt of consideration claimed; (b) the Assessing Officer himself referred valuation to the DVO and the DVO's computation was accepted by the assessee and taxes were paid accordingly; (c) revenue did not controvert that the assessee actually received the consideration shown nor pointed to evidence of higher receipts; and (d) although stamp-duty valuation exceeded declared consideration, once the Assessing Officer sought and accepted DVO input and the assessee furnished supporting evidence, the Assessing Officer could not thereafter ignore the DVO report. The Tribunal further observed inconsistency in revenue's treatment (no objection by purchasers, no appeal against stamp-duty valuation) and factual disputes over dates/registration which affected the weight of the stamp-duty value versus the parties' agreements.
Ratio vs. Obiter: Ratio - where the Assessing Officer refers valuation to the DVO and the DVO's computation is accepted (and the assessee produces evidence of actual receipt of consideration), the Assessing Officer cannot disregard the DVO report to fabricate an addition under section 50C absent independent evidence that the assessee received higher consideration. Obiter - observations on practical improbability of dates and registration anomalies as factor-weighing, not laying down a general rule for all such discrepancies.
Conclusions: The Tribunal upheld the CIT(A)'s deletion of the section 50C addition. It concluded that revenue failed to show that the assessee received more than the stated consideration, that the Assessing Officer could not repudiate the DVO's findings after having obtained them, and that the addition of long-term capital gain based on jantri value was not sustainable on the record.
Cross-references
See Issue 1 for conclusions on validity of reopening which permitted the merits to be considered; see Issue 2 for the Tribunal's factual and legal basis for dismissing the revenue's challenge to the CIT(A)'s deletion of the section 50C addition.
Reopening of assessment u/s 147 - Notice having been issued beyond four years from the last date of the relevant assessment year - HELD THAT:- It is pertinent to the note that the assessment year i.e. of 2014-15 and since the assessee has not filed any return of income u/s. 139 of the Act after recording the proper reasons and prior approval, the Assessing Officer has rightly reopened the case u/s. 147 of the Act. The observation of the CIT(A) is not justified. Thus, ground no. 1 of the Revenue’s appeal is allowed.
Addition u/s 50C on account of LTCG - assessee without any supporting evidence has taken a sale consideration value at much lower price than the actual jantry value of the property - CIT(A) deleted addition - HELD THAT:-It is pertinent to note that the assessee has paid the stamp duty on the value which was actually mentioned in the agreement and as per the transaction agreed in the year 2006 itself. The revenue at no point of time has made out a case that the assessee received more amount than the amount mentioned in the agreement. The assessee has also paid the taxes on the valuation which was shown by the DVO as per the reference of the AO and therefore the Assessing Officer cannot counter the DVO’s report once the AO himself referred the matter to the DVO. The terms agreed upon for the consideration of selling of those two properties were actually received by the assessee which was demonstrated by the assessee at the time of the assessment proceedings. Thus, CIT(A) has rightly deleted the addition - Revenue ground no. 2 is dismissed.
ISSUES PRESENTED AND CONSIDERED
1. Whether an application in Form No.10AB for regular approval under clause (iii) of the first proviso to section 80G(5) is maintainable where provisional approval under clause (i) was earlier granted by Form No.10AC.
2. Whether rejection of the Form No.10AB application as non-maintainable without further communication or personal hearing amounts to violation of principles of natural justice.
3. Whether the appropriate remedy is remittal to the authority for fresh adjudication on merits with opportunity of hearing where the impugned order is founded on a procedural/technical ground without considering substantive eligibility.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Maintainability of Form No.10AB application following provisional approval under Form No.10AC
Legal framework: The statutory scheme contemplates provisional approval under clause (i) by Form No.10AC for a limited period and prescribes a subsequent application in Form No.10AB for regular approval under clause (iii) once activities commence or before expiry of the provisional period; relevant statutory provisions and Rule 11AA govern formality and procedure for approvals under section 80G(5).
Precedent treatment: The Tribunal relied on the Coordinate Bench's approach in the assessee's related proceedings holding that selection of an incorrect clause or procedural lapse cannot render a valid application non-maintainable and that a provisional approval does not obviate need for regularisation by Form No.10AB.
Interpretation and reasoning: A plain reading of the statutory scheme shows provisional approval is time-bound and contingent; legislative intent and Rule 11AA require a fresh/regular application for final approval. The authority's conclusion that existence of provisional approval makes a subsequent Form No.10AB redundant ignores the transitional/temporal nature of provisional grants and the mandatory requirement to apply for regular approval.
Ratio vs. Obiter: Ratio - Provisional approval under Form No.10AC does not preclude maintainability of a subsequent Form No.10AB application for regular approval under clause (iii); the statutory scheme mandates fresh application where required. Obiter - None beyond the immediate statutory interpretation.
Conclusion: The Tribunal held the Form No.10AB application to be proper and maintainable; the CIT(E)'s view that the application was redundant was contrary to the statutory framework and therefore unsustainable.
Issue 2 - Violation of principles of natural justice by rejecting application without effective hearing
Legal framework: Administrative action is subject to principles of natural justice, which require issuance of adequate notice and an opportunity to be heard before adverse orders that affect rights are passed; procedural fairness extends to tax/charitable registration proceedings.
Precedent treatment: The Tribunal applied established principles that mere issuance of a single notice followed by filing of a detailed reply ordinarily requires further communication or personal hearing before rejection, especially where the applicant requests abeyance or additional consideration.
Interpretation and reasoning: The record shows only one notice dated 10.09.2024, the assessee's detailed reply dated 17.10.2024 requesting abeyance pending related proceedings, and no subsequent communication or hearing before the order of rejection on 06.11.2024. In those circumstances an effective opportunity to be heard was not afforded; denial of such opportunity is a procedural infirmity amounting to breach of natural justice.
Ratio vs. Obiter: Ratio - Rejecting an application on maintainability grounds without further communication or personal hearing where the applicant has filed particulars and sought abeyance constitutes violation of natural justice. Obiter - The appropriateness of a personal hearing as opposed to written communication depends on facts; here, personal hearing or further notice was warranted.
Conclusion: The Tribunal held that the impugned order involved denial of effective opportunity to be heard and thus violated principles of natural justice.
Issue 3 - Appropriate remedy where rejection is based on procedural/technical ground without examining substantive eligibility
Legal framework: Where an administrative order is vitiated by procedural defect or misconstruction of maintainability and substantive rights remain unexamined, the usual remedial course is to set aside and remit for fresh adjudication in accordance with law, with directions to afford opportunity of hearing and to decide on merits.
Precedent treatment: The Tribunal followed the Coordinate Bench's direction in the related 12A proceedings to restore the matter for fresh consideration and applied consistent remedial principles to attain substantial justice rather than permit dismissal on technical grounds.
Interpretation and reasoning: The impugned rejection rested on a technical premise - that prior provisional approval rendered fresh application non-maintainable - without any assessment of substantive eligibility. Given the procedural lapse and the related Bench's prior restoration, remittal for fresh, speaking decision after verification of facts and due hearing is appropriate to effectuate legislative purpose and prevent injustice.
Ratio vs. Obiter: Ratio - Where a registration/approval application is dismissed on technical grounds without merit examination and where procedural fairness is lacking, the matter should be set aside and remitted for fresh adjudication with directions to afford effective hearing and to pass a speaking order. Obiter - Procedural laches by consultants or third parties in communicating orders may justify condonation of delay in appellate filing (applied here by analogy to grant relief).
Conclusion: The Tribunal set aside the impugned order and remitted the matter to the authority for fresh adjudication on merits, directing effective opportunity of hearing and issuance of a speaking order; the assessee was directed to cooperate and supply requisite details.
Auxiliary - Condonation of delay in preferring appeal
Legal framework and reasoning: Delay of 76 days in filing the appeal was explained by affidavit attributing non-communication of the impugned order by the consultant and bona fide circumstances beyond the assessee's control; applying a liberal, justice-oriented approach, the Tribunal condoned the delay to prevent defeat of substantial justice.
Conclusion: Condonation of delay was allowed and appeal was decided on merits; this serves as a procedural underpinning for remittal rather than a reason for dismissing the appeal.
Rejection of application for registration of the trust u/s. 80G(5)(iii) - non affording the assessee an effective opportunity of being heard - rejecting the assessee’s application in Form No. 10AB for approval under clause (iii) of the first proviso to subsection (5) of section 80G by holding the same as non-maintainable - HELD THAT:- On a plain reading of the statutory provisions and Rule 11AA, we are unable to agree with the conclusion of the CIT(E). The assessee’s earlier approval in Form No. 10AC was provisional and was valid only for a limited period. The law specifically mandates that such provisional approval must be followed by a fresh application in Form No. 10AB for regular approval under clause (iii) once the activities have commenced or before the expiry of the provisional period. Therefore, the assessee’s application was both proper and maintainable under the scheme of the Act. The reasoning of the CIT(E) that the existence of provisional approval rendered the fresh application redundant is contrary to the intent and framework of the amended law.
We also find merit in the assessee’s grievance regarding lack of adequate opportunity of hearing. The record reveals that only one notice dated 10.09.2024 was issued by the CIT(E), in response to which the assessee filed a detailed reply on 17.10.2024, enclosing all relevant details and explaining that the matter be kept in abeyance pending the outcome of its appeal for registration u/s 12A. Thereafter, no further communication was made, and the order was passed without any personal hearing. The denial of an effective opportunity of being heard, in our considered opinion, amounts to a violation of the principles of natural justice.
We find that the Co-ordinate Bench [2025 (5) TMI 946 - ITAT AHMEDABAD] while dealing with the assessee’s earlier appeal under section 12A, had indeed restored the matter to the CIT(E) after holding that a procedural lapse in selecting the appropriate clause cannot render a valid application non-maintainable. The Bench had directed the CIT(E) to treat the application as filed under the correct provision and to decide the same on merits. The facts and reasoning involved in the present appeal are identical — the rejection is again on the technical ground of maintainability without any examination of the substantive eligibility of the assessee.
Thus, we hold that the impugned order passed by the CIT(E) is not sustainable in law. We accordingly set aside the said order and restore the matter to the file of the CIT(E), with a direction to examine the assessee’s application afresh on merits. Appeal filed by the assessee is allowed for statistical purposes.
1. ISSUES PRESENTED AND CONSIDERED
1. Whether reassessment/reopening is vitiated where the assessee was not supplied with the sanction under section 151 and the material relied upon in the reasons recorded under section 148(2).
2. Whether additions described as "unexplained income" can be sustained when the assessment order and reasons do not invoke or specify the particular deeming/proviso provisions (sections 68 to 69D) under which the additions are made.
3. Whether reasons recorded under section 148(2) are invalid if they are vague, non-specific and merely reproduce information without demonstrating application of mind or factual link to the assessee.
4. Whether reopening (or its validity) is vitiated where there is a material variation between the grounds/reasons for reopening under section 148A/D and the final additions made in the assessment order.
5. Whether reopening is invalid where the sole effective addition resulting from reassessment is below the monetary threshold prescribed by section 149(1)(b) (minimum threshold) and the original basis of reopening does not survive.
6. Whether a post-search assessment initiated and completed under sections 143(2)/143(3) is impermissible where the statutory scheme (Explanation 2 to section 148) prescribes reassessment/"deemed to have escaped assessment" treatment for search-related matters.
7. Whether approval/sanction that is unsigned or contains only a mechanical remark ("Approved") without recorded reasons amounts to invalid or vitiated approval under section 151 (or delegated approval), affecting jurisdiction to proceed.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Non-supply of sanction under section 151 and relied material with reasons under section 148(2)
Legal framework: Section 147/148 read with section 151 requires reasons to believe to be placed before the specified authority for approval; material forming the basis of reasons must be furnished to the assessee to enable objections.
Precedent treatment: Coordinate and High Court authorities held that approval under section 151 must be furnished with the reasons and that non-supply of relied upon material can vitiate reassessment; Supreme Court refusal of SLP in a leading decision affirmed the requirement.
Interpretation and reasoning: The Court found failure to supply the sanction copy and the documents referenced in reasons amounted to denial of fair opportunity and prevented meaningful objection. Materiality of documents (investigation/intimation/statements) that led to formation of belief is integral to the reasons and cannot be withheld.
Ratio vs. Obiter: Ratio - non-supply of sanction and the material on which reasons are founded vitiates the reopening and quashes reassessment. Observational - supply requirement is mandatory even if material might otherwise be sufficient.
Conclusion: Reopenings where sanction and relied material were not supplied are invalid; reassessments quashed for affected years.
Issue 2 - Failure to specify particular deeming provisions (sections 68-69D) when making additions described as "unexplained income"
Legal framework: Sections 68-69D contain separate deeming and substantive conditions; notice/reasons must indicate the legal basis so the assessee knows the charge and applicable burden/standards.
Precedent treatment: Courts held that reasons cannot be supplemented by assessment orders and that failure to indicate which specific provision is relied on deprives assessee of effective defence.
Interpretation and reasoning: The Tribunal observed that treating different heads of unexplained income interchangeably without identifying the invoked provision frustrates the statutory scheme because each section carries distinct requirements and evidentiary burdens.
Ratio vs. Obiter: Ratio - assessment orders that fail to indicate the specific deeming provision relied upon for additions on unexplained income are vitiated. Observation - CIT(A) should not alter the legal basis where not in record of reasons.
Conclusion: Additions lacking reference to the specific statutory provision under sections 68-69D are infirm and liable to be quashed.
Issue 3 - Vagueness and non-specificity of reasons recorded under section 148(2)
Legal framework: Reasons to believe must show sufficient factual nexus and application of mind; mere reproduction of information without inquiry does not cross the threshold from suspicion to belief.
Precedent treatment: Authorities emphasize tangible material and demonstration of enquiries made; mere narrative of information or issuance of notices without follow-up does not validate reopening.
Interpretation and reasoning: The reasons in the record largely reproduced information received and described issuance of a section 133(6) notice but did not set out specific inquiries or factual links proving how the assessee received alleged bogus entries. The absence of demonstrated application of mind rendered the reasons inadequate.
Ratio vs. Obiter: Ratio - reasons that are vague and devoid of specific factual links are insufficient to sustain reopening. Observation - issuance of notices alone does not validate reasons unless inquiries show resultant material.
Conclusion: Reopening based on such non-specific reasons is invalid; assessment quashed where applicable.
Issue 4 - Variation between reasons for reopening and final assessment additions
Legal framework: Reopening must remain within the scope of the reasons; AO cannot travel beyond the purpose disclosed in the reasons to make additions on a different theory.
Precedent treatment: High Courts have repeatedly held that an AO must act within the "four corners" of the reasons and cannot substitute a different basis (e.g., treating a matter as "adventure in the nature of trade" when reopening alleged undisclosed capital gains).
Interpretation and reasoning: Where the reopening quantified an alleged escapement on one basis but the final addition rested on a different, previously unpled theory (commission/accommodation entries), the Tribunal treated the variation as fatal because the assessee was deprived of opportunity to meet the alternate case.
Ratio vs. Obiter: Ratio - material variation between grounds of reopening and the final assessment invalidates the assessment. Observation - CIT(A) cannot sustain additions based on a provision or theory not disclosed in reasons.
Conclusion: Assessments containing additions not within the scope of the recorded reasons are vitiated.
Issue 5 - Monetary threshold under section 149(1)(b) and non-survival of reopening basis
Legal framework: Section 149(1)(b) prescribes a monetary threshold for validity of certain reassessments (minimum prescribed amount) and reopening must have a surviving basis supporting that threshold.
Precedent treatment: Courts have held that if the effective addition resulting from reassessment is below the statutory threshold and the original basis does not survive, the reopening can be vitiated.
Interpretation and reasoning: The sole effective addition in the assessment under challenge was below the statutory monetary threshold and was not the subject matter of the reasons for reopening; therefore, the reopening could not be sustained in law.
Ratio vs. Obiter: Ratio - where the surviving effective addition falls below the prescribed minimum and does not reflect the basis of reopening, reassessment is invalid. Observation - quantification in reopening must align with final outcome to pass muster.
Conclusion: Reopening is invalid where the effective addition is below the statutory threshold and the reopening basis does not survive; assessment quashed.
Issue 6 - Use of general scrutiny provisions (sections 143(2)/143(3)) for post-search cases covered by Explanation 2 to section 148
Legal framework: Explanation 2 to section 148 treats certain post-search matters as "deemed to have escaped assessment" and the statutory scheme post-Finance Act 2021 prescribes reassessment mechanics for search-related matters; specific provisions prevail over general ones.
Precedent treatment: Principle of specific provision excluding general provision applies; courts require that statutory prescription for search-related assessment be followed and not sidelined by general scrutiny provisions.
Interpretation and reasoning: The Tribunal accepted that where search occurred in the relevant period, the matter must proceed under section 148 (Explanation 2) and not be treated as a routine scrutiny under sections 143(2)/143(3). Use of general provisions where the specific regime applies undermines the legislative scheme and can render the assessment improper.
Ratio vs. Obiter: Ratio - search-based matters post-amendment attract the specific reassessment mechanism; assessment under general scrutiny provisions when the specific scheme governs is impermissible. Observation - approval and procedural prerequisites of the specific scheme must be complied with.
Conclusion: Post-search assessments not processed under the statutory reassessment regime are vulnerable; where the assessment proceeded under sections 143(2)/143(3) contrary to Explanation 2, it is vitiated.
Issue 7 - Validity of unsigned or mechanically worded approvals
Legal framework: Sanctions/approvals under section 151 (or delegated authorisations) must record satisfaction after application of mind; signature and reasons (or at least demonstrable application of mind) are required for an operative approval.
Precedent treatment: Courts have repeatedly held that unsigned notices/approvals or approvals consisting only of a printed or single-word "Approved" without reasons demonstrate non-application of mind and are invalid; mechanical approvals are fatal to jurisdiction.
Interpretation and reasoning: The approval relied upon consisted only of an "Approved" remark and lacked signature or recorded reasons, thus amounting to a mechanical/ritualistic sanction. Such an approval cannot validate subsequent proceedings and vitiates jurisdiction to reassess.
Ratio vs. Obiter: Ratio - unsigned or mere mechanical approvals without demonstration of application of mind are invalid and render subsequent assessment void. Observation - signature and meaningful record of reasons are necessary safeguards.
Conclusion: Approvals that are unsigned or display only a mechanical "Approved" notation are invalid; consequent assessments predicated on such approvals are quashed.
Overall Disposition
The Tribunal concluded that, on the issues considered, failures to supply sanction and material, failure to specify the statutory provision relied upon, vagueness and variation in reasons, reliance on improper procedural route for search-related matters, monetary-threshold defects and mechanical or unsigned approvals collectively vitiated the impugned assessments; accordingly the assessments were quashed.
Validity of reopening of assessment - addition being less than monetary threshold of Rs. 50 lakhs u/s 149(1)(b) - as alleged assessee was not supplied copy of sanction u/s 151 of the Act and the stated material relied upon in reasons u/s 148(2) of the Act along with the reasons recorded u/s 148(2) - HELD THAT:- Hon’ble Delhi High Court decision in case of Pioneer Town Planners Pvt. Ltd. [2024 (3) TMI 828 - DELHI HIGH COURT] is also relied by ld. Counsel for the same proposition that approval should not show non application of mind. As in this case where the copy of approval in PB shows in remark Column, approval is granted by mere words “Approved”.
Based upon the aforesaid discussion, we are of the considered view that the ld. AR has successfully demonstrated that in AYs 2013-14 and 2014-15 there were failure on the part of the ld. tax authorities in not supplying the copy of sanction u/s 151 of the Act and the material referred in reasons u/s 148(2) of the Act and, further, in AY 2014-15 the impugned effective addition of Rs. 31,50,213/- being less than the monetary threshold of Rs. 50 lakhs u/s 149(1)(b) of the Act, that makes the assessments bad in law and are liable to be quashed.
As with regard to AY 2018-19, the ld. counsel has sufficiently demonstrated that the assessment order lacks mention of deeming provisions invoked. As it is not a case of one sort of accommodation entries, but, allegedly unaccounted income earned from laundering of funds for providing accommodation entries to the beneficiaries in the guise of unsecured loans, bogus sale and purchase bills were added to the total income of the assessee in the form of commission income that all the more needed indicating which of the relevant deeming provisions u/ss 68 to 69D of the Act have been invoked. That certainly vitiates the assessment and the assessment order is liable to be quashed.
As with regard to AY 2021-22, the foundation of the proceedings by way of approval dated 28.06.2022 is established to be on the basis of an approval granted in a mechanical manner by merely mentioning ‘Approved,’. That again vitiated the assumption of jurisdiction and made the consequential assessment order liable to be quashed.
ISSUES PRESENTED AND CONSIDERED
1. Whether the reopening of assessment under section 147 read with section 148 of the Income Tax Act was validly initiated on the reasons recorded.
2. Whether a sum of Rs. 1,30,00,000 added by the Assessing Officer under section 68 as unexplained credit / non-genuine loan is sustainable on the materials on record.
3. Whether the Assessing Officer could treat the assessee's loan receipts from a sister concern as non-genuine by tracing the lender's "source of source" to alleged entry providers, absent independent verification and admissible documentary findings.
4. Whether the proviso to section 68 (requiring explanation of source of source) applies to sustain the addition in the assessment year under consideration.
5. Admissibility of additional grounds of appeal raising legal challenges to reopening when such grounds do not require fresh facts.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Validity of Reopening under sections 147/148
Legal framework: Reopening requires formation of a reason to believe that income chargeable to tax has escaped assessment; reasons recorded must correspond to the addition sought and must disclose material facts justifying reopening.
Precedent Treatment: Additional ground admitting legal challenge to reopening admitted by reference to the principle that pure legal grounds not requiring new facts are maintainable on appeal (National Thermal Power Co. Ltd. principle relied on by the Tribunal).
Interpretation and reasoning: The reasons recorded relied on information that credits to the assessee originated from transactions involving an alleged entry provider and that sums routed through group entities indicated non-genuineness. However, the Assessing Officer's eventual addition targeted amounts received by the assessee from its lender, not the credits originally described in the reasons; the AO did not carry out independent enquiry or record specific findings that linked the assessee's receipts to the alleged bogus source beyond relying on third-party statements. The reasons recorded therefore did not align with the basis of the addition and lacked necessary enquiry.
Ratio vs. Obiter: Ratio - Reopening is unsustainable where the reasons recorded do not fairly and reasonably indicate the income alleged to have escaped assessment and where the AO proceeds to make additions on a different basis without independent inquiry.
Conclusion: Reopening, as applied to sustain the section 68 addition, was not supported by legally adequate reasons and the addition based thereon is not sustainable. (This conclusion is treated as consequential to the Tribunal's finding on the merits of the addition.)
Issue 2 - Sustenance of addition under section 68 (unexplained credit / non-genuine loan)
Legal framework: Section 68 permits taxing unexplained credits where identity, genuineness and creditworthiness are not established; taxpayer must explain nature and source of receipt and adduced evidence must be considered by the revenue.
Precedent Treatment: The Tribunal applied long-standing principles requiring examination of documentary evidence, ledger accounts, bank statements and commercial realities in testing genuineness and creditworthiness; mere information of entry-provider activity is not ipso facto conclusive.
Interpretation and reasoning: The assessee produced loan confirmations, bank statements, financials of the lender, and ledger showing a running account and repayment. The AO rejected creditworthiness of the lender solely on return-declared income and alleged chain-transactions to entry providers, without evaluating lender's business (NBFC operations) or the documentary material. The Tribunal observed that advances by a NBFC may legitimately be funded by customer deposits or mobilised funds and that the AO failed to record findings negating the documentary evidence. The AO also added the entire Rs. 1,30,00,000 though the reasons recorded specifically referenced Rs. 65,00,000 as alleged bogus borrowing, exposing a disconnect between the stated cause and the quantum added.
Ratio vs. Obiter: Ratio - An addition under section 68 cannot be sustained where the revenue ignores documentary evidence of a genuine running account, repayment, and lender's financial capacity, and where the addition is premised on unverified information about the lender's source of funds.
Conclusion: The section 68 addition of Rs. 1,30,00,000 is not sustainable and is to be deleted; the assessee's evidentiary material and ledger showing running account and repayment undermine the AO's adductions of non-genuineness.
Issue 3 - Legitimacy of penetrating "source of source" and reliance on statements of alleged entry providers
Legal framework: Revenue may probe genuineness and reality of transactions, but invasion into "source of source" requires legal basis and must respect evidentiary thresholds; taxpayer is not obligated to prove source of source unless statutorily required.
Precedent Treatment: The Tribunal noted that the proviso to section 68 (imposing duty to explain source of source) was introduced only by Finance Act 2022 w.e.f. 01.04.2023, and thus is not applicable to the year under consideration; therefore revenue's attempt to discredit the transaction by pointing to the lender's funding from an alleged entry provider cannot stand on that statutory proviso.
Interpretation and reasoning: The AO treated the lender's borrowings from alleged entry providers as rendering the assessee's loans non-genuine, relying heavily on a third-party statement asserting accommodation entry practice. The AO, however, did not make independent factual findings after considering the lender's financial statements, loan ledger and bank records. Given the absence of findings and the inapplicability of the post-2022 proviso, treating the assessee's receipts as non-genuine on the basis of "source of source" information alone was impermissible.
Ratio vs. Obiter: Ratio - Revenue cannot sustain an addition by attacking the lender's source of funds based solely on third-party statements and without statutory duty of the assessee to explain source of source (where not provided by law for the relevant year) and without independent verification.
Conclusion: The AO's penetration into source of source and reliance on alleged entry-provider statements, without independent enquiry and absent statutory backing for source-of-source explanation, is insufficient to uphold the addition.
Issue 4 - Applicability of proviso to section 68 (Finance Act 2022) to the assessment year
Legal framework: Statutory amendments operate prospectively from their effective date; proviso to section 68 inserted by Finance Act 2022 took effect from 01.04.2023 and cannot be applied to earlier assessment years.
Interpretation and reasoning: The Tribunal expressly noted the proviso's effective date and held that the obligation to explain the source of source was not in force for the year under dispute; accordingly revenue's argument premised on that proviso is inapplicable.
Ratio vs. Obiter: Ratio - Legislative amendment imposing a requirement to explain source of source cannot be applied retrospectively to assessments for earlier years.
Conclusion: The proviso to section 68 is not applicable to the assessment year in issue and cannot sustain the addition.
Issue 5 - Admissibility and effect of additional legal grounds
Legal framework: Pure legal grounds not requiring additional factual investigation may be admitted at appellate stage.
Interpretation and reasoning: The additional grounds challenged the legality of reopening and were purely legal; the Tribunal admitted them following the governing principle permitting admission of such grounds.
Ratio vs. Obiter: Ratio - Pure legal grounds that do not require further fact-finding may be admitted on appeal and decided by the Tribunal.
Conclusion: Additional grounds were admitted and decided in favour of the assessee as part of the Tribunal's determination that the reopening and section 68 addition were unsustainable.
Addition u/s 68 - unexplained credit - AO based on the information received with regard to the chain of transactions originating from an alleged entry provider and accordingly held the loan received by the assessee from its sister concern M/s Omrim Security Ltd. as non-genuine - AO has however has recorded a finding that the credit worthiness of M/s Omrim Security Ltd has not been established since the income returned is not supporting the credit worthiness
HELD THAT:- Proviso to section 68 to explain source of source was inserted from Finance Act 2022 w.e.f. 01.04.2023 and therefore there is merit in the contention of the ld AR that the transaction between the assessee and M/s Omrim Security Ltd cannot be held as non genuine for the reason that M/s Omrim Security Ltd has sourced funds from alleged entry provider.
In the reasons recorded as extracted in the earlier part of this order the AO has stated that information is received from DDIT(Inv) regarding suspicious transactions entered into by M/s.Agrawal Enterprises and since assessee being a party who made payments, there is a reason to believe that the income has escaped assessment. Assessee proceeded to make an addition towards the payments received by the assessee from M/s Omrim Security Ltd based on information available regarding an alleged entry provider Shri Dahyabhai Thakkar.
Amount of alleged bogus borrowing by M/s Omrim Security Ltd from M/s Jalaram Finvest Ltd is stated to be Rs. 65,00,000 whereas the AO has added Rs. 1,30,00,000 as addition under section 68 of the Act. Accordingly there is also merit in the argument that the reasons recorded for reopening and the ground for making the addition are different and that the addition is merely based on information without proper enquiry.
Addition made by the AO u/s 68 is not sustainable and we direct the AO to delete the same. Accordingly the assessee succeeds.
ISSUES PRESENTED AND CONSIDERED
1. Whether the Tribunal should condone the delay in filing the appeal where the assessee filed after the limitation period, on grounds of "reasonable cause".
2. Whether the amount written off as "foreign investment written off" (in the books of the assessee) is allowable as a revenue/business loss or is a capital loss disallowable as a business expenditure.
3. Whether an advance receipt in foreign currency (USD 154,282 equivalent to Rs.99,23,830) is an unexplained cash credit liable to be added to income under section 68 of the Act (and consequentially whether section 115BBE can be invoked), or whether the identity, genuineness and source of the receipt were sufficiently explained as advance against supplies.
4. (Procedural/ancillary) Treatment of common grounds across two assessment years and application of findings mutatis mutandis between those years; and clarification that certain grounds (ad-hoc material consumption disallowance and excise write-off) were not pressed.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Condonation of delay in filing the appeal
Legal framework: The Tribunal has power to condone delay if "reasonable cause" prevented timely filing; guiding principles from Supreme Court decisions require consideration whether delay was intentional, whether appellant gained by delay, and whether grounds constitute reasonable cause.
Precedent treatment: Reliance placed on principles in Collector, Land Acquisition, Anantnag & Ors. v. Mst. Katiji & Ors. and Inder Singh v. State of Madhya Pradesh to evaluate "reasonable cause".
Interpretation and reasoning: The assessee explained that identical issues were sub judice before the Tribunal for an earlier assessment year and there was an honest belief the earlier final order would apply to the later year; additional delay arose while responding to a penalty notice and upon advice of Senior Counsel the appeal was filed. The Tribunal found delay not intentional, no undue advantage derived, and the explanation constituted reasonable cause.
Ratio vs. Obiter: Ratio - delay of 445 days condoned on facts where bona fide belief and absence of mala fides shown; not a general rule but fact-specific application of established principles.
Conclusion: Delay condoned and appeal admitted for adjudication.
Issue 2 - Nature of "foreign investment written off": revenue (business) loss v. capital loss
Legal framework: Distinction between revenue and capital loss; well-settled tests examine purpose and nature of investment - whether made for commercial expediency/expansion of business (leading to revenue/trading loss) or as long-term investment to earn dividends/appreciation (capital loss). Sectional provisions permitting deduction for business losses/bad debts depend on the character of the loss and whether it is written off in books.
Precedent treatment (followed/distinguished): The Tribunal considered and applied authorities holding that investments in wholly-owned subsidiaries made for commercial expediency (to further business operations) may result in revenue losses (e.g., decisions following Colgate Palmolive and Ace Designers). It distinguished authorities where facts showed investment intended to create enduring capital advantage or to earn dividend/price appreciation.
Interpretation and reasoning: The Tribunal conducted a factual analysis: (a) investments in the wholly-owned subsidiary were made to acquire 80% of an operating business and to expand overseas operations; (b) intercompany service and master agreements, credit agreements and ensuing receipts (service charges and export sales) demonstrate that business activity commenced and revenue flowed from the arrangement; (c) the assessee incurred and booked service income and export sales in subsequent years directly linked to the investment; (d) bankruptcy filings, board resolutions and court proceedings in the foreign jurisdiction established the occurrence of loss and the progressive write-offs; (e) the writing off was done in stages as proceedings unfolded and reflected prudential accounting in anticipation of loss. Applying the factual matrix against legal tests, the Tribunal concluded the investment was for commercial expediency and business expansion, not a passive capital investment for yield or appreciation.
Ratio vs. Obiter: Ratio - where investments in a wholly-owned subsidiary are made to acquire and operate a business abroad and generate operating revenue for the parent, losses on such investments may be treated as business (revenue) losses; factual demonstration of commercial expediency and nexus to revenue is decisive. This is a binding ratio for the case on its facts; not a broad rule displacing the need for fact-specific inquiry.
Conclusion: The write-off of Rs.97,61,190 for A.Y. 2018-19 and Rs.9,56,76,580 for A.Y. 2020-21 were held to be revenue/business losses deductible as expenditure; findings of the lower authority treating them as capital losses were reversed and appeals allowed on this point (with the A.Y.2018-19 appeal partly allowed and A.Y.2020-21 allowed mutatis mutandis).
Issue 3 - Addition under section 68 (unexplained cash credit) and applicability of section 115BBE
Legal framework: Section 68 permits addition of unexplained cash credits where identity, genuineness or source is not satisfactorily explained. Section 115BBE imposes special tax consequences on certain unexplained cash credits/additions.
Precedent treatment: The Tribunal applied statutory tests and factual scrutiny of documents evidencing identity of the payer, bank routing and commercial nexus between payer and assessee, noting that precedence requires acceptable explanation supported by contemporaneous records.
Interpretation and reasoning: The Tribunal reviewed ledger accounts, bank statements, intercompany relations and documentary evidence. It found that the USD 154,282 was received from the operating US company (the acquired operating concern), an entity directly related to the assessee's business model and in which the assessee's WOS held an 80% stake. The transaction was correctly characterized as an advance against supplies; the initial mis-classification in assessment proceedings was inadvertent. The identity and source were therefore satisfactorily explained and established through records; circularity of transactions in the broader group did not negate genuineness where commercial nexus and bank channels existed. Because the amount was explained, addition under section 68 and consequent invocation of section 115BBE were unwarranted.
Ratio vs. Obiter: Ratio - where a receipt is supported by ledger entries, bank records and demonstrable commercial nexus (advance against supplies from a related but operating concern), the requirement of explanation under section 68 is satisfied and addition is not justified; consequential tax provisions predicated on such addition (e.g., section 115BBE) cannot be invoked. This is a fact-specific conclusion.
Conclusion: Addition under section 68 (and consequential invocation of section 115BBE) was reversed; the sum was accepted as explained business receipt (advance against supplies).
Ancillary/Procedural conclusions and cross-references
1. Grounds relating to ad-hoc disallowance on material consumption and excise duty write-off were not pressed and therefore dismissed as not pressed.
2. Findings on the character of foreign investment write-off for A.Y. 2018-19 apply mutatis mutandis to the same legal point in A.Y. 2020-21; the Tribunal explicitly applied its earlier reasoning to the later assessment year.
3. The Tribunal's determinations are fact-driven; precedents were applied to similar fact situations (investment in WOS to operate/expand business), and contrary case law was distinguished on factual differences (e.g., absence of commercial nexus or evidence of enduring capital purpose).
Disallowance on account of Foreign Investment written off - Bad Debts in the form of Foreign Investment written off - HELD THAT:- We find that the assessee made investment in “WOSM/ s. Brahm Corporation located in USA for the purpose of expanding its business activities and the investment made in the Equity of “WOS-BC, USA” were not with the intention of earning Dividend or interest or other income in the form of enhancement of value of investment. We find that the purpose of foreign investment in “WOS-BC, USA” was to acquire the running business concern located in USA and then to increase the business activity including export of Goods and Services. The genuineness of this investment in “WOS-BC, USA” is well evidenced with various documentary evidences filed before us which shows the genuineness of carrying out of the business activity.
We also find that after making of the investment for business purposes, the assessee has been able to receive export orders and has also effected the exports and has also earned Revenue from export of services from the WOS located abroad and the other business concern namely M/s. Littler Diecast Corporation, USA.
We further find that the claim of the assessee is in the nature of business loss and not a capital loss or bad debt as the investments made abroad are not in the nature of sundry debtors or account receivable but the investments made for business purposes. We further find that the assessee with the support of various documents placed in paper book including the suit filed by Regions Bank, USA with Delaware County Circuit Court, USA and the resolution passed for declaring Bankruptcy proves that the assessee has incurred business loss and the same has been written off from the books of account in piece meal basis since the proceedings were going on and then finally culminated in the year 2020. Accordingly, writing off of the Foreign investment made in the “WOS-BC, USA” during the instant year at Rs. 97,61,190/- is purely for commercial expediency and is a business loss rightly claimed as expenditure by the assessee during the year. Thus, we fail to find any consistency in the finding of ld.CIT(A) and the same is reversed. Ground No.1 raised by the assessee for A.Y. 2018- 19 is allowed.
Addition for unexplained cash credit u/s. 68 - Alleged sum of USD 1,54,282 equivalent to Rs. 99,23,830/- has been received by the assessee from “LDC, USA” in which 80% of the stake is held by the assessee’s “WOSBC, USA” and that is considered as advance against supplies. Only due to inadvertent mistake committed by the representative of the assessee during the course of assessment proceedings mentioning that alleged sum was received from “WOS-BC,USA”, impugned addition has been made. However, since the identity of “LDC, USA” is not in dispute and that it is directly related to the assessee for its business activity and the alleged fund have been received as part of the business receipts as advance against supplies through proper banking channel. Assessee has successfully explained the nature and source of the alleged sum along with bank certificate and therefore no addition u/s. 68 of the Act r.w.s.115BBE for unexplained cash credit is called for. Finding of CIT(A) on this issue is reversed. Ground Nos. 2 and 3 raised by the assessee are allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether goods alleged to be misclassified and detained after testing by CRCL can be permitted to be re-exported pending adjudication under the Customs Act.
2. If re-export is to be permitted, what conditions (bond, bank guarantee or other security) are appropriate to protect revenue pending adjudication where confiscation under Section 111 and/or penalty and differential duty may be imposed.
3. The applicability and effect of Sections 110, 111 and 125 of the Customs Act in the context of permitting re-export of allegedly misclassified/imported goods pending adjudication.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Permissibility of re-export of goods detained as misclassified after CRCL testing
Legal framework: Section 110 (seizure of goods) and Section 111 (confiscation of improperly imported goods) of the Customs Act govern seizure and confiscation; Section 125 contemplates an option to pay a fine in lieu of confiscation.
Precedent Treatment: The Court considered prior judicial approaches permitting re-export where adjudication may ultimately result only in imposition of penalty/differential duty - including guidance from higher court decisions and High Court orders that allowed re-export subject to security (examples discussed by the Court included earlier decisions that permitted re-export with retention fines or bank guarantees). These precedents were followed as persuasive authority for balancing revenue protection and commercial realities.
Interpretation and reasoning: The Court observed that investigation and CRCL testing concluded with a finding of misclassification and possible undervaluation, which could attract confiscation under Section 111; however, the likely practical outcome of adjudication would be payment of differential duty and/or fine/penalty (or option under Section 125). The Court reasoned that retention of the physical goods in India is not necessary to secure recovery of any revenue liability that may be finally determined. To strike a balance between protecting revenue and avoiding undue retention of goods, the Court found that re-export could be permitted subject to appropriate security measures.
Ratio vs. Obiter: The core ratio is that where alleged misclassification/undervaluation may lead to monetary liabilities (differential duty, fine or option under Section 125) and the supplier agrees to take back the goods, the goods need not be retained in India if adequate security is provided to protect the revenue; this is a binding proposition within the decision. Observations about general practices in other High Courts and the reasoning that retention is unnecessary in all such cases are obiter to the extent they describe jurisprudential trends rather than form mandatory rules for all fact patterns.
Conclusions: The Court concluded that re-export of the detained goods may be permitted despite findings of misclassification by CRCL, provided adequate securities are furnished to safeguard any revenue claim arising from adjudication.
Issue 2 - Appropriate conditions and securities to protect revenue when permitting re-export
Legal framework: The Court relied on the adjudicatory scheme under the Customs Act, including provisions enabling confiscation (Section 111) and levy of fines as an alternative (Section 125), and the Court's inherent power to impose conditions while granting relief pending adjudication.
Precedent Treatment: The Court examined prior orders that permitted re-export on executing bonds and/or furnishing bank guarantees, and followed the approach of conditioning re-export on securities sufficient to cover potential revenue exposure. A reduced retention fine in earlier orders and decisions permitting bank guarantees for a percentage of re-determined value were noted and treated as persuasive.
Interpretation and reasoning: Considering that the ultimate adjudication would require payment of differential duty and/or fine, the Court framed conditions that directly relate to the quantum likely to be at stake: a bond covering the total value of the differential duty and a bank guarantee for a percentage of the re-determined value to secure potential penalties and other liabilities. The Court selected 20% of the re-determined value as the quantum for the bank guarantee, finding this proportion adequate to protect revenue while not being onerous to the importer. The Court balanced the need to prevent evasion or loss to revenue with the commercial imperative of avoiding indefinite detention of goods that a supplier is willing to accept back.
Ratio vs. Obiter: The imposition of a bond for the total differential duty and a bank guarantee equivalent to 20% of the re-determined value, together with a time limit for re-export, constitutes the operative ratio for the relief granted in the present factual matrix. References to other High Courts' practices and percentage formulations are explanatory/obiter inasmuch as they illustrate approaches adopted elsewhere but do not limit the Court's discretion to fix conditions suitable to the facts.
Conclusions: The Court directed that re-export be permitted upon fulfillment of two conditions: (i) execution of a bond for the total value of the differential duty payable; and (ii) furnishing a bank guarantee equivalent to 20% of the re-determined value. On compliance, re-export was to be effected within twelve days from compliance. These conditions were held sufficient to protect the revenue pending final adjudication.
Cross-References and Procedural Directions
Cross-reference: Issue 1 and Issue 2 are interlinked - the permissibility of re-export depends on the adequacy of safeguards imposed (see conditions in Issue 2); the Court's conclusion permitting re-export is contingent on compliance with those safeguards.
Procedural direction: Time limit for re-export was fixed (twelve days from compliance) to prevent undue delay and to ensure the security measures remain effective and enforceable.
Final Disposition
On the facts where CRCL testing disclosed misclassification and the supplier agreed to accept return, the Court permitted re-export subject to the specified security regime (bond for total differential duty and bank guarantee of 20% of re-determined value) and a twelve-day compliance window; no costs were imposed.
Permission to reexport imported goods - 303114 SQM of Textile Fabric Coated with Plastic - long delay in the release of the goods - HELD THAT:- The issue involved in the present writ petition has already been dealt with by this Court in [2025 (10) TMI 76 - MADRAS HIGH COURT] where it was held that 'The logical end to the adjudication proceedings will result in directing the petitioner to pay the fine/penalty and differential duty. For this purpose, it is not necessary to retain the goods in India. Therefore, to strike a balance, considering the fact that the goods are lying in India from January 2025, certain conditions can be imposed on the petitioner and on fulfilment of the conditions so imposed, the petitioner can be permitted to reexport the goods. This view has been taken by this Court and other High Courts while granting such a relief.'
The petitioner shall execute a bond for the total value of the differential duty payable by them - The petitioner shall furnish a bank guarantee equivalent to 20% of the redetermined value - On the petitioner fulfilling the above two conditions, they shall be permitted to reexport the goods within a period of twelve (12) days from the date of compliance of the above conditions as imposed by this Court.
Petition disposed off.
Issues: (i) Whether the Tribunal was justified in deciding the appeal ex parte when the appellant was in jail. (ii) Whether confirmation of penalty despite the appellant's incarceration and the criminal court proceedings violated principles of natural justice. (iii) Whether the penalty order based on the co-noticee's statement recorded by the DRI was sustainable.
Issue (i): Whether the Tribunal was justified in deciding the appeal ex parte when the appellant was in jail.
Analysis: The appellant had participated in and successfully contested the criminal prosecution, and the record showed concurrent factual findings against him in the adjudication and appellate proceedings. On that basis, the Court found no infirmity in the Tribunal proceeding with the matter in the appellant's absence, as the appellant could not show that his incarceration by itself prevented a proper adjudication.
Conclusion: The issue was answered against the appellant and in favour of the Revenue.
Issue (ii): Whether confirmation of penalty despite the appellant's incarceration and the criminal court proceedings violated principles of natural justice.
Analysis: The criminal appeal did not result in acquittal. The conviction was upheld, and only the sentence was reduced to the period already undergone. In those circumstances, the Court held that the penalty proceedings could not be invalidated on the ground of natural justice merely because the appellant was in custody or because the criminal sentence had been moderated.
Conclusion: The issue was answered against the appellant and in favour of the Revenue.
Issue (iii): Whether the penalty order based on the co-noticee's statement recorded by the DRI was sustainable.
Analysis: The Court held that the statement recorded by the DRI could be considered by the customs authorities in penalty proceedings, and it treated the challenge as covered by the legal position concerning DRI investigation and issuance of notice. The reliance on the co-noticee's statement, therefore, did not vitiate the order.
Conclusion: The issue was answered against the appellant and in favour of the Revenue.
Final Conclusion: The appeal failed on all substantial questions of law, and the penalty confirmed by the appellate authorities remained undisturbed.
Ratio Decidendi: An ex parte customs appellate decision is not vitiated merely because the appellant was in custody, nor is penalty unsustainable where the criminal conviction remains intact and the challenge to reliance on DRI-recorded statements does not disclose any legal infirmity.
Right to decide the appeal of the appellant ex-parte when the appellant was in jail from 1993 to 2006 - Tribunal failed to consider the fact that the present appellant is in jail since November, 1993 in connection with the very case - reliance placed on the statement of co-noticee which was recorded by the D.R.I. before issuance of SCN under the provisions of the Customs Act, 1962 - levy of penalty by relying on the statement of co-noticee which was recorded by the DRI before issuance of SCN under the provisions of The Customs Act, 1962.
Tribunal is just and right to decide the appeal of the appellant ex-parte when the appellant was in jail from 1993 to 2006 or not - HELD THAT:- Considering the facts of the case and concurrent findings of facts recorded by the Tribunal, it is opined that the Tribunal was right in deciding the Appeal in absence of the appellant, though he was in jail, as the appellant was able to persuade the criminal prosecution before the Court, then the appellant ought to have acted before the Adjudicating Authority as well as the Tribunal.
Tribunal did not consider the fact that the present appellant is in jail since November, 1993 in connection with the very case till 5.9.2006 till the Hon'ble the Supreme Court of India acquitted the present appellant and confirming the order of penalty of Rs.10 lacs imposed on the appellant in violation of the principles of natural justice - HELD THAT:- The Hon’ble Supreme Court has upheld the conviction and has reduced the sentence to the time of undergone by the appellant and therefore, there is no acquittal of the appellant and therefore, no interference is called for in confirming the levy of penalty of Rs.10 Lakhs imposed upon the appellant as there is no violation of principles of natural justice. Question is therefore answered in favour of the Revenue and against the appellant.
Levy of penalty by relying on the statement of co-noticee which was recorded by the DRI before issuance of SCN under the provisions of The Customs Act, 1962 - HELD THAT:- It appears that after considering the facts of the case as recorded by the Adjudicating Authority, the Tribunal has passed the impugned order relying upon the statement of co-noticee recorded by the DRI which is required to be considered by the Customs Authority under the provisions of the Customs Act as the investigation was carried out by DRI and in view of the decision of the Hon’ble Apex Court in case of Commissioner of Customs Versus M/s. Canon India Pvt. Ltd. [2024 (11) TMI 391 - SUPREME COURT (LB)], now the issues regarding the difference of investigation carried out by DRI and issuance of notice are no more res-integra - the question is also answered in favor of the Revenue and against the appellant.
The Appeal therefore, being devoid of any merit, is accordingly, dismissed.
Issues: Whether clear float glass having an absorbent layer, including a tin layer formed during manufacture, is classifiable under heading 7005 1090 and eligible for the benefit of Sl. No. 934 of Notification No. 46/2011-Cus dated 01.06.2011.
Analysis: Heading 7005 covers float glass and surface ground or polished glass in sheets, including glass having an absorbent, reflecting or non-reflecting layer. The imported goods were found to have an absorbent tin layer on one side, and the laboratory clarification supported that such layer constituted an absorbent and non-reflective layer. The fact that the layer arose in the manufacturing process did not alter its character for classification purposes. The reclassification under heading 7005 2990 was not supported by expert material, and the consequent denial of the exemption benefit could not be sustained.
Conclusion: The goods were correctly classifiable under heading 7005 1090 and were eligible for the exemption under Sl. No. 934 of Notification No. 46/2011-Cus dated 01.06.2011.
Final Conclusion: The demand of differential duty, interest, and penalty was set aside and the appeal succeeded with consequential relief.
Ratio Decidendi: For float glass, the presence of an absorbent tin layer is sufficient to attract classification under heading 7005 1090, and the origin of that layer in the manufacturing process does not change the classification.
Classification of imported clear float glass with an absorbent layer - to be classified under CTH 7005 1090 or under CTH 7005 2990? - eligibility for NIL rate of BCD as per Sl.No.934 of N/N. 46/2011 dated 01.06.2011 - HELD THAT:- It is observed that the appellant has imported the goods, ‘Clear Float Glass Non Wired Glass, Non Tined, Having an Absorbent, Non Reflecting layer of various sizes and thickness’ and filed Bill of Entry No. 2680938 dated 30.09.2022. The appellant classified the said goods under CTH 7005 1090 and claimed the benefit of Sl. No 934 of notification No 46/2011- Cus dated 01.06 2011. However, the Proper Officer did not agree with the classification adopted by the appellant and re-classified the same under CTH 7005 2990 and applied Sl. No. 935(i) of N/N. 46/2011-Cus dated 01.06.2011, which provided for 5% BCD - a float glass having an absorbent layer merits classification under heading 7005 1090. There is no dispute in this case the float glass imported by the appellant has an absorbent layer. It is immaterial whether the absorbent layer has come on account of manufacturing process or otherwise.
The test report received in the case of the goods imported by the appellant established that the float glass imported by the appellant has an absorbent layer. Accordingly, the goods imported by the appellant in this case appropriately merits classification under the CTH 7005 1090 and eligible for the benefit of Sl. No. 934 (1) of N/N. 46/2011 dated 01.06.2011.
A similar issue came up for consideration before the Commissioner of Customs (Appeals), New Delhi in the case M/s. Asahi India Glass Limited. The Commissioner (Appeals) held that the declared classification in respect of clear float glass under CTH 7005 1090 was correct.
Thus, the classification of the impugned goods under the heading 7005 1090 adopted by the appellant is correct and the impugned goods are eligible for the benefit of Sl. No 934 of N/N. 46/2011-Cus dated 01.06 2011. Thus, the demand of differential duty confirmed in the impugned order on account of reclassification of the impugned goods under the CTH 7005 2990, by denying the benefit of Sl. No. 934 of N/N.46/2011-Cus dated 01.06.2011, is not sustainable and hence the same is set aside - As the demand of duty is not sustained, the question of demand of interest and imposition of penalty does not arise and hence the same is set aside.
The impugned order is set aside - appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether the evidence on record establishes involvement of the appellants in the alleged smuggling of 40 gold bars.
2. Whether the burden of proof under Section 123 of the Customs Act shifts to the appellants in absence of conclusive evidence proving foreign origin of the seized gold.
3. Whether imposition of penalties under Section 112(b)(i) of the Customs Act is legally sustainable against the appellants, given the evidentiary material.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Whether evidence establishes involvement of the appellants in smuggling
Legal framework: Conviction/penalty under customs law requires proof that a person is concerned in acts rendering goods liable to confiscation (Section 112 read with Section 111). Seizure and subsequent adjudication rest on evidence establishing involvement beyond mere suspicion or uncorroborated statements.
Precedent treatment: Reliance placed on authorities holding that mere suspicion is insufficient for seizure/conviction and that statements of co-accused require corroboration and opportunity for cross-examination (e.g., Gian Chand; Tata Chemicals; decisions cited regarding town seizures and necessity of material indicating foreign origin).
Interpretation and reasoning: The record shows gold seized from a truck and the appellants present near the vehicle; the primary inculpatory material against appellants consists of voluntary statements (including statements of co-accused). There is no corroborative material linking appellants to smuggling (no ownership claim, no documents of licit provenance, no foreign markings on gold, no other independent evidence). Statements were not tested under Section 138B and co-accused were not effectively made available for cross-examination as to their statements implicating appellants. The Tribunal notes absence of prima facie evidence that the officers had formed a reasonable belief of foreign origin at the time of seizure; seizure inventory lacks material supporting such belief.
Ratio vs. Obiter: Ratio - where only uncorroborated statements of co-accused and appellant's own withdrawn/confessed statements exist, without other corroboration or testing, evidence is insufficient to establish involvement and sustain penalties. Obiter - references to factual narratives of individual co-accused serve explanatory purpose.
Conclusion: Evidence does not indicate appellants' involvement in alleged smuggling; answer to Issue 1 is negative.
Issue 2: Whether burden under Section 123 shifts to appellants absent conclusive proof of foreign origin
Legal framework: Section 123 provides that where goods specified (including gold) are seized in the reasonable belief that they are smuggled goods, burden shifts to person in possession/claiming ownership to prove they are not smuggled. Preconditions: (a) seizure must be made on reasonable belief of smuggling and (b) foreign origin must be prima facie established to activate the statutory presumption.
Precedent treatment: Cited authorities (Gian Chand; Umrao Lal; Ganesh Das; Abdul Gani; Tata Chemicals; decisions on town seizures) establish that mere suspicion is inadequate, reasonable belief must exist at seizure time, and the presumption under Section 123 arises only where there is prima facie material indicating foreign origin.
Interpretation and reasoning: Appellants were not in possession of the vehicle from which gold was recovered and do not claim ownership. No foreign markings on gold; purity values reported (995.1-996.7 mille) do not demonstrate foreign origin conclusively and may not amount to the tell-tale marking or documentary evidence that triggers the presumption. The DRI officers did not record subjective satisfaction nor produce seizure inventory materials establishing reasonable belief of foreign origin at the time of seizure. Lower authorities shifted burden primarily on those in actual possession (driver/helper), not on appellants. Tribunal reasons that absent prima facie evidence of foreign origin and given town seizure context, the onus does not shift to non-owners/non-possessors.
Ratio vs. Obiter: Ratio - statutory burden under Section 123 does not shift to persons who neither possessed nor claimed ownership absent prima facie proof of foreign origin and reasonable belief at seizure; in town seizure without markings or material evidence, burden remains on revenue. Obiter - discussion of comparative purity figures as not determinative of foreign origin in isolation.
Conclusion: Burden under Section 123 does not shift to the appellants; answer to Issue 2 is negative.
Issue 3: Whether penalties under Section 112(b)(i) are legally justified
Legal framework: Section 112(b) penalizes persons who acquire, possess, deal with, or are concerned with goods which they know or have reason to believe are liable to confiscation under Section 111 (including prohibited or smuggled goods). Penalty viability depends on proof that goods were liable to confiscation (i.e., smuggled/prohibited) or that the accused had knowledge/reason to believe so.
Precedent treatment: Tribunal and higher court decisions cited establish that where foreign origin/smuggled character is not proved or where allegations against an accused rest solely on uncorroborated co-accused statements, penalties under Section 112 are unsustainable (cited Tribunal decisions under similar facts where penalties were set aside).
Interpretation and reasoning: Since foreign origin and smuggled nature of gold were not established as to the appellants (see Issues 1-2), gold cannot be treated as prohibited goods vis-à-vis appellants. There is no independent evidence that appellants acquired, possessed, or dealt with the goods knowing or having reason to believe they were liable to confiscation. The adjudicating authority itself treated driver/helper as principal persons involved; appellants positioned as prospective buyers/collectors without corroboration. Given absence of requisite elements under Section 112(b)(i), imposition of penalty is legally unjustified.
Ratio vs. Obiter: Ratio - penalty under Section 112(b)(i) cannot be upheld against persons who are not proven to have been involved with goods that are established as smuggled/prohibited; where presumption under Section 123 is not triggered and only uncorroborated statements implicate a person, penalty is unsustainable. Obiter - reliance on other Tribunal decisions for analogous fact patterns supports the conclusion but is ancillary.
Conclusion: Penalties under Section 112(b)(i) imposed on the appellants are not sustainable and are set aside; answer to Issue 3 is negative.
Cross-references and final nexus
Answers to Issues 1-3 are interdependent: insufficiency of evidence on foreign origin and lack of corroboration (Issue 1 and Issue 2) preclude invoking statutory presumption under Section 123 and defeat necessary factual predicate for imposing penalties under Section 112(b)(i) (Issue 3). The Tribunal's conclusions follow established precedent that reasonable belief and prima facie proof of foreign origin are conditions precedent to shifting burden or sustaining confiscation/penalty.
Imposition of penalty u/s 112(b)(i) of the Customs Act, 1962 - smuggling of Gold bars - seizure of 40 gold bars under the ‘reasonable belief’ that the said gold bars were smuggled into the country without payment of appropriate duties of customs - onus to establish that the gold bars were legally procured - evidences available on record indicate that the appellants were involved in the alleged offence of smuggling of gold bars, or not.
Whether the evidences available on record indicate that the appellants were involved in the alleged offence of smuggling of gold bars, or not? - HELD THAT:- In the present case, it is found that the officers of DRI did not derive any subjective satisfaction that the gold was of foreign origin and smuggled. The seizure inventory fails to disclose any material evidence justifying a ‘reasonable belief’ for seizure of the gold. In this regard, it is observed that mere finding of gold does not render it liable for seizure unless there is cogent and positive evidence proving its foreign origin as the first condition, as precursor to seizure.
The Hon’ble Supreme Court, in Gian Chand v. State of Punjab [1961 (11) TMI 1 - SUPREME COURT], has categorically held that mere suspicion is not sufficient to justify seizure, and the prosecution must provide substantive evidence of foreign origin. Further, it is observed that in Union of India v. Mahesh Raj, the Hon’ble Supreme Court ruled that the burden under Section 123 arises only if there is prima facie evidence indicating foreign origin, which is entirely absent in this case. Also, in D. Bhoormull [1974 (4) TMI 33 - SUPREME COURT], the Hon’ble Supreme Court emphasized that suspicion alone is not a substitute for evidence. In Umrao Lal v. Commissioner of Customs, it was held that in the absence of markings or material evidence proving foreign origin, confiscation is not sustainable.
The evidences available on record do not indicate that the appellants were involved in the alleged offence of smuggling of gold bars. Accordingly, the question is answered in the negative.
Whether the burden of proof under Section 123 of the Customs Act, 1962, can be shifted to the appellants in the absence of any conclusive evidence proving the foreign origin of the gold, or not? - HELD THAT:- Admittedly, in the case on hand, the appellants herein are not claiming the ownership of the gold. They were not available in the vehicle which carried the gold bars. It can be seen that other than the statements, there is no other corroborative evidence available on record to implicate them in the offence. For shifting the onus on the person who claims the ownership of gold, it is required to prove first that the gold under seizure were of foreign origin. Once foreign character of the gold is proved, then only the onus is shifted on the person who claims the ownership, to show that the same were not smuggled. Incidentally, it is found from the impugned order the onus of proving that the gold was procured legally has been cast upon driver and vehicle helper only and not on the appellants herein.
Hon’ble Supreme Court in Ganesh Das v. Collector of Central Excise wherein it was held that before the burden shifts to the person from whom the goods were seized, it must first be established that the goods were of foreign origin and mere suspicion or presence of certain disputed markings is not sufficient. Further, the Hon’ble Supreme Court in Commissioner of Customs v. Abdul Gani has reiterated that reasonable belief must be backed by sufficient evidence of foreign origin. If there are no foreign markings or documentation, the Customs authorities cannot simply assume that the gold in question were of smuggled in nature.
It is a fact that in the present case, the gold biscuits do not have any foreign markings on it. Further, the appellants herein are not claiming the ownership of the gold. Hence, in the facts and circumstances of the case, it is observed that the burden of proof under Section 123 of the Customs Act does not shift on the appellants herein. The Customs authorities must first establish the foreign origin before invoking the presumption of smuggling. So, in this case, the responsibility is on the Department to show that the gold in question was smuggled into the country without payment of appropriate duties of Customs thereon, which the Department has failed to discharge in this case.
Thus, the burden of proof under Section 123 of the Customs Act does not shift to the appellants herein, as they have not claimed the ownership of the gold in this case. Accordingly, the issue is answered in the negative.
Whether the imposition of penalties under Section 112(b)(i) of the Customs Act, 1962, is legally justified, or not? - HELD THAT:- In the present case, it is not proved that the gold bars were imported. Further, the gold bars found were not established as smuggled in nature and hence on the face of it, the same cannot be treated as prohibited goods. Thus, we observe that when the gold in question is not considered as ‘prohibited goods’, the provisions of section 112 (b) (i) cannot be invoked to impose penalty. In this context, it is also noted that the gold bars were seized at Guwahati, away from the Indo-Myanmar international border and the investigation has also not brought in any evidence to counter this factual position. Hence, in these facts and circumstances, no penalty is imposable on the appellants herein under Section 112(b)(i) of Customs Act, 1962.
The penalties imposed on the appellants herein, who are the alleged buyers of the gold, under Section 112(b)(i) ibid. are not sustainable. Hence, the question answered in the negative.
Thus, the evidences available on record do not indicate that the appellants herein were involved in the alleged offence of smuggling of gold bars - the burden of proof under Section 123 of the Customs Act does not shift to the appellants herein, as they have not claimed the ownership of the gold in this case - the penalty imposed on the appellants herein under section 112(b) (i) of the Customs Act, 1962, are not sustainable and the same are liable to be set aside.
Appeal disposed off.
1. ISSUES PRESENTED AND CONSIDERED
Whether seizure of goods under Section 110(1) of the Customs Act was lawful when effected after CISF detention at a domestic terminal and without the seizing/receiving Customs officer forming an independent "reasonable belief" that the goods were liable to confiscation.
Whether the burden under Section 123 of the Customs Act to prove lawful ownership and domestic provenance of seized gold shifts to the owner where prima facie evidence of foreign origin is absent, and whether documentary and oral evidence of domestic melting/refining suffices to discharge that burden.
Whether markings on gold bars and partial chemical testing (one sample tested, one not tested) suffice to establish foreign origin and smuggled nature of the gold.
Whether penalty under Sections 112(a) and 112(b) is sustainable where confiscation is not sustained.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Lawfulness of seizure under Section 110(1) where Customs acted on CISF detention at a domestic terminal
Legal framework: Section 110(1) permits seizure where the proper officer has reason to believe goods are liable to confiscation; seizure requires subjective satisfaction grounded in objective material.
Precedent treatment: Followed and applied Union of India v. Mohammed Nawaz Khan (subjective satisfaction based on objective material); Gian Chand v. State of Punjab (mere suspicion insufficient); D. Bhoormull (suspicion not substitute for evidence); Mahesh Raj (burden under s.123 arises only where prima facie evidence indicates foreign origin).
Interpretation and reasoning: The Customs officers accepted CISF detention without independently forming or recording a reasonable belief based on objective material linking the goods to illegal importation. The seizure inventory lacked cogent positive evidence of foreign origin or smuggling. The place of seizure - domestic departure terminal - heightens requirement for independent and demonstrable basis to form a reasonable belief.
Ratio vs. Obiter: Ratio - seizure is invalid where the seizing/receiving Customs officer does not independently form subjective satisfaction supported by objective material; reliance on another agency's mere suspicion is legally insufficient. (Followed precedents form binding/relevant ratio.)
Conclusion: Seizure was arbitrary and legally unsustainable for want of independent reasonable belief under Section 110(1); therefore confiscation predicated on that seizure cannot stand.
Issue 2 - Whether claimant discharged burden under Section 123 by documentary and oral evidence of domestic melting/refining
Legal framework: Section 123 places on the owner/persons claiming goods the burden to prove lawful ownership and domestic origin once certain factual foundation exists (but burden shifts only where prima facie evidence indicating foreign origin is produced by Revenue).
Precedent treatment: Applied Mahesh Raj, Umrao Lal, and Tribunal decisions recognizing that s.123 arises only if Revenue adduces prima facie evidence of foreign origin; Rajesh Kumar and other Tribunal precedents hold that possession of foreign-marked gold without corroborative chain is insufficient.
Interpretation and reasoning: The appellant produced contemporaneous vouchers/challans, invoices from a melter/refiner and silver supplier, statement of the melter confirming melting/refining and marking at customer's request, and historical accounting showing prior holdings of old jewellery. Investigating officers verified genuineness of documents. No credible evidence was produced by Revenue to show foreign origin or illicit importation. Where Revenue failed to produce prima facie evidence of foreign origin, the claimant's documentary and oral proof sufficed to discharge the burden under Section 123.
Ratio vs. Obiter: Ratio - where Revenue fails to produce prima facie evidence of foreign origin, validated documentary and corroborative oral evidence from the melter/refiner establishes lawful domestic provenance and discharges s.123 burden. (Tribunal's application of established legal test is ratio.)
Conclusion: The claimant discharged the burden under s.123; the evidence established domestic melting/refining and ownership, undermining any claim of smuggling.
Issue 3 - Sufficiency of markings and partial chemical testing to prove foreign origin
Legal framework: Foreign markings and hallmarks are evidentiary, not conclusive; chemical purity testing can be relevant but must be properly conducted and produced for all relevant samples; chain-of-custody and corroborative evidence required to infer foreign importation.
Precedent treatment: Followed Bombay High Court (Prithviraj Pokhraj Jain) and Tribunal decisions (Rajesh Kumar) that markings alone do not establish foreign origin; D. Bhoormull and related authorities caution against presumptions from markings without evidentiary link.
Interpretation and reasoning: Only one sample (A1) was chemically tested and found to be 99.7% purity (not 99.9% normally associated with imported 24-carat bullion); no test report exists for the A2 sample or the remaining bars. The marking "Suisse" on one bar therefore was not corroborated by purity or chain evidence as indicative of foreign origin; the marking "BAUNLEE CHOMPOO" had no recognized international association or certification establishing foreign provenance. Absent tests and corroboration for all bars and absent evidence tying markings to a foreign refinery, markings cannot support confiscation.
Ratio vs. Obiter: Ratio - markings and partial chemical testing are insufficient to prove foreign origin; comprehensive testing and corroborative provenance evidence are required before inferring smuggling. (This is applied as binding evidentiary principle.)
Conclusion: Markings and incomplete chemical testing do not establish foreign origin or smuggling; Revenue failed to produce adequate scientific or documentary proof to the contrary.
Issue 4 - Liability for penalty where confiscation is set aside
Legal framework: Penalty under Sections 112(a) and 112(b) is predicated on commission of the prohibited act (e.g., illegal importation/possession liable to confiscation); if foundational finding of confiscation is unsustainable, penalty cannot be maintained.
Precedent treatment: Consistent with Tribunal practice that penalty flows from the primary substantive finding; if confiscation is set aside, consequential penalty is liable to be set aside.
Interpretation and reasoning: Since confiscation was found legally unsustainable (no reasonable belief, no proof of foreign origin, claimant discharged s.123 burden), the imposition and enhancement of penalty lack foundation.
Ratio vs. Obiter: Ratio - penalty cannot be sustained where the substantive confiscation is set aside for want of evidence; penalty is consequential and requires the underlying violation to be established. (Ratio applied.)
Conclusion: Penalty imposed under Sections 112(a) and 112(b) is unsustainable and is set aside along with confiscation.
Overall Disposition
The confiscation of the seven gold bars and the penalty imposed were set aside: seizure lacked independent reasonable belief by Customs officers; claimant's documentary and oral evidence discharged the burden under Section 123; markings and partial testing failed to establish foreign origin; consequent penalty could not stand. These conclusions follow the cited authorities and established evidentiary principles regarding seizure, marking, testing and burden of proof.
Absolute confiscation of Gold Bars and Silver - levy of penalty u/s 112 (a) & 112(b) of Customs Act, 1962 - appellant could not produce any document for legal purchase of the gold and silver in question on the spot - lawful domestic procurement of the gold bars remains uncontroverted - HELD THAT:- It is found that the appellant was a domestic passenger scheduled to travel by Indigo flight No.6E- 663 on 18-12-2019. At the time of screening of his baggage at the domestic departure terminal of the NSCBI Airport, the CISF personnel recovered 7 pieces of gold biscuits and 1 kg of silver granules from the baggage of the appellant. As the appellant could not produce any document for legal purchase of the gold and silver in question on the spot, the CISF personnel seized the 7 pieces of gold bars and silver granules and handed it over to Customs officers for initiating action under the Customs Act, 1962. Thus, it is agreed with the submission of the appellant there is no legal obligation on the part of the domestic passenger to carry all documents evidencing legal purchase of the gold and silver.
In the present case, it is observed that the gold was seized by the personnel CISF from the domestic terminal and later handed over to Customs, meaning that the Customs officers did not act on their independent belief but merely accepted the detention/seizure done by another agency. The Hon’ble Supreme Court in Union of India v. Mohammed Nawaz Khan, [2021 (9) TMI 1054 - SUPREME COURT], held that the authority effecting the seizure must demonstrate a subjective satisfaction based on objective material, failing which the seizure is invalid.
Further, it is observed that in Union of India v. Mahesh Raj, the Hon’ble Supreme Court ruled that the burden under Section 123 arises only if there is prima facie evidence indicating foreign origin, which is entirely absent in this case.
In the instant case, it is observed that CISF personnel has recovered the 7 bars gold from the procession of appellant solely on the suspicion that it was smuggled and later handed it over to Customs. However, instead of conducting an independent verification or forming their own reasonable belief based on credible evidence, the Customs officers proceeded with the seizure under the Customs Act without exercising due diligence. They failed to assess whether a reasonable belief of smuggling genuinely existed, as required by law, and merely acted on the presumption created by CISF personnel. This lack of independent application of mind renders the seizure arbitrary and legally unsustainable - thus, there was no ‘reasonable belief’ in this case for seizure of the gold in question in terms of Section 110(1) of the Customs Act, 1962.
Regarding domestic procurement of the gold, it is observed that later during the course of investigation, the appellant gave all documents evidencing domestic procurement/ conversion of the gold and silver - the documents produced clearly establish that the 7 pieces of gold were made by melting his old jewellery. I find that the investigation officers verified all the documents submitted by the appellant and found that all documents were genuine.
The appellant has discharged the burden cast upon him as per section 123 of the Customs Act, 1962 that the gold in question were his own property and the gold bars were obtained by melting of his old jewellery. It is also found that the department has not brought in any evidence to substantiate the allegation that the gold in question was of smuggled in nature.
Thus, it is a settled law that even foreign markings on gold bars do not, by themselves, establish the smuggled nature of the gold. The place of seizure in this case is the domestic terminal of NSCBI airport. Thus, the additional evidence is therefore required to prove that the gold was illegally imported, which is not available in this case.
Regarding the markings "Suisse" available in one piece of gold, it is found that it was found to be gold of 99.7% purity and not 999.9% purity, which is normally associated with imported 24 carat gold. Thus, the one gold bar with "Suisse" marking mentioned in the seizure list dated 05-12- 2020, cannot be considered to be of foreign origin as evidenced form the test report. Regarding the remaining 6 bars, it is also found that there are no specific findings in the impugned order to prove that "BAUNLEE CHOMPOO" is a foreign marking. It is seen that "BAUNLEE CHOMPOO" is neither an internationally recognized brand nor a certified hallmark or refinery marking associated with any established gold manufacturer. In the absence of any official certification, industry recognition, or conclusive evidence linking "BAUNLEE CHOMPOO" to a specific foreign source, such markings, if they even existed at seizure cannot be relied upon to establish the foreign origin of the gold. There is no factual or legal basis to conclude that such markings, even if present, prove illicit importation.
The order confiscating the 7 pieces of gold bars set aside. As the confiscation of the gold bars is not sustained, imposing penalty on the appellant for the alleged offence is also not sustainable and hence the same is set aside.
The impugned order is set aside - appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether statements recorded under section 108 of the Customs Act during inquiry/investigation are admissible as evidence for proving truth of facts in adjudication proceedings without compliance with section 138B.
2. Whether a penalty under section 114 of the Customs Act can be sustained where the only basis for liability is statements recorded under section 108 and the procedure of section 138B has not been followed.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Admissibility of statements recorded under section 108 without following section 138B
Legal framework: Section 108 empowers officers to summon persons and record statements during inquiry. Section 138B(1)(b) provides that statements recorded under section 108 shall be relevant for proving their contents only when the person who made the statement is examined as a witness before the adjudicating authority and the adjudicating authority, having regard to the circumstances, forms an opinion that the statement should be admitted in evidence (subject to exceptions where the person is dead or cannot be found); further, once so admitted an opportunity for cross-examination must be afforded. Section 9D(1)(b) of the Central Excise Act supplies an analogous procedural safeguard.
Precedent Treatment: The Tribunal's recent analysis of sections 108 and 138B (with reference to equivalent central excise provisions) was followed. That analysis held the procedural requirements of section 138B(1)(b) to be mandatory: statements recorded under inquiry/officer-recorded statements are not admissible for proving their truth unless the maker is examined before the adjudicating authority and the adjudicating authority determines admissibility in the interests of justice, after which cross-examination must be provided.
Interpretation and reasoning: The Court/Tribunal reasoned that officer-recorded statements have a risk of being recorded under coercion or compulsion; the safeguards in section 138B neutralize this risk by requiring in-adjudication examination and an express admissibility determination. A plain reading of section 138B(1)(b) and its statutory parallelism with central excise law mandate that officer-recorded statements cannot be relied upon for truth unless the statutory procedure is followed. The decision relied on previous authorities interpreting similar provisions, concluding that the provisions are mandatory not directory.
Ratio vs. Obiter: Ratio - Section 138B's procedure is mandatory, and statements under section 108 are inadmissible for proving their truth unless the maker is examined before the adjudicating authority and the adjudicating authority admits the statement in evidence with opportunity for cross-examination. Obiter - Observations on the rationale (risk of coercion) and on parallels with section 9D of the Central Excise Act, while explanatory, support the primary ratio.
Conclusions: Statements recorded under section 108, not subjected to the section 138B(1)(b) procedure (examination before adjudicating authority, opinion on admissibility, and opportunity for cross-examination), are not relevant evidence for proving the facts contained therein.
Issue 2 - Validity of penalty under section 114 when based solely on section 108 statements not admitted under section 138B
Legal framework: Section 114 prescribes penalty for persons who do or omit acts rendering goods liable to confiscation under section 113 or who abet such acts; in cases of drawback claims the penalty may be up to five times the amount of drawback claimed. Adjudicatory findings imposing penalty must rest on admissible evidence.
Precedent Treatment: The Tribunal's holding (as applied by the Court) that section 138B is mandatory directly impacts reliance on statements under section 108 for imposing penalties. Prior authorities interpreting analogous provisions were accepted to the extent that non-compliance with the protective procedure precludes reliance on officer-recorded statements.
Interpretation and reasoning: The impugned penalty was imposed solely on the basis of statements recorded under section 108 (by an accountant and co-noticees). Because section 138B's procedural safeguards were not complied with, those statements could not be treated as relevant evidence to prove the appellant's acts of omission/commission. Without admissible evidence proving the alleged involvement, the statutory prerequisite for imposing penalty under section 114 was lacking. The Tribunal's reasoning that procedural non-compliance renders such statements inadmissible was applied to conclude that the penalty cannot stand.
Cross-reference: See Issue 1 for the mandatory nature of section 138B and the inadmissibility consequence.
Ratio vs. Obiter: Ratio - A penalty under section 114 cannot be sustained if it is founded solely on statements recorded under section 108 which were not admitted in evidence in accordance with section 138B(1)(b) (examination before adjudicating authority, adjudicatory opinion on admissibility, and opportunity for cross-examination). Obiter - Remarks concerning the relative roles of other investigative material or independent evidence that might sustain penalty if available were not necessary to the decision.
Conclusions: The imposition of penalty under section 114, insofar as it is based exclusively on officer-recorded statements not admitted under section 138B, is unsustainable and must be set aside.
Disposition
The adjudicatory order insofar as it imposes penalty under section 114 based solely on statements recorded under section 108 without compliance with section 138B is quashed; the appeal is allowed to that extent.
Relevancy of statements recorded u/s 108 of the Customs Act - relevant evidence u/s 138B or not - levy of penalty on Managing Director u/s 114 of the Customs Act, 1962 - fraudulent availment of duty drawback - inflating the actual value two to three times - HELD THAT:- Reference can be made to the decision of the Tribunal in M/s Surya Wires Pvt. Ltd. vs. Principal Commissioner, CGST, Raipur [2025 (4) TMI 441 - CESTAT NEW DELHI]. The Tribunal examined the provisions of sections 108 and 138B of the Customs Act as also the provisions of sections 14 and 9D of the Central Excise Act, 1944 and observed that 'a person who makes a statement during the course of an inquiry has to be first examined as a witness before the adjudicating authority and thereafter the adjudicating authority has to form an opinion whether having regard to the circumstances of the case the statement should be admitted in evidence, in the interests of justice. Once this determination regarding admissibility of the statement of a witness is made by the adjudicating authority, the statement will be admitted as an evidence and an opportunity of cross-examination of the witness is then required to be given to the person against whom such statement has been made. It is only when this procedure is followed that the statements of the persons making them would be of relevance for the purpose of proving the facts which they contain.'
Thus, the statements recorded under section 108 of the Customs Act cannot be considered as relevant. As these statements were made the basis for imposition of penalty upon the appellant, the imposition of penalty cannot be sustained.
The impugned order, in so far as it imposes penalty upon the appellant cannot, therefore, be sustained and is set aside - appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether penalty under section 112(a)(ii) of the Customs Act can be validly imposed on a whole-time director for an act or omission that would render imported goods liable to confiscation under section 111, where there is no direct evidence of his involvement in customs documentation or submission of false/incorrect material.
2. Whether statements recorded under section 108 of the Customs Act during inquiry can be relied upon by the adjudicating authority without following the procedure mandated by section 138B of the Customs Act (i.e., recording the witness statement before the adjudicating authority, forming an opinion on admissibility, and affording opportunity of cross-examination).
3. Whether the imposition of penalty on a senior officer on the basis that "responsibility flows up" is permissible in the absence of reasons distinguishing why liability did not attach to a higher functionary who occupied a senior managerial position.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Validity of penalty under section 112(a)(ii) for acts/omissions rendering goods liable to confiscation (legal framework)
Legal framework: Section 112(a)(ii) prescribes penalty where any person "does or omits to do any act which act or omission would render goods liable to confiscation under section 111" (or abets such act); maximum penalty is duty sought to be evaded or Rs. 5,000, whichever is greater.
Precedent treatment: The adjudicating authority's analysis must identify an act or omission attributable to the person which, by its nature, renders the goods liable to confiscation under section 111; mere managerial position or indirect involvement is insufficient. Comparative findings in respect of other senior functionaries were relied upon in the order under challenge to test consistency.
Interpretation and reasoning: The Court examined the adjudicating authority's findings that the appellant had supervisory and operational/financial responsibilities and that he "accepted" inclusion of certain design charges in valuation. However, the record did not disclose direct evidence that the appellant himself carried out or caused any act/omission that made the goods liable to confiscation, nor that he submitted false/incorrect documents at the time of import (the Commissioner himself recorded absence of evidence for section 114AA). The Commissioner's imposition of penalty rested on an inference that responsibility for customs filing had to "flow up" because subordinate officers denied involvement, rather than on concrete evidence of an act/omission by the appellant rendering goods confiscable under section 111.
Ratio vs. Obiter: Ratio - Penalty under section 112(a)(ii) cannot be imposed merely on the basis of rank or conjectural flow of responsibility; it requires evidence of an act/omission attributable to the person that would render the goods liable to confiscation under section 111. Obiter - Observations comparing roles of other officers and the explanation that acceptance of responsibility during investigation weighed with the Commissioner are explanatory.
Conclusion: The imposition of penalty under section 112(a)(ii) on the appellant was unsustainable. There was no evidence that the appellant did or omitted any act rendering the goods liable to confiscation under section 111; the finding was based on conjecture and surmise. The penalty is set aside.
Issue 2 - Admissibility and relevance of statements under section 108 absent compliance with section 138B
Legal framework: Section 108 empowers recording statements during inquiries. Section 138B prescribes conditions for such statements to be relevant in proceedings - where the person is examined as a witness before the adjudicating authority, the authority forms an opinion on admissibility in the interests of justice, and an opportunity for cross-examination is afforded (except in limited exceptions).
Precedent treatment (followed): The Tribunal's reasoning in the cited authority interpreting sections 108 and 138B (and the parallel provisions in Central Excise law) was followed: statements recorded during inquiry are inadmissible for proving truth of their contents unless the procedural safeguards in section 138B are complied with.
Interpretation and reasoning: The Court held that statements relied upon by the Commissioner (both of the appellant and of a subordinate, on whose denial the Commissioner relied) were recorded under section 108 but there is no indication that the section 138B procedure was followed to render them admissible. The adjudicating order treated those statements as evidence without demonstrating compliance with statutory safeguards; accordingly, such statements could not legitimately form the basis for substantive adverse findings.
Ratio vs. Obiter: Ratio - Statements under section 108 cannot be used to prove substantive facts in adjudication unless section 138B's mandatory procedure is complied with; reliance on such statements in the absence of compliance invalidates findings based on them. Obiter - Discussion of rationale behind safeguards (risk of coercion) is explanatory.
Conclusion: The adjudicating authority erred in placing decisive reliance on statements under section 108 without demonstrating adherence to section 138B; such reliance cannot sustain the penalty imposed.
Issue 3 - Legitimacy of imputing liability upwards ("responsibility flows up") and consistency of assessment among senior officers
Legal framework: Liability under section 112(a)(ii) turns on culpable act/omission or abetment that makes goods liable to confiscation; attribution cannot rest upon rank alone but on specific acts/omissions.
Precedent treatment: Consistent application of statutory standard requires reasons where liability is imputed to one senior official but not to another occupying a higher/place of control; the adjudicator must explain why liability attaches to one and not to another when the factual matrix is comparable.
Interpretation and reasoning: The Commissioner imposed penalty on the appellant on the basis that subordinate officers denied responsibility and therefore "someone" had to decide customs filing, implying the duty flowed upward to the appellant. Yet the Commissioner absolved a Managing Director and another senior official of penalty on findings that they did not deal with customs documentation and there was no evidence of involvement. No reasoned explanation was provided for differentiating why responsibility should not have been attributed to the Managing Director (a more senior officer) if the "flow up" theory was to apply. The approach amounted to conjecture rather than evidential attribution.
Ratio vs. Obiter: Ratio - Attribution of penal liability by postulating upward flow of responsibility is impermissible unless supported by evidence and reasoned distinction as to why other senior officers are not liable. Obiter - Observations on organizational hierarchies and practical allocation of duties are illustrative.
Conclusion: Imputing penalty on the appellant by inference that responsibility "flowed up" was speculative and inconsistent with findings absolving other senior officers; such imputation cannot uphold the penalty.
Overall Conclusion
The penalty imposed under section 112(a)(ii) is overturned: (a) there was no evidence that the appellant did or omitted any act rendering the goods liable to confiscation under section 111; (b) decisive reliance on statements under section 108 was impermissible absent compliance with section 138B; and (c) the "responsibility flows up" rationale was conjectural and unjustified, particularly given inconsistent treatment of other senior officers. The adjudicating order insofar as it levies penalty under section 112(a)(ii) is set aside.
Levy of penalty on whole time Director u/s 112(a)(ii) of the Customs Act, 1962 - short payment of customs duty by not including the cost of services and drawings to the assessable value of the imported goods in terms of rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 - whether the appellant did or omitted to do any act, which act or omission would render goods liable to confiscation under section 111 of the Customs Act? - HELD THAT:- Reference made to the statement made by the appellant on 20.04.2012 under section 108 of the Customs Act wherein he stated that his responsibility is to supervise the role of Mr. D P Banerjee. He also stated that Biswaroop Bandopadhyay was incharge of imports and he would be able to explain the valuation of goods.
The Commissioner noted that Biswaroop Bandopadhyay in his statement dated 21.04.2012 stated that he was not conversant with the Customs Valuation Rules and, therefore, cannot comment on the valuation. Thereafter, the Commissioner proceeds to examine the statement made by the appellant on 26.09.2012 wherein he is said to have stated that he agreed to include the cost on design charges related to structural design and that it may be confirmed against ESL. From this, the Commissioner has concluded that though the appellant was not aware of the customs documentation at the time of import, but was responsible for its filing.
The statement made by the appellant that Biswaroop Bandopadhyay was involved with custom matters was not believed because Biswaroop Bandopadhyay had made a statement that he was not involved in custom work. What basically weighed with the Commissioner was the fact that the appellant had accepted that the design charges should be included in the valuation.
The statements made under section 108 of the Customs Act cannot be considered as relevant if the procedure contemplated under section 138B of the Customs Act has not been followed. This is what was held by the Tribunal in M/s. Surya Wires Pvt. Ltd. vs. Principal Commissioner, CGST, Raipur [2025 (4) TMI 441 - CESTAT NEW DELHI].
Thus, though from the statement made by the appellant, it cannot be concluded that he was responsible for any act or omission which would render the goods liable to confiscation under section 111 of the Customs Act, but even otherwise the statement made by the appellant or by Biswaroop Bandopadhyay under section 108 of the Customs Act cannot be considered as relevant - It clearly transpires from the order that penalty has been imposed upon the appellant merely because someone had to take decision regarding filing of documents with the customs and since Biswaroop Bandopadhyay and Ashutosh Aggarwal had denied, therefore, it must be the appellant who was responsible. It is, therefore, clear that this finding is based purely on conjectures and surmises and has been recorded without any evidence.
There is nothing on the record which may show that the appellant did or omitted to do any act which act or omission would have rendered the goods liable to confiscation under section 111 of the customs act - penalty could not have been imposed upon the appellant under section 112(a)(ii) of the Customs Act.
The impugned order, to the extent it imposes penalty upon the appellant under section 112(a)(ii) of the Customs Act, would, therefore, have to be set aside and is set aside - Appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether the Customs Broker breached Regulation 10(d) of the Customs Brokers Licensing Regulations, 2018 by failing to advise the client to comply with the Customs Act, allied Acts and rules and/or failing to bring non-compliance to the notice of the Deputy/Assistant Commissioner of Customs.
2. Whether the Customs Broker breached Regulation 10(e) of the Customs Brokers Licensing Regulations, 2018 by failing to exercise due diligence to ascertain the correctness of any information imparted to a client with reference to clearance of cargo.
3. Whether the Customs Broker breached Regulation 10(n) of the Customs Brokers Licensing Regulations, 2018 concerning KYC obligations (as alleged), and whether any such breach affects the proportionality of punitive measures.
4. Whether imposition of monetary penalty under Regulation 18 of the CBLR, 2018 is warranted on the facts found.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Breach of Regulation 10(d):
Legal framework: Regulation 10(d) obliges a Customs Broker to advise his client to comply with the provisions of the Customs Act, allied Acts and the rules and regulations thereof, and in case of non-compliance, to bring the matter to the notice of the Deputy Commissioner/Assistant Commissioner of Customs.
Precedent Treatment: No prior judicial precedent was cited or relied upon in the judgment for guiding the factual assessment under Reg.10(d).
Interpretation and reasoning: The Commissioner found large-scale undervaluation by the importers and concluded that the Broker had an obligation to advise clients about authenticity and truthfulness of documents and to report non-compliance. The Tribunal examined the record and observed absence of any material showing that the Broker did not advise the client or that the Broker had knowledge of client non-compliance or undervaluation at the relevant time. The Commissioner's finding rested on the existence of the importers' fraudulent scheme and a view that the Broker "failed to discharge their responsibilities," but there was no evidentiary foundation showing the Broker either knew of the non-compliance or omitted advice/notification when awareness existed.
Ratio vs. Obiter: The Tribunal treats the requirement of proof to establish breach (knowledge/awareness or failure to advise/notify) as essential - this constitutes the ratio on the application of Reg.10(d) to the facts.
Conclusions: The finding of violation of Regulation 10(d) was unsustainable for want of evidence that the Broker failed to advise the client or knew of the client's non-compliance and failed to bring it to the notice of Customs. The Tribunal set aside the finding of violation of Reg.10(d).
Issue 2 - Breach of Regulation 10(e):
Legal framework: Regulation 10(e) requires a Customs Broker to exercise due diligence to ascertain the correctness of any information imparted to a client relating to cargo clearance.
Precedent Treatment: No authorities were relied on or distinguished in relation to the standards of due diligence under Reg.10(e).
Interpretation and reasoning: The Commissioner's decision characterized the Broker as negligent in filing papers and concluded that failure to exercise due diligence contributed to the importers' undervaluation scheme. The Tribunal scrutinized the record and found no evidence that the Broker provided incorrect information to the client or that the Broker actually knew or should have known of the falsity of documents. The Commissioner's generalised findings about the existence of a fraudulent scheme and the Brokers' alleged negligence were not linked to specific acts/omissions by the Broker establishing failure to exercise due diligence as required by the regulation.
Ratio vs. Obiter: The Tribunal's conclusion that mere occurrence of fraud by clients does not, without supporting evidence that the Broker failed specific due-diligence obligations, amount to a breach of Reg.10(e), is treated as ratio on the standard of proof and causal connection required.
Conclusions: The finding that the Broker violated Regulation 10(e) cannot be sustained due to lack of evidence that the Broker imparted incorrect information or lacked due diligence in a manner established on the record. The Tribunal set aside the finding of violation of Reg.10(e).
Issue 3 - Alleged breach of Regulation 10(n) (KYC obligations):
Legal framework: Regulation 10(n) (as invoked) requires maintenance of KYC and verification obligations by the Customs Broker (as reflected in the inquiry and impugned order).
Precedent Treatment: No precedent was cited; the Commissioner assessed KYC documents produced and their timing.
Interpretation and reasoning: The Commissioner analysed KYC documents produced by the Broker and observed such documents were not time-sensitive but, when correlated with investigative material (importers' cooperation, recorded statements), the identity and existence of importers were not in dispute. The Commissioner concluded that it was not evident the Broker violated Reg.10(n). The Tribunal expressly recorded and endorsed that finding of the Commissioner that Reg.10(n) was not violated.
Ratio vs. Obiter: The Court's acceptance that KYC documents need temporal specificity to evidence a breach, and that absence of such indication defeats a Reg.10(n) charge where importer existence/identity is undisputed, is a binding factual ratio for the present record.
Conclusions: The Broker did not violate Regulation 10(n) on the facts; the Commissioner's finding of no breach on this point stands and was accepted by the Tribunal.
Issue 4 - Propriety of imposing monetary penalty under Regulation 18:
Legal framework: Regulation 18 authorises imposition of penalty for contraventions of the CBLR; proportionality and evidence of breach are relevant to entitlement to impose penalty.
Precedent Treatment: No precedents were relied upon concerning proportionality or quantum of penalties.
Interpretation and reasoning: The Commissioner imposed a penalty of Rs.25,000/- after concluding breaches of Reg.10(d) and 10(e) (but not 10(n)). The Tribunal found both substantive findings of breach (10(d), 10(e)) lacked evidentiary support. Where the foundational findings of breach do not stand, imposition of monetary penalty under Regulation 18 cannot be sustained. Additionally, the Commissioner had considered, and declined, extreme sanctions (revocation/forfeiture) as disproportionate, yet still imposed a monetary penalty as a cautionary measure; the Tribunal held that such cautionary penalty must be premised on established violations, which are absent here.
Ratio vs. Obiter: The ratio is that imposition of penalty under Regulation 18 requires sustainable findings of contravention; penalty cannot be upheld where the contraventions themselves are not supported by evidence on record.
Conclusions: The penalty of Rs.25,000/- imposed under Regulation 18 is set aside because the findings of breach of Regulations 10(d) and 10(e) are unsustainable. The Tribunal allowed the appeal to the extent of quashing the penalty and the recorded findings of violations under Regs.10(d) and 10(e), while recording that Reg.10(n) was not violated.
Cross-References and Observations
1. The Tribunal's conclusions on Regs.10(d) and 10(e) are interlinked: both require evidentiary demonstration of either advisory/notification failures or lack of due diligence/knowledge; absence of such evidence defeats enforcement under Regulation 18.
2. The Commissioner's acceptance that revocation/forfeiture would be disproportionate is noted but immaterial where the predicate violations themselves are not established.
3. The decision underscores the evidentiary threshold for finding a Customs Broker liable for client misconduct: the existence of client fraud, standing alone, does not automatically translate into broker liability without proof of broker's knowledge, omission to advise/notify, or specific lapses in exercising due diligence.
Levy of penalty on Customs Broker under Regulation 18 of Customs Brokers Licensing Regulations, 2018 - undervaluation of goods - evasion of Customs duty - violation of Regulations 10 (d) and 10 (e) of CBLR - HELD THAT:- It is evident that according to the Commissioner, since there was massive evasion of duty through undervaluation of goods by its client, the appellant failed to advise his client to comply with the provisions of the Act, allied Acts and rules and regulations and also failed to bring the matter to the notice of the Deputy Commissioner when the client did not comply with the Act and Rules. Nothing in the record shows that the appellant did not advise its client to follow the Act and Rules. Nothing in the records also shows that the appellant was aware that its client was not complying with the provisions of the Act and Rules or that it was undervaluing goods. There is nothing on record to show that the appellant, having knowledge of the non-compliance by its client, did not bring it to the notice of the Assistant Commissioner.
Regulation 10 (e) requires the appellant to provide correct information to its client and exercise due diligence in this regard. In this entire case, there is no evidence that the appellant had provided incorrect information or even an allegation that the appellant had provided some incorrect information to its client. For these reasons, the finding of the Commissioner that the appellant had violated regulations 10 (d) and 10 (e) cannot be sustained.
Consequently, the penalty of Rs. 25,000/- imposed upon the appellant under Regulation 18 of the CBLR deserves to be set aside and is set aside - Appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether demand of customs duty under section 28(4) can be sustained against an importer who cleared goods by utilising DEPB scrips whose values were fraudulently inflated in the Customs EDI system.
2. Whether the extended period of limitation under section 28(4) is invokable where non-payment/short payment of duty resulted from third-party manipulation of scrip values in the EDI system.
3. Whether mandatory penalty under section 114A is imposable where duty is recovered under the extended period (section 28(4)) on account of fraud in relation to DEPB scrip utilisation.
4. Whether penalty under section 114AA is maintainable against an importer in the absence of evidence of knowledge of forgery or direct involvement in the fraud.
5. Standard of care or verification expected from an importer who purchases and uses DEPB/DEEC scrips through intermediaries - whether mere payment to an intermediary absolves the importer of liability for unpaid customs duty.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Sustainment of demand under section 28(4) where DEPB scrip values were fraudulently inflated in Customs EDI
Legal framework: Section 28(4) permits recovery of duties notwithstanding the normal period of limitation where non-payment or short payment of duty is by reason of collusion or any willful mis-statement or suppression of facts; the Customs Act provides for assessment/recovery where duty has been evaded.
Precedent Treatment: The Tribunal considered earlier decisions upholding recovery in cases where scrips were fraudulently utilised by manipulating EDI entries; those decisions were treated as applicable and followed.
Interpretation and reasoning: The Tribunal found undisputed facts that the scrip was issued by the trade authority for a limited amount, its value was fraudulently inflated in Customs EDI (about fifty-fold), and the importer cleared goods using the inflated value. The importer neither purchased the scrip from the recorded owner nor verified the scrip's existence or value and did not contact the owner. The Tribunal held that mere payment to intermediaries within a syndicate does not equate to payment of customs duty to the exchequer. The importer thereby profited from the fraud and effectively evaded duty.
Ratio vs. Obiter: Ratio - where an importer uses fraudulently inflated DEPB scrip values to clear goods and has not taken steps to verify genuineness/ownership, duty demand under section 28(4) is sustainable. Obiter - commentary that payment to intermediaries in a fraud network is insufficient to discharge duty liability.
Conclusion: The demand of duty under section 28(4) against the importer is upheld.
Issue 2 - Invoking extended limitation (section 28(4)) where manipulation occurred in third-party systems
Legal framework: Extended period available when non-payment/short payment is due to collusion or willful mis-statement/suppression; doctrine allows recovery where fraud vitiates transactions.
Precedent Treatment: Tribunal relied on earlier authorities upholding extended period for similar EDI-manipulation schemes; those authorities were followed.
Interpretation and reasoning: The Tribunal concluded that the fraudulent enhancement of scrip values in the Customs EDI system and the importer's failure to verify or contact the recorded scrip owner amounted to conduct that justified invoking section 28(4). The importer's lack of enquiry and the resultant benefit from the fraud meant the extended period applied.
Ratio vs. Obiter: Ratio - extended limitation under section 28(4) applies where an importer benefits from fraud in EDI scrip manipulation and has not exercised due verification; Obiter - factual emphasis that passive acquisition of scrips via intermediaries does not negate applicability of section 28(4).
Conclusion: Invocation of the extended period under section 28(4) is justified and the demand is not time-barred.
Issue 3 - Imposability of mandatory penalty under section 114A when extended period is invoked
Legal framework: Section 114A prescribes mandatory penalty where extended period of limitation is invoked for recovery of duty; penalty grounds correspond to those supporting extended limitation.
Precedent Treatment: Tribunal followed prior decisions treating mandatory penalty under section 114A as imposable on the same grounds that justify invoking extended limitation.
Interpretation and reasoning: Given the Tribunal's conclusion that the extended period applied because of fraudulent enhancement of scrip values and the importer's failure to verify/ascertain genuineness, the mandatory penalty under section 114A is properly attracted. The importer's conduct showed no minimal effort to confirm validity; therefore the statutory penalty follows.
Ratio vs. Obiter: Ratio - mandatory penalty under section 114A is imposable where the facts justify invoking section 28(4); Obiter - analysis of sufficiency of verification steps expected from importers.
Conclusion: Penalty under section 114A is upheld.
Issue 4 - Maintainability of penalty under section 114AA absent evidence of knowledge or direct involvement
Legal framework: Section 114AA contemplates penal consequences for specific culpable conduct (fraud/forgery/knowledge); mens rea or knowledge may be relevant to sustain that particular penalty.
Precedent Treatment: The Commissioner (Appeals) had set aside penalty under section 114AA due to absence of evidence of the importer's knowledge of forgery; Revenue did not appeal that relief and the point was treated as final.
Interpretation and reasoning: The Tribunal noted the Commissioner (Appeals)'s factual finding that there was no evidence of the importer's knowledge of forgery of the scrip license and that, accordingly, the penalty under section 114AA stood set aside. As Revenue did not challenge that finding, the issue attained finality.
Ratio vs. Obiter: Ratio - where there is no evidence of knowledge or direct participation in forgery, penalty under section 114AA may be unsustainable; Obiter - no broader pronouncement on evidentiary thresholds beyond the present facts.
Conclusion: Penalty under section 114AA is not sustained in this matter and the appellate decision setting it aside is final (no appeal by Revenue).
Issue 5 - Standard of care/verification required from importer using DEPB scrips purchased through intermediaries
Legal framework: Importers are expected to exercise reasonable care to ensure validity of instruments relied upon to claim duty exemptions; general principle that fraud vitiates transactions applies.
Precedent Treatment: Tribunal relied on prior authorities which treated lack of due enquiry/verification by importers as culpable conduct supporting recovery and penalties.
Interpretation and reasoning: The Tribunal emphasised that the importer neither verified the scrip ownership nor its face value, nor contacted the recorded owner, and therefore took no reasonable steps to ensure the instrument's validity. Payment to intermediaries within a fraudulent syndicate was insufficient to treat the importer as having discharged duty obligations. The maxim "fraud vitiates everything" was applied to deny the importer protection from recovery.
Ratio vs. Obiter: Ratio - importers must exercise basic verification of DEPB scrip validity and ownership before utilising them; failure to do so that results in benefit from fraud supports duty recovery and penalties (as in Issues 1-3). Obiter - practical suggestions on minimal verification steps were noted but not exhaustively laid down.
Conclusion: Importer's failure to verify the scrip or contact its recorded owner constituted lack of due care, justifying duty recovery and penalties under the Act.
Interrelation and final determination
Cross-reference: Issues 1-3 are interlinked - the fraudulent inflation of scrip values in the Customs EDI system (Issue 1), and the importer's failure to verify (Issue 5), together justify invocation of extended limitation (Issue 2) and imposition of mandatory penalty under section 114A (Issue 3). Issue 4 is distinct and was resolved in favour of the importer on facts (no evidence of knowledge), and that relief was not appealed.
Final conclusion: The Tribunal upheld the demand of customs duty under section 28(4) and the mandatory penalty under section 114A, while noting that the penalty under section 114AA had been set aside by the lower appellate authority and was not appealed by the Revenue; the appeal by the importer was dismissed.
Use of fraudulently enhanced DEPB scrips to evade customs duty - extended period of limitation under section 28(4) for recovery of customs duty - mandatory penalty under section 114A - discretion to impose penalty under section 114AA - fraud vitiates everything
Use of fraudulently enhanced DEPB scrips to evade customs duty - extended period of limitation under section 28(4) for recovery of customs duty - fraud vitiates everything - Validity of demand of customs duty by invoking extended period under section 28(4). - HELD THAT: - The Tribunal found that the appellant cleared goods without paying customs duty by utilising a DEPB scrip whose value had been fraudulently enhanced in the Customs EDI system from Rs. 56,091 to Rs. 25,67,974, and that the appellant used the inflated value to the extent of Rs. 4,58,537. The appellant neither purchased the scrip from the recorded holder nor verified its value or contacted the owner. Although the appellant paid intermediaries in the syndicate, that payment did not amount to discharge of duty to the exchequer. The Tribunal applied the established principle that fraud vitiates everything and held that the non-payment of duty resulted from the fraud in the EDI system; therefore the extended period under section 28(4) for recovery was rightly invoked and the demand sustained. [Paras 11]
Demand of customs duty invoked under extended period was upheld.
Mandatory penalty under section 114A - extended period of limitation under section 28(4) for recovery of customs duty - Sustainability of penalty imposed under section 114A. - HELD THAT: - The Tribunal held that the grounds for invoking the extended period of limitation under section 28(4) are the same grounds on which mandatory penalty under section 114A is imposable. Given the finding that the appellant had cleared goods using fraudulently enhanced scrips and had taken no steps to verify or ensure the scrip's validity, the Tribunal found no reason to interfere with the imposition of the mandatory penalty under section 114A. [Paras 11]
Penalty under section 114A was upheld.
Discretion to impose penalty under section 114AA - Status of penalty imposed under section 114AA. - HELD THAT: - The Commissioner (Appeals) had already set aside the penalty under section 114AA in the impugned order and the Revenue has not appealed against that part of the order. The Tribunal recorded that this aspect has therefore attained finality and does not call for interference. [Paras 12]
Penalty under section 114AA remains set aside and that finding is final.
Final Conclusion: The appeal is dismissed. The impugned order is upheld insofar as it sustains the demand of customs duty under the extended period and the penalty under section 114A; the penalty under section 114AA has been set aside by the Commissioner (Appeals) and is final.
ISSUES PRESENTED AND CONSIDERED
1. Whether the Appellate Tribunal has jurisdiction to entertain an appeal against an order-in-appeal passed by the Commissioner (Appeals) in respect of goods imported as baggage recovered from a passenger.
2. Whether the proviso to Section 129A(1) of the Customs Act excludes appeals to the Appellate Tribunal in baggage seizure/confiscation matters and thereby renders such appeals not maintainable before the Tribunal.
3. The relevance of judicial decisions addressing (a) exclusion of Tribunal jurisdiction in baggage matters, and (b) procedural defects relating to service/waiver of show cause notice and opportunity of hearing (natural justice), to the present question of maintainability of appeal before the Appellate Tribunal.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Jurisdiction of the Appellate Tribunal over baggage seizure/confiscation matters
Legal framework: Section 129A(1) (Rule 129A) of the Customs Act prescribes the orders against which an appeal to the Appellate Tribunal lies and contains a proviso expressly stating that no appeal shall lie to the Tribunal in respect of orders passed by the Commissioner (Appeals) under Section 128A if such order relates to any goods imported or exported as baggage.
Precedent treatment: The Tribunal relied on prior Tribunal and High Court pronouncements (cited) that have recognised the statutory exclusion of Tribunal jurisdiction in baggage cases under the proviso to Section 129A(1).
Interpretation and reasoning: The Court examined the factual matrix - recovery of gold concealed on person/luggage of a passenger who arrived from abroad - and categorized the matter as one concerning goods imported as baggage. Applying the plain language of the proviso to Section 129A(1), the Court reasoned that the Tribunal is statutorily barred from adjudicating appeals against Commissioner (Appeals) orders relating to baggage. The statutory text was held determinative of jurisdiction irrespective of the merits of confiscation or procedural infirmities at earlier stages.
Ratio vs. Obiter: Ratio - The exclusion in the proviso to Section 129A(1) removes Tribunal jurisdiction over Commissioner (Appeals) orders concerning baggage; such appeals are not maintainable before the Tribunal. Obiter - ancillary observations on procedure not directly altering the jurisdictional conclusion.
Conclusion: The Appellate Tribunal lacks jurisdiction to entertain the present appeal arising from seizure/confiscation of baggage; the appeal is not maintainable and must be dismissed on that ground.
Issue 2 - Effect of the statutory exclusion on remedies and appropriate forum
Legal framework: The statutory framework contemplates specific appellate routes and limits thereof; where an appeal to the Tribunal is statutorily barred, statutory and alternative remedies (including writ jurisdiction) or appeal avenues contemplated by the Act must be explored by the aggrieved party.
Precedent treatment: The Court referred to decisions expressing the same view and indicated that the exclusion should be given effect. The Court noted that the Commissioner (Appeals) had itself recorded the exclusion in an order preamble, reinforcing statutory applicability.
Interpretation and reasoning: Given the bar on Tribunal jurisdiction, the Court concluded the appellant must seek remedy before the forum(s) lawfully available (e.g., writ jurisdiction or other statutory recourse) rather than by appealing to the Tribunal. The Court did not adjudicate on merits or procedural fairness as the jurisdictional bar disposed of the appeal.
Ratio vs. Obiter: Ratio - When Section 129A(1) proviso applies, the Tribunal must dismiss appeals as not maintainable and direct parties to pursue appropriate alternate remedies if available. Obiter - No guidance was given on the efficacy of alternative remedies in this case because the Tribunal did not reach merits.
Conclusion: Appeal dismissed as not maintainable; appellant may pursue remedy before the appropriate forum as permitted by law.
Issue 3 - Relevance of decisions on show cause notice waivers and natural justice to maintainability under Section 129A(1)
Legal framework: Section 124 (issue of show cause notice before confiscation) and provisions ensuring opportunity of representation and hearing form part of the substantive and procedural safeguards in confiscation proceedings; separate judicial decisions have addressed when a printed/oral waiver suffices and consequences of non-issuance of a valid SCN.
Precedent treatment: The Court considered a recent High Court decision that set aside detention where no proper show cause notice was issued and held printed waivers cannot substitute conscious, informed waivers under Section 124. That decision concerns compliance with natural justice and validity of original orders.
Interpretation and reasoning: The Court distinguished those authorities on the narrow ground that they address procedural defects (service/waiver of SCN and hearing) and the validity of original confiscation/detention orders, not the appellate jurisdictional question under Section 129A(1). While acknowledging the force of natural justice principles, the Court held such decisions do not affect the statutory jurisdictional bar that precludes appeals to the Tribunal in baggage cases. The Tribunal expressly declined to adjudicate on whether procedural lapses occurred or whether the original order is sustainable, because jurisdictional incapacity foreclosed consideration of merits.
Ratio vs. Obiter: Ratio - Procedural infirmities in issuance of SCN or waiver do not cure or override the statutory exclusion of Tribunal jurisdiction in baggage matters; jurisdictional provisions are to be given effect first. Obiter - Observations distinguishing the factual/purposive contexts of natural justice cases from the question of appellate jurisdiction.
Conclusion: Decisions addressing invalidity of orders for lack of proper SCN or hearing do not alter the statutory prohibition on appeals to the Tribunal in baggage cases; such procedural issues, if agitated, must be pursued in the appropriate forum (e.g., writ court) but do not confer jurisdiction on the Tribunal.
Overall Conclusion
The Appellate Tribunal is statutorily precluded by the proviso to Section 129A(1) from entertaining appeals against Commissioner (Appeals) orders relating to goods imported as baggage; the present appeal concerning seizure/confiscation of gold recovered from a passenger's person/luggage is not maintainable and is dismissed. The Tribunal did not decide on merits or procedural objections to the original order; the appellant may pursue remedies before an appropriate forum as available under law.
Maintainability of appeal - availability of alternative remedy - Smuggling - foreign origin gold - baggage was illegally brought into India in concealment without making any declaration to this effect under Customs Act, 1962 - HELD THAT:- It is evident that this appeal is filed in case of seizer/confiscation of gold recovered during search of a person and his luggage. The person had traveled from Dubai to India. The case being of a baggage seizure case, appeal against the order of Commissioner (Appeals) in this case could not lie before this Tribunal.
The appeal is dismissed as not maintainable. Appellant may pursue for remedy before appropriate forum, if possible.
ISSUES PRESENTED AND CONSIDERED
1. Whether confiscation of seized agricultural produce can be sustained where the Revenue has not established foreign/illicit origin of the goods.
2. On whom lies the burden of proof to establish that seized goods are smuggled goods when the goods are not notified under Section 123 of the Customs Act.
3. Whether the specified period of six months under Section 110(2) (for issuance of show cause notice) is applicable where provisional release was made under a Provisional Release Order.
4. Whether confiscation of the vehicle used for transportation of the seized goods is maintainable under Section 115(2) where the vehicle was employed in illegal transportation but vehicle-owner's knowledge is not established.
5. Whether penalties under Section 112(b) are maintainable against various persons (driver, vehicle-owner, consignor, mandi inspector) in absence of evidence of knowledge or express culpability.
6. Whether expert testing or enquiry as to country/origin and documentary verification is necessary to establish foreign origin of agricultural produce alleged to be smuggled.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Validity of confiscation of goods where foreign/illicit origin is not established
Legal framework: Confiscation under Section 111(b) is available where goods are smuggled or illegally imported in contravention of Customs Act provisions and allied notifications (e.g., Notification No.63/94-Cus(N.T.)). Section 123 prescribes burden of proof in certain cases for specified goods.
Precedent treatment: The Tribunal followed and relied upon earlier decisions (including Kolkata Bench and Calcutta High Court) holding that where goods are not notified under Section 123, burden to prove foreign origin rests on Revenue (citing Sudhir Saha, Subodh Das and related authorities cited in the order).
Interpretation and reasoning: The Tribunal found no evidence establishing Nepali/Canadian origin of the peas. No expert testing, no enquiry to trace brand/manufacturer of packing material, and no conclusive documentary or testimonial proof demonstrated foreign origin. The lower authorities proceeded largely on inferences from doubtful documentary material (6R receipts, invoice) and non-establishment of trading relationship, but failed to prove recent importation from abroad. Tribunal noted peas are extensively grown in India and appellants claimed local purchase; absence of positive evidence by Revenue defeats confiscation.
Ratio vs. Obiter: Ratio - Where goods are not notified under Section 123, the Revenue must prove foreign/smuggled origin before confiscation under Customs Act can be sustained. Obiter - observations on plausibility of documentary anomalies and possible misuse of buyer's name are ancillary and do not substitute for proof of foreign origin.
Conclusion: Confiscation of the seized peas could not be upheld; absence of proof of foreign origin requires setting aside confiscation and related penalties under the Customs Act.
Issue 2 - Burden of proof when Section 123 is not attracted
Legal framework: Section 123(1) places burden on person from whose possession goods are seized only for goods specified by notification under Section 123(2). For goods not so notified, burden remains on Customs to prove foreign origin.
Precedent treatment: Tribunal applied established law that non-notified goods do not attract reversed burden; relied on earlier Tribunal/High Court rulings (e.g., Sudhir Saha, Subodh Das) to affirm that Revenue must adduce evidence of foreign origin.
Interpretation and reasoning: The order reasons that peas were not included in any notification under Section 123 and no statutory notification was produced. Parliamentary statements or monitoring measures do not carry statutory effect to shift burden. Consequently, the Revenue's failure to test or otherwise prove foreign origin means the presumption of smuggling cannot be drawn.
Ratio vs. Obiter: Ratio - Absence of notification under Section 123 places the onus on Revenue to prove smuggled/foreign origin; mere suspicion or contradictory documentary records are insufficient.
Conclusion: Burden to prove foreign origin of the seized peas rested on Revenue and was not discharged; therefore confiscation and penalties premised on smuggling fail.
Issue 3 - Applicability of six-month limitation under Section 110(2) where provisional release order issued
Legal framework: Section 110(2) prescribes time limits for issuance of show cause notice from date of seizure, subject to exceptions such as provisional release provisions.
Precedent treatment: The Commissioner (Appeal) and Tribunal treated the question on facts, holding that issuance of provisional release order altered applicability of the six-month bar.
Interpretation and reasoning: The impugned order found that a provisional release order had been issued (Provisional Release Order No.02/2019-20 dated 28.08.2019) and therefore the six-month period constraint did not render the subsequent show cause notice invalid. Tribunal accepted that finding and did not interfere on that ground.
Ratio vs. Obiter: Ratio - Provisional release under the statutory scheme affects computation/application of the six-month period in appropriate circumstances. (Decision limited to the facts where provisional release existed.)
Conclusion: The challenge based on delay under Section 110(2) was not sustainable given the provisional release order; no interference warranted on that ground.
Issue 4 - Confiscation of vehicle under Section 115(2) absent evidence of owner's knowledge
Legal framework: Section 115(2) permits confiscation of vessels, vehicles or aircraft used in illegal importation or concealment of smuggled goods.
Precedent treatment: The Tribunal upheld confiscation of vehicle where it was used in illegal transportation, even if owner's knowledge was not established, consistent with statutory object of targeting means of illegal transport.
Interpretation and reasoning: The Tribunal found the vehicle was admittedly used to transport the seized peas at the time of interception. Although driver and cleaner stated they acted per owner's directions and there was no record to show owner's knowledge, the admitted use of vehicle in illegal transportation justified confiscation under Section 115(2). The confiscation of the vehicle was therefore sustained distinct from the fate of the goods.
Ratio vs. Obiter: Ratio - Use of a vehicle in illegal transportation of smuggled goods renders it liable to confiscation under Section 115(2) irrespective of proof of owner's guilty knowledge, provided the vehicle was the instrumentality of the illegal act.
Conclusion: Confiscation of the vehicle under Section 115(2) was upheld notwithstanding lack of direct evidence that the owner knew of the smuggled nature of goods.
Issue 5 - Imposition of penalties under Section 112(b) on driver, vehicle-owner, consignor and mandi inspector
Legal framework: Section 112(b) empowers imposition of penalties on persons contravening provisions of the Customs Act; culpability requires evidence of involvement/knowledge.
Precedent treatment: The Tribunal applied principle that mere presence or role (e.g., driver) without evidence of express culpability or discretion does not justify penalty; it set aside penalties against driver and vehicle-owner while upholding penalty against the alleged mastermind whose involvement was supported by material.
Interpretation and reasoning: Tribunal found no justification to penalize the driver and vehicle-owner where they acted under direction and no express culpability was established. Conversely, the person found to have orchestrated procurement/load and whose documentary fabrications and conduct were shown was properly penalized. Penalty against mandi inspector for issuing pass without due inquiry was maintained by the lower authority but the Tribunal's main stance was that penalties tied to smuggling cannot stand when smuggled nature not proved; therefore penalties linked to confiscated goods were set aside except where independent culpability was established.
Ratio vs. Obiter: Ratio - Penalty under Section 112(b) requires proof of knowledge/culpability; absent such proof, penalties on subordinate actors (driver, owner) are not sustainable. Obiter - Administrative failings by third officials may attract other consequences but cannot substitute for proof under Customs Act.
Conclusion: Penalties imposed on driver and vehicle-owner were unjustified and set aside; penalty against the principal orchestrator sustained to the extent supported by record; overall penalties dependent on confiscation of goods were quashed since confiscation failed.
Issue 6 - Necessity of expert testing and documentary verification to establish origin
Legal framework: Determination of country of origin may require testing, brand/manufacturer tracing, and documentary enquiries; burden of proof dictates the effort required by Revenue.
Precedent treatment: Tribunal relied on authorities holding that in absence of statutory notification the Revenue must carry out effective inquiry, including testing, verification of brand and documentary chains, to prove foreign origin.
Interpretation and reasoning: Tribunal noted absence of any expert opinion, laboratory test, enquiry into brand/packaging or manufacturer, or proper verification of the documentary chain. Mere reproduction of bag photographs or reliance on doubtful 6R receipts is inadequate to establish foreign origin.
Ratio vs. Obiter: Ratio - Where burden to prove foreign origin lies on Revenue, it must undertake adequate investigative steps (testing, verification) to discharge that burden; failure to do so undermines confiscation/penalty actions.
Conclusion: Lack of expert testing and documentary verification contributed decisively to failure of Revenue to prove smuggled/foreign origin; this deficiency required setting aside confiscation and attendant penalties (subject to vehicle confiscation and proven individual culpability as noted above).
Confiscation of seized goods - Levy of penalties u/s 112 of the CA - smuggling of peas - Revenue failed to establish foreign origin/Nepali origin of goods - non existence of trading relation ship between the appellant and the persons claimed to be buyers - burden to prove the smuggled nature of the goods u/s 123 of CA, 1962 - HELD THAT:- On perusal of the records, it is quite evident that no effort has been made to establish the foreign nature or Nepali origin of the peas seized. The case proceeds on the basis of the non existence of trading relation ship between the appellant and the persons claimed by him to be his buyers. Even if the arguments advanced in the orders of the lower authorities are to be accepted then still the smuggled nature or contravention of the provisions of the Custom Act, 1962 cannot be established.
Peas are grown in huge quantity in India and in the appellants have in his intial statement claimed to have purchased the same from local farmers. He even produced the documents of such purchase. The said claim of the appellants have been brushed aside without recording any concrete finding with regards to the Nepali Origin of the peas. Was it possible to distinguish between the peas of Indian or Nepali origin, no expert opinion on the issue has been recorded. There are no evidence brought on record by which it can be said that the said peas were the peas of Nepali origin. It is also noticed that there seem to be certain variation in respect of the country of origin of the peas confiscated.
It is found that these goods are not even specified under Section 123 of Customs Act and hence the burden to prove the smuggled nature of these goods is squarely on the departmental authorities.
It is also not brought on record as to how any test or opinion of certain experts were taken in the matter for determining the origin of these goods. In absence of any evidence to establish that the impugned goods were illicitly brought from Nepal, there are no merits in the impugned order upholding the confiscation of the goods. As the confiscation of the goods could not be upheld, the penalties imposed under Section 112 of the Act needs to be set aside.
Appeal allowed.
Issues: (i) Whether the belated claims of homebuyers, whose payments and allotments were already reflected in the records of the corporate debtor and in the resolution professional's affidavit, were required to be considered in the resolution plan notwithstanding filing after the CIRP timeline and after CoC approval. (ii) Whether such claims could be confined to the refund clause of the resolution plan instead of being treated in the same manner as other financial creditors in a class.
Issue (i): Whether the belated claims of homebuyers, whose payments and allotments were already reflected in the records of the corporate debtor and in the resolution professional's affidavit, were required to be considered in the resolution plan notwithstanding filing after the CIRP timeline and after CoC approval.
Analysis: The applications of the homebuyers were pending when the earlier remand order was passed and the appellate directions required the adjudicating authority to decide those applications on merits before resubmission of the plan. The record showed that the allotments and payments of the appellants were admitted in the books of the corporate debtor and were tabulated by the resolution professional. In such a situation, the claims could not be ignored merely because they were filed belatedly. A claim reflected in the corporate debtor's records required due consideration in the resolution process and in the addendum to the plan.
Conclusion: The issue is answered in favour of the appellants. Their claims were required to be considered and incorporated in the resolution plan on the basis of the admitted record.
Issue (ii): Whether such claims could be confined to the refund clause of the resolution plan instead of being treated in the same manner as other financial creditors in a class.
Analysis: The refund clause was intended for allottees whose claims had neither been filed, verified, nor brought to the notice of the resolution applicant before submission of the plan. The appellants' claims stood on a different footing because the allotments and payments were already reflected in the corporate debtor's records and in the resolution professional's affidavit. Once the claims were verified from the record, they could not be relegated to a limited refund mechanism. They were entitled to be dealt with in the same class and manner as other similarly placed homebuyers.
Conclusion: The issue is answered in favour of the appellants. The refund clause was held inapplicable, and the claims had to receive the same treatment as those of other financial creditors in a class.
Final Conclusion: The appeals succeeded to the extent that the impugned rejection was set aside and the resolution applicant was directed to prepare a further addendum including the appellants' claims, to be placed before the Committee of Creditors and then before the Adjudicating Authority for consideration of the resolution plan.
Ratio Decidendi: Where a homebuyer's allotment and payment are already reflected in the corporate debtor's records and verified by the resolution professional, a belated claim cannot be excluded from the resolution plan or confined to a refund-only clause merely because it was filed after the CIRP timeline.
Prayer for acceptance of belated claims - Home Buyers - application were filed beyond 90 days of Corporate Insolvency Resolution Process (CIRP) commencement date - HELD THAT:- The most important feature to be noted in the present case is the fact that Resolution professional himself has filed the Affidavit before the Adjudicating Authority containing details of all applicants, including unit no., days of delay in filing the claim and amount outstanding. The table produced clearly amounts to the verification of the claim and on the verification of the record of the Corporate Debtor, the said chart has been prepared and filed before the Adjudicating Authority in compliance of the order dated 05.03.2024 and 11.06.2024. Adjudicating Authority did not advert to the Affidavit filed by the Resolution Professional and the fact that payments made by the Appellant against allotment of different units is a fact which is admitted by the Resolution Professional in its tabular chart. When the amount paid by the unit holders on the basis of valid allotment is reflected in the record of the Corporate Debtor, the judgment of Puneet Kaur vs. M/s. K.V. Developers Private Limited [2022 (6) TMI 108 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI] fully covers the issue and the said payments by unit holders cannot be ignored by Resolution Applicant and such claims were required a due consideration by the Resolution Applicant.
It is true that the claims were filed by the Appellants after the CoC approved the plan on 04.03.2020. The Resolution Plan application was filed before the Adjudicating Authority however, the plan was never approved by the Adjudicating Authority and was remitted back to the CoC on 05.03.2024. Admittedly, the applications by the Appellants were filed before the Adjudicating Authority much before 05.03.2024 and they were pending consideration on 05.03.2024. Applications filed by the Appellants were also taken note in the order dated 05.03.2024 and directed to the listed on 30.04.2024. Thus, the facts and circumstances of the present case and especially, the fact that amount paid by the Appellant and details of their allotments and payment being on record of the Corporate Debtor, the claims were required to be dealt with by the Resolution Applicant. Resolution Professional has further submitted that the claims are reflected in the Information Memorandum of the Appellant.
The judgment of the Hon’ble Supreme Court in Puneet Kaur vs. M/s. K.V. Developers Private Limited
[2022 (6) TMI 108 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI] and Amit Nehra & Anr. Vs. Pawan Kumar Garg & Ors. [2025 (9) TMI 624 - SUPREME COURT] fully supports the submissions of the Appellant.
The judgment of the Adjudicating Authority rejecting applications cannot be sustained. Appellant has made out a case for treatment of their claims in the Resolution Plan as per the details which were submitted by the Resolution Professional before the Adjudicating Authority by means of an Affidavit - The order passed by the Adjudicating Authority is set aside - Appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether assets provisionally attached by an investigating agency under the Prevention of Money Laundering framework prior to commencement of CIRP could be included in the Information Memorandum and form part of a resolution plan.
2. Whether an interim restraint/status-quo order of a High Court passed prior to commencement of CIRP precluded inclusion of provisionally attached assets in the Information Memorandum or their treatment in the resolution process.
3. Whether a successful resolution applicant (SRA) whose plan is approved is entitled to the benefit of Section 32A of the Insolvency and Bankruptcy Code (IBC) when provisional attachment under PMLA was made before commencement of CIRP, and if so, the effect of Section 32A on such prior provisional attachment.
4. Whether directions of the Adjudicating Authority requiring the SRA to seek release of prior provisional attachment from the PMLA adjudicating authority are consistent with the statutory scheme of Section 32A.
5. The relief, if any, available to the SRA in light of the above questions.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Inclusion of provisionally attached assets in Information Memorandum and Resolution Plan
Legal framework: PMLA provisions governing provisional attachment (Section 5) and definition of attachment; IBC provisions requiring preparation of Information Memorandum (Section 29) and CIRP Regulations / Regulation 36(2)(a) (assets and liabilities as on insolvency commencement date); duties of IRP/RP under Section 18(1)(f) (take control/custody of assets over which CD has ownership rights).
Precedent treatment: Tribunal and judicial authorities have held that provisional attachment under the PMLA does not, by itself, divest ownership or enjoyment of immovable property (PMLA s.5(4) and case-law noted by parties). Relevant administrative and appellate decisions confirm that mere attachment is a protective/investigative measure and does not necessarily alter title.
Interpretation and reasoning: Section 5(4) of PMLA explicitly preserves the right of the person interested in enjoyment of immovable property despite provisional attachment. The Information Memorandum must contain assets belonging to the corporate debtor as on the insolvency commencement date; neither the PMLA attachment nor the High Court interim order had, on the record, divested ownership or established that the assets did not belong to the corporate debtor. Thus the RP was entitled to disclose and include such assets in the Information Memorandum.
Ratio vs. Obiter: Ratio - provisional attachment under PMLA does not automatically prevent inclusion of the attached assets in the Information Memorandum or their consideration in the resolution plan when ownership is not shown to have been divested. Obiter - discussion of comparative policy considerations between insolvency value maximization and criminal enforcement schemes.
Conclusion: Assets provisionally attached on 24.01.2019 could lawfully be included in the Information Memorandum and form part of the resolution plan.
Issue 2 - Effect of High Court's interim restraint/status-quo order on resolution treatment of attached assets
Legal framework: The interim order of the High Court stayed certain PMLA proceedings and directed the corporate debtor not to alienate property and to maintain status quo vis-à-vis those properties.
Precedent treatment: Interim restraint orders are binding between the parties and may operate to preserve status quo; but absence of subsequent, specific directions obtained after commencement of CIRP limits their continuing operability vis-à-vis the CIRP participants.
Interpretation and reasoning: The Division Bench order dated 13.02.2019 maintained status quo but was directed at the parties to that writ/appeal. CIRP in this matter began years later; no further or clarificatory orders were obtained from the High Court post-commencement of CIRP. The interim direction therefore did not, on the record, operate as an enduring bar preventing the IRP/RP from recording the asset in the Information Memorandum or dealing with it in the approved resolution plan.
Ratio vs. Obiter: Ratio - an interim High Court restraint, absent further or continuing directions obtained during CIRP, does not ipso facto preclude inclusion of assets in the Information Memorandum or their being part of an approved resolution plan. Obiter - general observations on interplay between interim orders and subsequent insolvency proceedings.
Conclusion: The restraint/status-quo order did not prevent inclusion of the attached assets in the Information Memorandum or their treatment in the resolution process on the facts before the Tribunal.
Issue 3 - Applicability and effect of Section 32A on pre-CIRP provisional attachment
Legal framework: Section 32A IBC (inserted by amendment effective 28.12.2019) - (1) cessation of corporate debtor's liability for pre-CIRP offences upon approval of a qualifying resolution plan effecting a change in management/control to an unrelated person and (2) bar on action against property of the corporate debtor in relation to such offences where property is covered under an approved plan, with an Explanation clarifying that "action" includes attachment, seizure, retention or confiscation under any applicable law; Section 5 & Section 8 PMLA (provisional attachment, adjudication and confiscation mechanism).
Precedent treatment: The Supreme Court in Manish Kumar has authoritatively construed Section 32A's object, scope and conditions; other tribunals and High Courts have reached differing conclusions on interplay between IBC and PMLA (some holding Section 32A protective once plan is approved; other precedents said NCLT/NCLAT cannot adjudicate PMLA attachment validity). Recent decisions (including those of this Tribunal and certain High Courts) differ on whether Section 32A operates to vacate pre-existing attachments upon plan approval; some three-member Bench decisions addressed related but distinct questions (jurisdiction under Section 60(5)).
Interpretation and reasoning: Section 32A's trigger is the approval of a qualifying resolution plan; its language is non-obstante and expressly contemplates cessation of liability and a bar on action against property (including attachment) where the property is covered by the approved plan and the plan effects the requisite change in control to a qualifying person. The legislative history and committee reports show object of providing a "clean slate" to bona fide SRAs to enable revival and value maximization, and to protect assets acquired under resolution from subsequent enforcement action that would nullify the plan. The provision contains no carve-out excluding attachments made prior to CIRP; rather the immunity is expressly structured to operate from the approval of plan. Where conditions of Section 32A are satisfied, continuation of provisional attachment that would frustrate the efficacy of the approved plan is inconsistent with the statutory scheme. The PMLA attachment regime remains competent prior to these trigger events, but cannot be used to defeat the protective wall erected by Section 32A once its conditions are met. The Tribunal therefore read Section 32A and PMLA together: pre-CIRP provisional attachment was valid when made but ceases to have effect in relation to the corporate debtor's property once Section 32A protection is engaged by an approved qualifying plan.
Ratio vs. Obiter: Ratio - upon approval of a qualifying resolution plan satisfying Section 32A(1)/(2) conditions, the corporate debtor (and persons acquiring its property under the plan) are entitled to statutory immunity such that prior provisional attachment of those properties (if covered by the plan) shall cease and no further action (attachment/seizure/retention/confiscation) may be taken in relation to those properties under PMLA; hence there is no requirement for the SRA to separately seek release from the PMLA adjudicating authority. Obiter - commentary on competing precedents and on policy balance between criminal enforcement and insolvency value maximization.
Conclusion: The SRA is entitled to benefit of Section 32A upon approval of a qualifying resolution plan; the provisional attachment dated 24.01.2019 ceased to have effect insofar as it affected the assets covered by the approved plan and the SRA need not resort to separate PMLA proceedings for release.
Issue 4 - Validity of Adjudicating Authority's directions requiring SRA to seek PMLA release
Legal framework: Section 32A IBC and the explanation thereto which expressly includes attachment as an action against property; PMLA adjudicatory process (Section 8) and remedies.
Precedent treatment: Adjudicating Authority had directed SRA to resort to PMLA remedies; some tribunals/High Courts have accepted NCLT/NCLAT jurisdiction to apply Section 32A and direct release; other authorities have held NCLT cannot adjudicate PMLA attachment validity. Manish Kumar and committee reports support statutory operation of Section 32A.
Interpretation and reasoning: Given Section 32A's statutory bar on action against property where the plan qualifies, directing the SRA to initiate separate PMLA proceedings to obtain release is inconsistent with the protective operation of Section 32A and is unnecessary where conditions for immunity are satisfied and plan has been approved. That direction imposed an avoidable procedural burden and failed to give effect to the legislative scheme which makes the bar operate upon plan approval.
Ratio vs. Obiter: Ratio - requiring an SRA to pursue PMLA adjudicatory remedies post-approval where statutory immunity under Section 32A applies is unnecessary and inconsistent with Section 32A's operation. Obiter - analysis of limits of NCLT/NCLAT jurisdiction vis-à-vis PMLA authorities in other factual matrices.
Conclusion: The Adjudicating Authority's directions that the SRA must seek release of attachment from PMLA authorities were unnecessary and not in accordance with Section 32A.
Issue 5 - Reliefs available
Legal framework & reasoning: Where an approved qualifying resolution plan effects change in management/control to an unrelated person and satisfies Section 32A conditions, statutory immunity and protection for property arise automatically upon approval; attached properties covered by the plan cease to be subject to PMLA attachment insofar as they relate to the corporate debtor's liability for pre-CIRP offences.
Conclusion: The SRA is entitled to Section 32A relief on approval of the resolution plan; the provisional attachment dated 24.01.2019 must be treated as having ceased in relation to the covered properties and the SRA need not file a separate application before the PMLA adjudicating authority for release.
OVERALL CONCLUSION
The Tribunal holds that (i) provisional attachment under PMLA does not ipso facto prevent inclusion of the attached assets in the Information Memorandum or their being part of a resolution plan; (ii) the interim High Court restraint did not, on the facts before the Tribunal, preclude inclusion of the assets in the resolution process; (iii) upon approval of a qualifying resolution plan meeting Section 32A conditions, the corporate debtor and property covered by the plan obtain statutory immunity and prior provisional attachment ceases to have effect in relation to those assets; and (iv) the Adjudicating Authority's directions requiring the SRA to pursue PMLA remedies for release were unnecessary and inconsistent with Section 32A, entitling the SRA to relief without further PMLA proceedings.
Refusal to enlarge the protection of Section 32A of IBC to uplift the attachment by Enforcement Directorate over the properties - inclusion of provisionally attached assets in the assets of the CD in the Information Memorandum or could be part of the Resolution Plan - assets of CD could be made part of the Information Memorandum, or could have been dealt in the Resolution Plan, due to restraint order passed by the Delhi High Court - entitlemnet to the benefit of Section 32A of the IBC, consequent to the approval of Resolution Plan - the findings requiring the SRA to resort to appropriate proceedings to seek release of the attachment, is in accordance with the statutory scheme - effect and consequence of approval of Resolution Plan of the CD.
Whether due to provisional attachment of the assets of the CD vide order dated 24.01.2019, the assets could not have been included in the assets of the CD in the Information Memorandum nor could be part of the Resolution Plan? - HELD THAT:- Information memorandum was required to mention details of all assets which belong to the corporate debtor. In the present case, there is no case of the respondent that asset do not belong to the corporate debtor, nor it claim that appellant has been divested with its ownership on account of provisional attachment under PMLA.
Due to provisional attachment of the assets of the corporate debtor vide order dated 24.01.2019, the assets could very well be included in the assets of the corporate debtor in the information memorandum and could be part of the resolution plan.
Whether due to restraint order passed by the Delhi High Court dated 13.02.2019 passed in LPA No.104 of 2019, assets of CD could not be made part of the Information Memorandum, nor could have been dealt in the Resolution Plan? - HELD THAT:-The LPA, which arose out of which order dated 22.01.2019, which was order passed under Writ Petition filed by the corporate debtor, the restraint order was passed on the corporate debtor not to alienate the property. Order of status quo which was directed with regard to the property in question where the status quo to be maintained both by corporate debtor as well as the Directorate of Enforcement. The order dated 13.02.2019, was passed much before initiation of CIRP, which commenced only on 23.03.2022. The interim direction passed by the High Court was only with respect to the corporate debtor and the Directorate of Enforcement, the said order 13.02.2019 cannot be interpreted to mean that it prohibited the IRP/RP to include the asset in the information memorandum or to deal with the same in the resolution plan. It is not on the record that after the commencement of CIRP, any further directions were sought from the Delhi High Court, either by Directorate of Enforcement or by the RP or any clarification has been sought.
The order was passed by Delhi High Court on 13.02.2019, and CIRP commenced after 3 years from the said order, and no further order having been obtained by either of the parties from the Delhi High Court, the order dated 13.02.2019 cannot be held to be restraint on the assets to be included in the information memorandum or in the resolution process.
Due to restraint order passed by the Delhi High Court dated 13.02.2019 passed in LPA No.104/2019, the assets of the corporate debtor could have very well be included in the information memorandum and made part of the resolution process.
Whether the Appellant is not entitled to the benefit of Section 32A of the IBC, consequent to the approval of Resolution Plan dated 04.07.2024 by the Adjudicating Authority, due to the reason that provisional attachment order was issued by the ED on 24.01.2019, much prior to initiation of CIRP on 23.03.2022? - HELD THAT:- Insertion of Section 32A in the IBC was preceded with Insolvency Law Committee (ILC) Report as well as the Report of the Standing Committee of Lok Sabha. Section 32A as inserted by Act No.01 of 2020, came to be challenged before the Hon’ble Supreme Court by means of Writ Petition under Article 32 of the Constitution of India, which challenge was decided by the Hon’ble Supreme Court in Manish Kumar vs. Union of India and Anr. [2021 (1) TMI 802 - SUPREME COURT] The Hon’ble Supreme Court in the said judgment in context of challenge to the provision has elaborately noticed the Insolvency Law Committee Report as well as Report of the Standing Committee of the Lok Sabha. The Hon’ble Supreme Court having already considered Section 32A, it is necessary to notice the judgment of the Hon’ble Supreme Court, which has authoritatively pronounced the law on the subject, which is binding on all. It is relevant to notice that the Petitioner challenging the provision of Section 32A before the Hon’ble Supreme Court has contended that immunity granted to the CD and its assets acquired from the proceeds of crimes and any criminal liability arising from the offences, will jeopardize the interest of the allottes/ creditors. Reliance was also placed on the Prevention of Money Laundering Act, 2002.
The judgment of this Tribunal in Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcement [2019 (5) TMI 1468 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI] have been relied. It is submitted that in the above case this Tribunal held that proceeding under PMLA are independent and not overridden by the IBC. In the above case, Directorate had attached the properties of Varrsana Ispat Limited. RP filed an application before the adjudicating authority for releasing the attachment of the certain assets of the corporate debtor. Attachment Order was issued on 10.07.2017, prior to the order of the declaration of moratorium. Application was held not maintainable against which the appeal was filed. This Tribunal had occasion to consider Section 14 of the IBC and certain provisions of the PMLA Act, 2002. It was held by this Tribunal that Section 14 of the IBC are not applicable to the proceedings under PMLA.
Whether the findings and observations of the Adjudicating Authority as contained in paragraphs 60 and 61 of the impugned order requiring the SRA to resort to appropriate proceedings to seek release of the attachment, is in accordance with the statutory scheme as delineated under Section 32A of the IBC? - What is the effect and consequence of approval of Resolution Plan of the CD by order dated 04.07.2024 on the provisional attachment made by ED by order dated 24.01.2019? - HELD THAT:- Section 32A which was inserted by Act No. 01/2020 in the IBC was brought by legislature providing for certain immunity from the liability from prior offences to a new management of the corporate debtor, which has come into existence after approval of the resolution plan, which result in change in the management or control of the corporate debtor. Section 32A only give immunity to the new management of the corporate debtor and conditions which are mentioned in Section 32A(a) and (b) has to be fulfilled, that is the new management who has come into control of the corporate debtor is not a promoter or in the management or control of the corporate debtor or related party of such person or person with regard to whom investigation authority on the basis of material has reason to believe that he has awaited conspire omission of offence - The provision of Section 32A itself does contemplate initiation of proceeding under the PMLA prior to CIRP commencement or even during CIRP commencement. Thus, Section 32A carve not garb out any exception for applicability of Section 32A in a case where Provisional Attachment Order has been passed prior to initiation of CIRP. Thus, the submission of the counsel for the Enforcement Directorate is correct that trigger event under 32A happens when resolution plan is approved, and at that time when Provisional Attachment Order was passed under PMLA, the Directorate of Enforcement was fully competent to exercise its power.
When the Section 32A itself contemplate cessation of liability and injunction not to prosecute for any offence after approval of resolution plan and to discharge the corporate debtor, we fail to see any purpose and object of continuing the Provisional Attachment affecting the resolution process which has undergone and attained finality under IBC.
The Provisional Attachment Order shall cease to operate after resolution plan is approved, bringing into effect Section 32A. In the present case conditions under Section 32A for extending the benefit to appellant are fulfilled and it is not the case of either of the parties that the SRA does not fulfil the condition contemplated under Section 32A. We thus are of the view that Provisional Attachment Order has to be treated to cease by virtue of legislative scheme under Section 32A and there is no necessity to obtain any order by the SRA from the adjudicating authority under the PMLA.
The appellant is entitled for the relief holding that appellant is entitled for the benefit of Section 32A and further there is no requirement in law by the SRA to file an application before the adjudicating authority of the PMLA for release of the asset.
The appellant is entitled for the benefit of Section 32A on approval of resolution plan - Due to the legislative scheme under Section 32A there is no re- quirement of appellant in the facts of the present case to resort to the proceeding for release of the assets from attachment by En- forcement Directorate. The provisional attachment order dated 24.01.2019 has to be treated to have ceased after the approval of the resolution plan.
Appeal disposed off.
Issues: Whether the petitioner's arrest under Section 19(1) of the Prevention of Money Laundering Act, 2002 was vitiated for want of necessity, non-issuance of summons, alleged mechanical grounds of arrest, delayed arrest, and alleged irregularities in further investigation and remand.
Analysis: The petition challenged the arrest on the ground that the Enforcement Directorate already had the material in its possession, had not issued summons under Section 50 of the Prevention of Money Laundering Act, 2002, and arrested the petitioner after a delay following the search and recording of statements. The Court held that the power of arrest under Section 19(1) is an investigative power and that the statutory safeguards are the existence of material in possession of the authorized officer, recording of reasons to believe, and communication of grounds of arrest. It accepted that judicial review is available, but its scope is confined to legality and procedural compliance and does not extend to reappreciation of sufficiency of material or a mini-trial. The Court further held that non-issuance of summons under Section 50 does not by itself vitiate arrest, that the grounds of arrest referred to non-cooperation and other circumstances, and that questions relating to the adequacy of material, the timing of arrest, and the evidentiary value of statements raise disputed issues not capable of conclusive determination in writ jurisdiction. It also held that alleged defects in further investigation and remand, at the highest, amounted to irregularities and not illegality so as to nullify the arrest.
Conclusion: The arrest and consequential proceedings were not liable to be quashed, and the challenge failed.
Ratio Decidendi: A challenge to arrest under Section 19(1) of the Prevention of Money Laundering Act, 2002 succeeds only if the statutory preconditions or constitutional safeguards are shown to be violated; disputed questions about necessity, sufficiency of material, or alleged procedural irregularities do not by themselves invalidate the arrest.
Money Laundering - seeking quashing of illegal arrest, reasons to believe, grounds of arrest, remand orders, and all consequential proceedings - illicit financial transactions and proceeds of crime - sufficient material exists with the authorized officer who had recorded his “reasons to believe” in writing - absence of need and necessity to arrest - requirement of authorized officer (Director, Deputy Director, Assistant Director or authorized officer) to independently record a “reason to believe” that the person has been guilty of an offence punishable under the Act - non-issuance of notice u/s 50 of PMLA - Grounds of arrest - non-cooperation by the accused - Investigation conducted without prior permission.
HELD THAT:- Section 19(1) of the Prevention of Money Laundering Act (PMLA) grants officers of the Directorate of Enforcement (ED) the authority to arrest an individual they believe is guilty of a money laundering offence. This power is subject to specific conditions and safeguards intended to prevent arbitrary arrests.
Non-issuance of notice u/s 50 of PMLA - HELD THAT:- Section 50 of the PMLA vests in the Director, Additional Director, Joint Director, Deputy Director or Assistant Director, the power to summon any person whose attendance may be necessary from giving evidence or for producing records during the course of investigation. The statement recorded under this provision carries significant evidentiary value, being deemed to have the same sanctity as that of evidence recorded before a civil court. It is therefore not a mere procedural formality but a substantive safeguard intended to ensure transparency, fairness and accountability in the process of investigation.
It is pertinent to mention here that Section 19 and Section 50 of the PMLA are distinct provisions and operate in distinct and well defined domains. The power under Section 50 of the PMLA is not a pre condition for arrest under Section 19 of the PMLA. These are two separate and distinct conditions under the PMLA itself. Non-issuance of notice under Section 50 of the PMLA cannot be restrained to the Investigating Officer for arrest of accused under Section 19 of the PMLA. Therefore, non-issuance of notice under Section 50 of the PMLA to the petitioner is a procedural lapse which does not amount to illegality.
Grounds of arrest - non-cooperation by the accused - HELD THAT:- It is pertinent to mention here that the petitioner was neither served with summons under Section 50 of the PMLA nor required to appear in relation to the alleged offence before the ED, therefore, the allegations of non-cooperation are incorrect mentioned in the document of ground of arrest but the arrest in the present case was not founded solely on the ground of non-cooperation but in the ground of arrest there are other grounds which justifies the custodial action, therefore, only on the basis of wrong mention in the ground of arrest i.e. the non-cooperation of the accused in investigation would not by itself amount to illegality because the arrest of the present petitioner was not founded solely on ground of non-cooperation but on the subjective satisfaction of the Investigating Officer based on material which was available with the ED. Therefore, this procedural lapse also does not amount to illegality whereas it amounts to irregularity.
The Apex Court has held that mere non-cooperation to summons under Section 50 PMLA is not sufficient to constitute a ground for arrest under Section 19 of the PMLA. In Pankaj Bansal [2023 (10) TMI 175 - SUPREME COURT], the court emphasized that the ED must show tangible material and the decision to arrest must confirm to the safeguards and strictures of Section 19 of the Act.
Investigation conducted without prior permission - HELD THAT:- The learned counsel for the ED contends that even after filing the prosecution complaint, it retains the statutory authority to conduct further investigation under the PMLA. However, the Apex Court has consistently held that such power is not unfettered and must be exercised subject to judicial oversight and the statutory safeguards prescribed under the Act. In Vijay Madanlal Choudhary Vs. Union of India [2022 (7) TMI 1316 - SUPREME COURT (LB)], the court emphasized that investigative powers, including those exercised post filing of a charge sheet must be exercised on the basis of tangible material and within the bounds of law.
It is the duty of the Investigating agency that once a complaint filed before the Magistrate and Magistrate has taken cognizance thereafter the further investigation should be with the permission of the Magistrate.
Upon consideration of the rival contentions of the parties and the material placed on record, this Court is of the view that the allegations of illegality in further investigation are not substantiated by any cogent material. The scheme of the PMLA permits the Investigating Agency to collect further evidence after filing of a complaint subject to the prior permission of the Special Court - As regards the non-cooperation and mechanical arrest, this Court finds that the issue involves disputed factual questions that cannot be conclusively determined in exercise of writ jurisdiction. The Grounds of Arrest, though brief, refer to the necessity of preventing destruction of evidence, influencing of witnesses and tracing of proceeds of crime. Whether such reasons are adequate or not, is a matter of assessment by the trial court.
The ground raised by the petitioner in this petition are procedural lapses/irregularities which does not amount to illegality - the grounds raised in this petition are procedural lapses /irregularities not amounting to illegality and these are the grounds of bail. In light of the foregoing discussion, this Court finds no ground to interfere with the investigation or the arrest effected by the Investigating Agency.
Petition dismissed.
Issues: (i) Whether the intra-court appeal was maintainable against the order impugned before the Division Bench. (ii) Whether the coal block allocation letter constituted "property" under the Prevention of Money Laundering Act, 2002. (iii) Whether misrepresentation in obtaining the coal block allocation could result in "proceeds of crime" and attract the offence of money-laundering. (iv) Whether the Directorate was justified in provisionally attaching the value of coal extracted. (v) Whether the cut-off date of 04.09.2003 could restrict the Directorate's action to the pre-allocation stage.
Issue (i): Whether the intra-court appeal was maintainable against the order impugned before the Division Bench.
Analysis: The challenge before the Single Judge was directed against a provisional attachment order issued by an executive authority and the consequential show cause and complaint proceedings. The reliefs sought were in the nature of writ remedies under Article 226 of the Constitution of India, and the writ petition attacked the legality of the foundational executive action and its sequelae. The proceedings were therefore not confined to supervisory correction of a subordinate court or tribunal.
Conclusion: The appeal was maintainable.
Issue (ii): Whether the coal block allocation letter constituted "property" under the Prevention of Money Laundering Act, 2002.
Analysis: The definition of property under the Act is inclusive and broad, covering corporeal and incorporeal interests, deeds and instruments evidencing title or interest, and assets of every description. A coal block allocation letter confers a valuable right to seek a mining lease and to obtain economic benefit from the allocation. Such an allocation is not to be treated narrowly as a mere administrative permission when it operates as an instrument conferring commercial advantage and legal interest.
Conclusion: The allocation letter was property within the meaning of the Act.
Issue (iii): Whether misrepresentation in obtaining the coal block allocation could result in "proceeds of crime" and attract the offence of money-laundering.
Analysis: Proceeds of crime include property derived or obtained, directly or indirectly, from criminal activity relating to a scheduled offence, as well as its value. The offence of money-laundering covers any process or activity connected with such proceeds, including possession, acquisition, use, concealment and projection as untainted property, and is of a continuing nature. Where the allocation was obtained by misrepresentation and suppression of material facts, the resulting financial gains and benefits derived from use of that allocation could fall within the statutory definition and attract Section 3.
Conclusion: The misrepresentation could generate proceeds of crime and the ingredients of money-laundering were attracted.
Issue (iv): Whether the Directorate was justified in provisionally attaching the value of coal extracted.
Analysis: Section 5 permits provisional attachment where the authorised officer has reason to believe, on the basis of material in possession, that a person is in possession of proceeds of crime and that such proceeds are likely to be dealt with so as to frustrate confiscation. The Act expressly includes the value of such property, enabling attachment of equivalent value where the tainted property has been used, dissipated or is otherwise represented by its value. On the material relied upon, the quantified value of extracted coal was treated as the gain flowing from the tainted allocation.
Conclusion: The provisional attachment of the value of coal extracted was justified.
Issue (v): Whether the cut-off date of 04.09.2003 could restrict the Directorate's action to the pre-allocation stage.
Analysis: The statutory scheme of the Act does not confine attachment or investigation to the date of the predicate allocation alone. The requirement of a report or complaint under Section 173 of the Code of Criminal Procedure, 1973 operates as a jurisdictional trigger, not as a limitation on the scope of the enquiry. The continuing nature of money-laundering permits the Directorate to proceed against post-allocation dealings with proceeds of crime, and the quashing of the earlier first FIR and chargesheet did not control the later proceedings founded on the second FIR and the ECIR.
Conclusion: The Single Judge erred in restricting the matter to the pre-allocation stage.
Final Conclusion: The Division Bench held that the writ challenge was maintainable, the allocation letter was property, the tainted allocation and its financial gains constituted proceeds of crime, and the provisional attachment was legally sustainable; the impugned order was therefore set aside and the appeals succeeded.
Ratio Decidendi: An allocation instrument that confers a valuable right and is obtained by misrepresentation can constitute property under the Prevention of Money Laundering Act, 2002, and the proceeds and value derived from its exploitation may be provisionally attached where the statutory preconditions under Section 5 are satisfied.
Money Laundering - fraudulent activities resulting in financial gains leading to proceeds of crime - allocation of the Chotia Coal Block in favour of M/s Prakash Industries Limited (PIL) - allocation letter can be construed as ‘property’ or not - misrepresentation in allocation of coal block leads to proceeds of crime making it an offence of money laundering - correctness in attaching the value of coal extracted - correctness in restricting the applicability of PMLA, pre-allocation, in view of the quashing of First FIR and Chargesheet.
Maintainability of appeal - HELD THAT:- A perusal of the facts, in conjunction with the applicable statutory framework under the PMLA would show that actual question for consideration ought to have been, ‘whether the allocation letter constitutes ‗property’ within the meaning of Section 2(1)(v) of the PMLA; and if so, whether the said property was subsequently used or dealt with in a manner that enabled PIL to derive any financial gain, thereby generating ‗proceeds of crime’ as provided under Section 2(1)(u) of PMLA’. It is only in such circumstances that Section 3 of the PMLA could have been validly invoked - the LSJ, having incorrectly identified the preliminary legal issue, then proceeded to conclude that the offence of money laundering under Section 3 of the PMLA was not attracted in the present case. This inference, in the opinion of this Court, strikes at the fundamental core of the issue raised before the LSJ, making the findings legally unsustainable.
Whether allocation letter construes as 'property' - HELD THAT:- The definition of ‘property’ as provided under Section 2(1)(v) of the PMLA, is inclusive and expansive, broadly including every description of asset provided thereunder, in form of a deed or instrument evidencing title or interest in such assets. To put it simply, the definition of ‘property’ as provided under the PMLA is broad and inclusive in its approach towards what constitutes as property within the contours of the Act. This statutory definition is further supported by the constitutional jurisprudence of India, reiterating the understanding of what constitutes as property in India under Article 300A of the COI, which recognizes property as inclusive of intangible interests and rights created through incorporeal assets.
In the present case, the coal block allocation letter, although subsequently cancelled by the Supreme Court in ML Sharma [2014 (9) TMI 992 - SUPREME COURT], is an instrument evidencing a right or interest, namely, a right to obtain mining lease from the Government and extract coal through its utilisation. In accordance with, the definition of ‘property’ provided under both Black’s Law Dictionary and Section 2(1)(v) of the PMLA, such a right, once exercised and converted into economic gain becomes a form of property and the very foundation for what the Directorate has identified as proceeds of crime. Moreover, it is undisputed that the allocation letter was neither dormant nor kept in abeyance rather was utilised by PIL to derive substantial financial gains through coal excavation, leading to form the very foundation for the economic generation stated to be proceeds of crime by the Directorate.
It is pertinent to note that, the act of allocation, in itself, may not constitute a complete offence; rather, it is the first step in a chain of subsequent events, carrying a cascading effect. These events begin with the procurement of the allocation, which is then followed by the actual extraction of coal, an act, if done on the basis of an unauthorised allocation, constitutes a separate illegal act - The allocation sets in motion the process through which the State Government is expected to act upon the recommendation made by the Central Government and facilitate the formalities flowing therefrom. This process leads to an initiation of series of administrative actions, which, if found to be tainted by criminality at the origin, ultimately results in usurpation of a public resource, which otherwise would rightfully vest in the State as a natural resource belonging to the general public at large.
Whether misrepresentation in allocation of coal block leads to proceeds of crime making it an offence of money laundering? - HELD THAT:- Sections 2(1)(u) and 3 of the PMLA, when put together leads to infer that Section 3 criminalises any process or activity connected with proceeds of crime, which in turn includes property derived or obtained, directly or indirectly, by any person, as a result of criminal activity, relating to a scheduled offence and the value of such property.
In the present case, PIL misrepresented facts and figures in the process of obtaining coal block allocations, which typically attracts offences under Sections 420 and 467 of the IPC and Section 13(1)(d) of the PCA. Thereafter, the coal block allocation letter obtained through such criminal activity conferred valuable rights in favour of PIL which enabled the party to secure mining leases from the government and subsequently undertake coal excavation. As a result, it led PIL to obtain financial benefits in the form of profits earned from the extraction and sale of coal or through the usage of the financial benefits to substitute or derive assets, which qualifies as proceeds of crime within the meaning of Section 2(1)(u) of the PMLA.
The Supreme Court in Satyendar Kumar Jain v. Directorate of Enforcement [2024 (3) TMI 862 - SUPREME COURT] has clarified that the offence of money laundering is not limited to the final act of integration and remains ongoing as long as the proceeds are being dealt with. Accordingly, the continuing nature of money laundering, sustains the liability arising out of the PMLA for post-enactment activities involving such proceeds.
Moreover, the source of funds stated to be spent by PIL remains unexplained, as such in the absence of a clear financial trail showing that the expenditure incurred by PIL was funded through untainted and legitimate means it cannot merely be presumed that the losses absolve the liability under the Act. In substance, the fallacious premise that “a negative plus a negative result in positive” cannot be invoked to defeat the legislative intent and mandate of the PMLA, since the statute focuses on the derivation of use of property obtained through a criminal activity and not on the eventual profit or loss incurred by a party.
Whether the Directorate is justified in attaching the value of coal extracted? - HELD THAT:- In the present case, the Directorate’s evaluation of Rs. 951.77 crores corresponding to the coal excavated during the financial years from 2006-07 to 2014-2015, reflects the financial gain derived by PIL pursuant to attaining the coal block allocation through misrepresentation. The quantification reached by the Directorate as also elaborated in the preceding paragraphs is not constrained to the date of allocation, rather continues as long as the benefit from the tainted property subsists. In the aforesaid background, although it is the case of PIL that the quantification by the Directorate is baseless, no credible evidence to rebut the said quantification has been produced, thereby failing to discharge the onus of proof imposed upon it once the procedural presumption arises.
Therefore, once the Directorate has made a prima facie case, establishing the predicate offence, its nexus to the proceeds and reason to believe, the burden shifted to PIL to prove that the property is untainted. Accordingly, the Directorate, is justified in attaching the “value” of coal extracted under Section 5 of the PMLA, when the pre-requisites of attachment has been satisfied.
Correctness in restricting the applicability of PMLA, pre-allocation, in view of the quashing of First FIR and Chargesheet - HELD THAT:- The finding of the LSJ limiting the jurisdiction of the Directorate strictly to pre-allocation events, i.e. 04.09.2003, falls short of the intention of the PMLA and overlooks the continuing nature of the offence of money laundering recognised under explanation (ii) to Section 3 of the PMLA, which highlights that the said offence persists as long as the proceeds of crime are possessed, used, concealed, or projected as untainted. It is to note that, while the second chargesheet filed by the CBI may have confined itself to events leading upto the allocation, the PMLA is a standalone statute empowering the Directorate to investigate and act upon ancillary events as long as they are connected to the proceeds of crime. The Directorate is not confined to the timeframe or scope set out by the predicate agency.
The LSJ ought not to have rendered conclusive findings premised on an outcome that lacks finality. More specifically, owing to the reason that, the quashing of the FIR and chargesheet was allowed at a preliminary stage, without delving into the examination of the facts, evidence and surrounding circumstances. Furthermore, when the LSJ invoked its extraordinary jurisdiction at the stage of issuance of SCN, relying on the principles laid down in Whirlpool Corporation v. Registrar of Trademarks, it rather became necessary to exercise judicial restraint. Thus, the LSJ must not have drawn definitive conclusion on the existence or absence of predicate offence at such a nascent stage - the financial benefits derived by PIL post-allocation, such as coal extraction, commercial exploitation, profit generation, or any asset substitution, form part of the economic chain flowing from the alleged tainted allocation. These are squarely within the scope of the Directorate’s jurisdiction under the PMLA. Therefore, the Directorate is legally justified in extending its actions beyond the pre-allocation phase, and the artificial cut-off date of 04.09.2003 cannot be used to curtail its statutory mandate.
Thus, this Court has reached the conclusion that the issuance of the Provisional Attachment Order under Section 5 of the PMLA formulates a foundational executive action, the legality of which was challenged by PIL under Article 226 of the COI. Further, the coal block allocation letter dated 04.09.2003 obtained through misrepresentation constitutes ‘property’ under Section 2(1)(v) of the PMLA, whereas the illegal financial gains facilitated the generation of proceeds of crime under Section 2(1)(u) of the PMLA. Furthermore, PIL’s continued possession and use of these proceeds established the offence under Section 3 of the PMLA. Moreover, the Directorate has satisfied the statutory pre-requisites envisaged under Section 5 of the PMLA justifying the issuance of PAO.
The Impugned Judgment passed by the learned Single Judge, which is under challenge herein, is hereby set aside - Appeal allowed.
Issues: (i) Whether the extended period of limitation was invokable for the service tax demand on the ground of suppression of facts with intent to evade tax; (ii) Whether penalty under Section 78 could be sustained and whether the impugned order required interference.
Issue (i): Whether the extended period of limitation was invokable for the service tax demand on the ground of suppression of facts with intent to evade tax.
Analysis: The demand for the subsequent period was based on balance-sheet figures and other documents obtained from the assessee, while an earlier show cause notice on the same issue had already been issued for the prior period. The record did not establish any positive act of suppression, wilful misstatement, or deliberate withholding of information with intent to evade tax. In such circumstances, mere non-payment or non-disclosure, without proof of a conscious design to evade, was held insufficient to sustain invocation of the extended period.
Conclusion: The extended period of limitation was not invokable and the demand beyond the normal period was unsustainable.
Issue (ii): Whether penalty under Section 78 could be sustained and whether the impugned order required interference.
Analysis: Since the foundation for invoking the extended period failed, the penalty based on the same allegation of suppression also could not survive. The Tribunal further found no merit in the Revenue's challenge to the remand and speaking-order direction, as the impugned order had proceeded on the absence of proof of mala fide intent and the need for proper adjudication on the material placed by the assessee.
Conclusion: Penalty under Section 78 was not sustainable and no interference with the impugned order was warranted.
Final Conclusion: The Revenue's challenge failed, and the assessee retained the benefit of the Commissioner (Appeals)'s relief, including the setting aside of the time-barred demand and related penalty.
Ratio Decidendi: Extended limitation under the service tax law can be invoked only on proof of deliberate suppression, wilful misstatement, or other positive conduct showing intent to evade tax; absent such proof, the normal limitation applies and consequential penalty cannot stand.
Recovery of service tax inclusive of Education Cess, Higher Education Cess, Swachh Bharat Cess and Krishi Kalyan Cess, with interest and penalty by invoking extended period of limitation - suppression of facts or not - setting aside of penalty under Section 78 - HELD THAT:- The impugned order clearly relates that the Appellant had been earlier issued Show Cause Notice dated 10.10.2014 for the period from April 2009 to March 2015 which has been adjudicated vide Order-In-Original dated 15.12.2016. Since earlier Show Cause Notice on the same issue has been issued the Respondent the impugned order concluded that invoking extended period of limitation for the subsequent period would not be a correct proposition.
It has been further observed in the impugned order that demand made on the basis of balance-sheet for the respective year and such documents provided by the Respondents and no evidence has been adduced to substantiate the allegation of mala fide intention of the Respondents. Therefore, it has been concluded that extended period of limitation could not have been invoked nor penalty under Section 78 can be imposed.
There are no finding to show that the Appellant was positively suppressing the facts from the Department with intent to evade payment of tax. In the case of Uniworth Textiles Ltd. V/s Commissioner of Central Excise, Raipur [2013 (1) TMI 616 - SUPREME COURT] the Hon’ble Supreme Court has held that 'In the present case, from the evidence adduced by the appellant, one will draw an inference of bona fide conduct in favour of the appellant. The appellant laboured under the very doubt which forms the basis of the issue before us and hence, decided to address it to the concerned authority, the Development Commissioner, thus, in a sense offering its activities to assessment. The Development Commissioner answered in favour of the appellant and in its reply, even quoted a letter by the Ministry of Commerce in favour of an exemption the appellant was seeking, which anybody would have found satisfactory.'
Once the SCN for the past period was issued Revenue was duty bound to issue ‘Statement of Demand’ for the subsequent period if no other ground was coming forth. Section 73A of the Finance Act, 1994 clearly provides so. Having failed to issue the statement of demand in time in continuation for the earlier Show Cause Notice, Revenue could not have turned back and issued a Show Cause Notice invoking extended period of limitation.
There are no merits in this appeal and the same is dismissed.
Issues: (i) whether the DTA clearances made by the 100% EOU were contrary to Para 6.8(a) of the Foreign Trade Policy; (ii) whether the disputed goods were correctly classifiable under the residuary tariff item as parts or under the heading for filtering or purifying machinery and apparatus for water; (iii) whether the demand of differential duty, interest and penalty could be sustained, including invocation of the extended period.
Issue (i): whether the DTA clearances made by the 100% EOU were contrary to Para 6.8(a) of the Foreign Trade Policy.
Analysis: Para 6.8(a) permits DTA sale by an EOU up to the prescribed FOB-value limit, subject to positive NFE and sale of products similar to goods exported or expected to be exported. The goods cleared in DTA were held to fall within the same broad class of water treatment and filtration machinery/components as the export goods. The Development Commissioner had granted and renewed the LoP, and no objection had been raised by the implementing authority on the DTA clearances. The materials on record also showed that the overall DTA entitlement was not breached.
Conclusion: The DTA clearances were not in violation of Para 6.8(a) of the Foreign Trade Policy and were entitled to concessional treatment.
Issue (ii): whether the disputed goods were correctly classifiable under the residuary tariff item as parts or under the heading for filtering or purifying machinery and apparatus for water.
Analysis: Classification must follow the tariff headings read with the Section and Chapter Notes. Heading 8421 specifically covers filtering or purifying machinery and apparatus for water, while the residuary entry is confined to parts. Applying the notes in Section XVI and Chapter 84, the goods in dispute were found to be machines or apparatus used for filtering or purifying water, not mere parts falling under the residuary entry. The reasoning rejected the departmental approach of treating the goods as uncategorised parts.
Conclusion: The goods were correctly classifiable under the water-filtering / purifying heading and not under the residuary parts entry.
Issue (iii): whether the demand of differential duty, interest and penalty could be sustained, including invocation of the extended period.
Analysis: Once the classification and FTP entitlement were accepted in favour of the appellant, the basis for differential duty failed. The clearances were regularly disclosed through returns and intimations, and the record showed departmental awareness of the DTA clearances, which negatived suppression or misstatement. In the absence of a sustainable duty demand, the penalty proposal also could not stand.
Conclusion: The differential duty demand, interest and penalty were not sustainable, and the extended period could not be invoked.
Final Conclusion: The impugned orders were set aside, the appellants succeeded on merits, and the Revenue's challenge failed.
Ratio Decidendi: For an EOU's DTA clearances, eligibility to concessional duty turns on whether the goods are similar to the exported goods and whether the FTP entitlement is satisfied; where the goods are properly classifiable as the substantive machinery itself rather than as residuary parts, the duty demand and penalty cannot be sustained.
DTA clearance of excisable goods made by the appellants is in violation of Para 6.8(a) of the Foreign Trade Policy or not - revised classification of the excisable goods arrived at Tariff Item 8421 9900 of the Central Excise Tariff Act, 1985 in the impugned orders are legally sustainable or not? - demand of differential duty with penalty - HELD THAT:- On plain reading of the Paragraph 6.8 (a) of FTP (2019-14) it provides that “Units other than gems and jewellery units may sell goods up to 50% of FOB value of exports, subject to the fulfilment of positive NFE on payment of concessional duties. Within entitlement of DTA sale, units may sell in DTA, its products similar to goods which are exported or expected to be exported from units. However, units which are manufacturing and exporting more than one product can sell any of these products into DTA, up to 90% of FOB of export of the specific products, subject to the condition that total DTA sale does not exceed the overall entitlement 50% of FOB value of exports for the unit, as stipulated above.” In the legal provision governing the levy of excise duty under Section 3 of the Central Excise Act, 1944 duty leviable on ‘like’ goods imported into India is mentioned. However, in CBIC Circular No. 7/2006- Customs dated 13.01.2006, it is stated that the definition of ‘similar goods’ would be based on the definition of similar goods as provided in the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 - Since CTI 8421 2190 covers all types of ‘filtering or purifying machinery and apparatus for water’, other than household type, it is not feasible to treat the goods covered under single CTI as other than ‘similar goods’.
Further, even on considering by usage of such goods, these are used for purifying or filtering water and therefore, this condition of ‘similar goods’ is also fulfilled by the goods under dispute in the present case. Moreover, it is not the case of revenue that the total DTA clearances have exceeded the overall 50% value of exports. Therefore, the clearance of excisable goods to DTA are eligible to be considered for extending the exemption under No.23/2003- C.E. dated 31.03.2003.
It is found that the issue of similar goods had been examined by various Hon’ble High Courts and Tribunal in a number of cases. In the case of Abi Turnamatics [2019 (2) TMI 1296 - CESTAT CHENNAI] the Co-ordinate Bench of the Tribunal have held that for interpretation of the term ‘similar goods’ in respect of DTA clearances from EOU, the common parlance meaning has to be adopted and not the one suggested by the department in the CBIC circular.
In the case of Axiom Cordages Ltd. [2021 (5) TMI 665 - CESTAT MUMBAI], the Co-ordinate Bench of the Tribunal had elaborately dealt with various case laws on the issues under dispute in a similar case and had extended the benefit of similar goods and exemption applicable to EOUs in respect of DTA clearances.
Thus, the dispute is no more open for any debate and the impugned order treating the DTA clearances made by the appellants EOU unit as ineligible for concessional duty under the notifications dated 31.03.2003 and 17.03.2012 for determination of excise duty, reclassification of disputed goods does not stand the scrutiny of law. Thus, the impugned orders dated 30.01.2015 and 04.11.2016 in confirmation of the adjudged demands is not legally sustainable.
Consequently appeal filed by Revenue for non-imposition of penalty and re-determination of duty demands is liable to be dismissed.
Issues: (i) whether the domestic tariff area clearances made by the 100% export oriented unit violated Paragraph 6.8(a) or 6.8(k) of the Foreign Trade Policy and were ineligible for concessional duty under Notification No. 23/2003-C.E.; (ii) whether the differential duty demand, penalty and invocation of the extended period of limitation were sustainable.
Issue (i): whether the domestic tariff area clearances made by the 100% export oriented unit violated Paragraph 6.8(a) or 6.8(k) of the Foreign Trade Policy and were ineligible for concessional duty under Notification No. 23/2003-C.E.
Analysis: The goods cleared in the domestic tariff area and the goods exported were held to fall within the same broad pharmaceutical heading, and therefore to be similar goods for purposes of the policy and notification. The entitlement for domestic tariff area sales was read in the context of export performance, positive net foreign exchange, and the permissions granted by the Development Commissioner. The clearance pattern, including advance domestic tariff area sales in the pharmaceutical sector, was found to be within the policy framework and not contrary to Paragraph 6.8(a) or 6.8(k). The interpretation adopted by the revenue was rejected in favour of the broader policy-based understanding of similar goods and entitlement.
Conclusion: The domestic tariff area clearances were held to be in accordance with the Foreign Trade Policy and the assessee was entitled to concessional duty.
Issue (ii): whether the differential duty demand, penalty and invocation of the extended period of limitation were sustainable.
Analysis: The record showed that the clearances had been disclosed through returns and were subject to departmental audit and development commissioner approvals, with no concealment or suppression established. Since the substantive demand itself failed on merits, the penalty and extended limitation also could not survive. The departmental objection was further rejected on the ground that the competent authority under the export policy had already accepted the clearances.
Conclusion: The differential duty demand, penalty and extended limitation were held to be unsustainable.
Final Conclusion: The impugned order could not be sustained in law, and the assessee succeeded on the merits of the dispute concerning domestic tariff area sales by the export oriented unit.
Ratio Decidendi: Where the competent export-policy authority has permitted the domestic tariff area clearances and the goods cleared and exported are commercially and broadly similar, the revenue cannot deny concessional duty or invoke limitation and penalty merely by adopting a narrower classification-based objection contrary to the policy framework.
100% EOU - DTA clearance of excisable goods made by the appellants is in violation of Para 6.8(a)/6.8(k) of the Foreign Trade Policy or not - confirmation of differential duty with penalty - HELD THAT:- In respect of domestic tariff area clearances of excisable goods by a 100% EOU, the levy of excise duty shall be determined as though it is the aggregate of customs duties that are leviable on like goods, when the goods are removed from EOU/bonded area into the DTA. Classification of the excisable goods are based on the Schedule to the Central Excise Tariff as given under the Central Excise Tariff Act, 1985. Central Excise classification had initially followed Six-digit classification code until 2003 and was broadly based upon HSN (Harmonized System of Nomenclature) classification. However, there were a number of differences with HSN classification and as such the 6-digit classification was not totally aligned with HSN, on the basis of which Customs Tariff has been designed. Eight-digit HSN based Commodities Classification Code was adopted for the purpose of levy of Customs duty with effect from 01.02.2003. Same eight-digit Code was also adopted by DGFT for FTP/EXIM Policy and by DGCIS for compilation of trade statistics. In such background, the Central Government thought it is desirable to adopt a common commodity classification code for all trade related transactions so as to avoid disputes and facilitate smooth flow of trade. Accordingly, for the purpose of eight-digit classification code for levy of Central Excise duty also, Central Excise Tariff (Amendment) Act, 2004 was brought into force with effect from 28th February 2005. Therefore, it can be seen that classification of goods for the purposes of Central Excise duty, Customs duty and for compliance with Foreign Trade Policy follow a common code.
From the facts on record it clearly transpires that the classification of items under dispute are vaccines for Hepatitis and similar vaccines for other diseases, injections and other pharmaceutical formulations. It would be travesty of justice to contend that a pharmaceutical product for treating one ailment/disease is not similar goods to other pharmaceutical product, since that is for treatment of some other disease. The classification of goods of Chapter 30 and more particularly heading 3002, clearly provide that in terms of heading and the sub-headings, all pharmaceutical products manufactured by the appellants and cleared in the DTA as well as the pharmaceutical products exported or to be exported in terms of LOP granted by the Development Commissioner, are duly covered under single heading 3002 of the Central Excise Tariff. Therefore, it cannot be said that these are not ‘similar goods’.
The clearance of excisable goods to DTA are in compliance with the FTP Policy. Further, in case of advance DTA sale, since respective duty has also been paid by the appellants taking into account the un-adjusted advance DTA sale, there is no violation of para 6.8(k) of the FTP. Therefore, the case of the appellants in clearance of DTA sale are eligible to be considered for extending the exemption under No.23/2003-C.E. dated 31.03.2003.
It is found that the issue of similar goods had been examined by various Hon’ble High Courts and Tribunal in a number of cases. In the case of Abi Turnamatics [2019 (2) TMI 1296 - CESTAT CHENNAI] the Co-ordinate Bench of the Tribunal have held that for interpretation of the term ‘similar goods’ in respect of DTA clearances from EOU, the common parlance meaning has to be adopted and not the one suggested by the department in the CBIC circular.
The dispute is no more open for any debate and the impugned order treating the DTA clearances made by the appellants EOU unit as ineligible for concessional duty under the notification No.23/2003-C.E. dated 31.03.2003 for determination of excise duty, imposition of penalty on the appellants do not stand the scrutiny of law.
The impugned order dated 18.02.2015 in confirmation of the adjudged demands is not legally sustainable - Appeal allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether penalty under Rule 26 of the Central Excise Rules, 2002 can be sustained against partners for alleged clandestine removal and evasion of duty where principal demand against the manufacturing unit was set aside by the Tribunal.
2. Whether the material relied upon (delivery challans and documents seized from third parties' premises or common premises) and statements of third parties and employees (some retracted) constitute sufficient and corroborative evidence to establish clandestine manufacture/removal and quantify duty liability.
3. Whether partners who are alleged to have "actively connived" in suppression of manufacture/clearance can be held liable for penalties in absence of direct corroborative evidence (e.g., excess raw material consumption, unexplained cash seizures, unrecorded stocks, or seizure of goods).
4. Whether SSI exemption is forfeited by use of a common trade/brand name where a co-ownership/trademark usage arrangement exists between related units operating from common premises.
5. Whether confiscation under Rule 25 can/should be ordered where excisable goods are not physically available, and the appropriate recovery provisions and interest/applicability apply.
ISSUE-WISE DETAILED ANALYSIS
Issue 1 - Sustainment of penalty against partners where principal demand is set aside
Legal framework: Penalty liability under Rule 26 of the Central Excise Rules, 2002 attaches to persons who transport, remove, deposit, keep, conceal, sell or purchase excisable goods which they knew or had reason to believe are liable to confiscation; enforcement must be grounded on proof of the substantive contravention (duty evasion/clandestine removal).
Precedent Treatment: Tribunal decisions emphasize that penalties cannot be sustained where the foundational demand for duty/clandestine removal is not established by admissible/corroborative evidence; findings based on unsupported assumptions are vulnerable (citing principles from prior Tribunal decisions extracted in the judgment).
Interpretation and reasoning: The Tribunal found that the demand against the manufacturing unit was set aside because the documents on which demand relied either bore another unit's name, were seized from common premises or third parties, and there was inadequate investigation linking seized documents to the unit in question. Given this, penal liability of partners founded on the same defective evidentiary basis cannot survive. The Court reasons that penal consequence against individuals presupposes a safe conclusion of clandestine removals attributable to the unit; absent that, the causal and mens rea links are not adequately proved.
Ratio vs. Obiter: Ratio - Penalty under Rule 26 cannot be sustained against partners when the essential charge of clandestine removal by the unit is not established by corroborative evidence. Obiter - Observations on partners' supervisory roles are contextual, but the decisive legal conclusion rests on insufficiency of primary proof.
Conclusions: Penalties imposed on the partners were set aside because the primary demand and clandestine removal findings against the unit were invalidated by the Tribunal's earlier decision.
Issue 2 - Sufficiency and admissibility of evidence (third-party documents, delivery challans, statements)
Legal framework: Revenue bears the onus to prove clandestine removal and quantification of duty by adducing corroborative evidence linking seized third-party records to removals from the assessee's premises; reliance on third-party documents or uncorroborated statements is insufficient without cross-examination or tangible linkage (established Tribunal jurisprudence).
Precedent Treatment: The Tribunal reiterated established authorities holding that documents seized from third parties or statements of third parties/transporters/labourers, if uncorroborated and not subjected to cross-examination, cannot conclusively establish clandestine removals or support quantification of duty; assumptions based on such material are impermissible.
Interpretation and reasoning: The Court examined delivery challans and seized papers showing inconsistencies (documents bearing another unit's name, contradictory statements, retractions). It found investigation to be partial ("half cooked"), lacking inquiries at key related entities and failing to produce transporters/customers for cross-examination. Absence of corroborative physical evidence (no excess raw material, no unaccounted stocks, no cash seizure) further weakens the case. Consequently, documents and statements relied upon do not meet the threshold of proof required to sustain demands/penalties.
Ratio vs. Obiter: Ratio - Demands based solely on third-party records and uncorroborated/retracted statements are not sustainable; corroboration and opportunity for testing evidence (cross-examination) are necessary. Obiter - Discussion of specific documentary inconsistencies illustrates application but does not expand legal tests beyond settled law.
Conclusions: The Tribunal's prior findings that reliance on such evidence is inadequate are determinative; therefore the departmental demands and consequential penalties based on that evidence cannot be sustained.
Issue 3 - Liability of partners in absence of direct corroborative evidence (retraction affidavits, language/comprehension claims)
Legal framework: Individual liability requires proof that the person had knowledge or reason to believe of the excisable goods' liability to confiscation and actively participated in or connived with clandestine removals; statements of the accused must be reliable and capable of corroboration; retraction/claims of coercion or language incomprehension undermine such statements' evidentiary value.
Precedent Treatment: Tribunal authority holds that retracted statements and untested witness statements cannot form the sole basis for penal findings; reliability of confessional or explanatory statements must be evaluated with supporting material.
Interpretation and reasoning: The Court notes retraction affidavits and contentions that statements were pre-compiled and/or given without proper comprehension. In absence of independent corroboration (no unaccounted stocks, no cash seizures, no corroborating supplier/customer evidence), the statements cannot be used to reliably fix individual culpability. The Tribunal therefore refuses to sustain penalties predicated on such statements.
Ratio vs. Obiter: Ratio - Reliance on retracted or uncorroborated statements to attribute active connivance and impose penalty on partners is impermissible. Obiter - Observations on standard indicia of clandestine activity (excess raw material, excess power usage, unexplained cash) are illustrative.
Conclusions: Penalties against partners fail for want of dependable evidence of their active connivance; claims regarding statement reliability further vitiate the prosecution's basis.
Issue 4 - SSI exemption and use of common trademark/brand name
Legal framework: Small Scale Industry (SSI) exemption is available based on prescribed criteria; ownership/use of a brand name per se does not disentitle an assessee from SSI benefit where a co-ownership/trademark usage arrangement exists and units operate under agreed usage.
Precedent Treatment: Tribunal precedents recognize that joint or co-ownership arrangements for trademarks/brands preclude automatic denial of SSI exemption merely because goods bear a common trade name, provided the arrangement demonstrates entitlement.
Interpretation and reasoning: The Tribunal examined the co-ownership agreement for the brand and concluded that the units were entitled to use the trade name on a co-ownership basis. Therefore the presence of the brand "Bhayani" on machines does not, by itself, negate SSI exemption. The Department's denial of exemption on that ground was unsustainable.
Ratio vs. Obiter: Ratio - SSI exemption cannot be denied solely because a common brand name is used where co-ownership/right to use the trademark is established. Obiter - References to supporting precedent reinforce principle but are consistent with mainstream authority.
Conclusions: SSI exemption stood; denial based solely on brand usage was improper and contributed to setting aside the impugned demand.
Issue 5 - Confiscation and recovery where goods not physically available; interest/recovery provisions
Legal framework: Confiscation under Rule 25 requires presence/identification of goods liable for confiscation; where goods are not physically available, confiscation orders are inappropriate per settled practice; monetary recovery of tax, interest and penalties proceeds under statutory recovery provisions (Section 11A/11AA/11AB as applicable).
Precedent Treatment: Departmental practice and judicial pronouncements disfavor making confiscation orders where goods cannot be seized; recovery instead pursued by monetary demands and appropriation of voluntary payments.
Interpretation and reasoning: The Commissioner had indicated liability for confiscation but refrained from passing confiscation orders because the goods were not available. The Tribunal did not disturb the settled position that confiscation cannot be ordered absent goods; it also noted department's entitlement to appropriate voluntary payments and to claim interest under relevant sections if substantive duty demand is established (but here the demand was set aside).
Ratio vs. Obiter: Ratio - Confiscation cannot be ordered where the alleged excisable goods are not found; appropriate statutory monetary recovery mechanisms apply when duties are otherwise established. Obiter - Discussion of appropriation of voluntary payments and applicable interest is contextual.
Conclusions: No confiscation was ordered due to non-availability of goods; since primary demands were set aside, related monetary recoveries/interest were not sustained in this context.
Levy of penalty on partners u/r 26 of Central Excise Rules, 2002 - conscious knowledge and involvemnt of pertners in the clandestine removal and contravention or not - charges of any clandestine removal as well as demand against firm, was set aside - reliance placed upon statement of third parties - corroborative evidences or not - HELD THAT:- Tribunal in Excise Appeal No. 11822/2018 and 12083/2016 [2019 (12) TMI 281 - CESTAT AHMEDABAD] observed that 'No independent and corroborative evidence has been brought to show any excess procurement of raw material or clearance of goods to buyer which can show that the Appellant cleared goods clandestinely. Our views are also based upon judgments in case of Sakeen Alloys [2013 (7) TMI 535 - CESTAT AHMEDABAD] and T.G.L Poshak [2001 (9) TMI 683 - CEGAT, CHENNAI]. Thus we hold that the charges of any clandestine removal against the Appellant are not sustainable. For the same reason we set aside the fines and penalties imposed upon the appellants.'
The impugned order passed by the learned Commissioner imposing penalties upon the appellants is not sustainable and it is liable to be set aside and the appeals are liable to be allowed.
The appeals are allowed and the penalties imposed upon the appellants are set aside.
TaxTMI 