TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 259
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....etorship firm, by, Pradeep Joshi (proprietor of Greenfield) against Impugned Order dated 30.04.2024 passed by Adjudicating Authority in MA 1265 of 2018 in C.P.(IB) No. 724/MB/2017. 3. Mr. Anil Goel who is the liquidator of Loha Ispat, the Corporate Debtor is the Respondent herein. 4. The Appellant submitted that the Impugned Order directed the Appellant to pay an amount of Rs. 5,49,23,112/-, despite the alleged transaction being genuine and conducted in the ordinary course of business. During the financial year 2016-2017, the Appellant legitimately purchased scrap trimming by- products from the Corporate Debtor, arising as scrap during the manufacturing of steel, at a gross value of Rs. 29,15,78,735/-. 5. The Appellant submitted that the Corporate Insolvency Resolution Process (CIRP) was initiated on 28.04.2017 against the Corporate Debtor. Consequently, the look-back period applicable to transactions with unrelated parties spans from 28.04.2016 to 27.04.2017. The impugned transactions, which occurred between 01.04.2016 and 27.04.2017, fall outside the ambit of this look-back period. As evidenced by the calculations provided in Exhibit - F, the appellant is entitled to the benef....
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....transactions conducted in the ordinary course of business. The Appellant contended that during the financial year 2016-17, it purchased scraps of mild steel and trimming by-products from the Corporate Debtor, generated as scrap during the steel manufacturing process, at a gross value of Rs. 15,92,34,161/-. 13. The Appellant submitted that the CIRP commenced on 28.04.2017 and consequently, the look-back period applicable to transactions with unrelated parties spans from 28.04.2016 to 27.04.2017. The impugned transactions, which occurred between 01.04.2016 and 27.04.2017, fall outside the scope of this look- back period. As per the calculations provided in Exhibit - F, the appellant is entitled to claim the benefit of transactions amounting to Rs. 6,11,20,189/- that took place during the period from 01.04.2016 to 27.04.2017. Therefore, these transactions are not subject to examination or avoidance under Section 43 of the Insolvency and Bankruptcy Code. Common pleadings 14. The Appellants submitted that the Adjudicating Authority erred in classifying the Appellant's purchase of Hot Roll Trimming (a byproduct) from the Corporate Debtor during the Financial Year 2016-17 as a preferen....
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.... can only be scrutinized as preferential if these occur within one year prior to the insolvency commencement date. The Appellants contended that the transactions in question, occurring during Financial Year 2016-17, fall outside this one-year period and, being in the ordinary course of business, are exempt from scrutiny under Section 43 of the Code. 19. The Appellants submitted that the Respondent, Mr. Anil Goel, acted improperly by relying solely on a Forensic Audit Report prepared by M/s Khandelwal & Jain, which was commissioned without prior Adjudicating Authority approval. The Appellants contended that the report is fraudulent and adverse, causing harm to the Appellant's interests. Furthermore, the Respondent's suspension by the Insolvency and Bankruptcy Board of India on two occasions raises serious concerns about his conduct and credibility in filing M.A. No. 1265 of 2018. 20. The Appellants submitted that the purchased Hot Roll Trimming was deteriorated scrap, lying at the Corporate Debtor's premises for 4-5 years, subject to corrosion and devaluation. The transaction were undertaken in good faith to mitigate losses due to the Corporate Debtor's failure to clear outstandin....
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...., violates the principles of res judicata and judicial discipline. The Respondent submitted that the Appellant have failed to demonstrate any exceptional circumstances, rendering their plea an afterthought and procedurally defective. This attempt to introduce a fresh cause of action unrelated to the impugned transaction undermines the fairness of the adjudicative process. 26. The Respondent asserted that the Appellant's reliance on Gluckrich Capital Pvt. Ltd. vs. The State of West Bengal and Ors. [(2023) ibclaw.in 75 SC] is legally erroneous and misleading. The cited judgment pertains to Section 66 of the Code, which addresses fraudulent transactions requiring proof of intent to defraud creditors. In contrast, the impugned transactions fall under Section 45 of the Code, which concerns undervalued transactions and does not necessitate proof of fraudulent intent, focusing instead on objective undervaluation. The Respondent submitted that this conflation of distinct legal standards is irrelevant and an attempt to obscure the true nature of the transaction, thereby weakening the Appellant's case. 27. The Respondent contended that the Appellant's portrayal of the impugned tran....
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....sferees, including the Appellants, at a reduced price of Rs. 49,57,31,767, resulting in a loss of Rs. 18,62,40,188. In FY 2016-17, stocks worth Rs. 90,03,07,622 were returned at Rs. 55,39,12,089, leading to a loss of Rs. 34,63,95,534. The Respondent contended that these losses, totalling Rs. 53,26,35,722 across both years, reflect a pattern of undervalued transactions designed to benefit specific parties at the expense of creditors. Specifically, the Appellants were directed to pay reflecting the loss from returning stocks. 32. The Respondent submitted that the Corporate Debtor returned HR Coils to the Appellants, in FY 2015-16 and 2016-17, despite retaining the materials for over a year. The Respondent contended that HR Coils are non-perishable commodities, and their value does not typically diminish significantly over time, except in cases of gross negligence such as rusting due to improper storage. The prolonged retention undermines the Appellant's claim of quality defects, suggesting that the returns were a pretext for undervalued transactions. 33. The Respondent asserted that the Forensic Audit Report and Tally data, including the stock item register for HR Coils, confirm th....
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.... from prior addresses, raising doubts about their genuineness. The Respondent contended that these entities, dealing in transactions exceeding Rs. 100 crores, lack credible business premises, suggesting potential manipulation to siphon funds. 38. The Respondent asserted that Section 45 of the Code defines undervalued transactions as those where the value received is significantly less than the asset's market value. The impugned transactions meet this criterion, with HR Coils returned at prices causing losses of Rs. 18,62,40,188 in FY 2015-16 and Rs. 34,63,95,534 in FY 2016-17. The Respondent submitted that these transactions lack commercial rationale and were not in the ordinary course, as they disproportionately benefited the Appellant and others. 39. The Respondent contended that the impugned transactions, involving significant discounts, lack of documentation, and a pattern of benefiting specific parties, are not in the ordinary course of business. The Appellant emphazised that the Hon'ble Supreme Court in Anuj Jain (supra), N.R. Dongre vs. State Bank of India (2017), and Gopal Krishna Shetty vs. State Bank of India (Civil Appeal No.1499 of 2020), and this Appellate Tribun....
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....the ingredients of undervalued transactions under Section 45 of the Code. 44. Concluding arguments, the Respondent requested this Appellate Tribunal to dismiss all these Appeals with cost. Findings 45. Based on the above discussion and the record available with us, following issues are required to be determined in order to decide these three appeals. Issue No. I Are the transactions covered in forensic audit and Impugned Order in nature of purchased return as alleged by the Liquidator or are they in nature of fresh purchase as submitted by the Appellants. Issue No. II a) What is the lookback period with reference to under value transaction under section 45 of the Code. b) Whether Look-back period is to be counted with respect to CIRP date or period is to be treated as full financial year preceding the CIRP date. c) Whether calculations were correctly made in the present case with respect to stipulated Look-back period in the Code. Issue No. III Whether the alleged misconduct by the Resolution Professional in some other cases as well as non- approval of appointment of Forensic Auditor by Adjudicating Authority will have any bearing or impact in the present appeals. Is....
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....as not taken place in the ordinary course of business of the corporate debtor." Regulation 34: Resolution professional costs. 34. The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses1 shall constitute insolvency resolution process costs. 2[Explanation. - For the purposes of this regulation, "expenses" include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.]" (Emphasis Supplied) 47. Similarly, we have taken into consideration the relevant portion of the forensic audit, opinion of the Resolution Professional on such forensic audit while submitting avoidance application under Section 45 of the Code and the Impugned Order on the subject. 48. Issue No. I Are the transactions covered in forensic audit and Impugned Order in nature of purchased return as alleged by the Liquidator or are they in nature of fresh purchase as submitted by the Appellants. (i) It is the case of the Appellants that the transactions which have been treated as undervalued transacti....
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....c. When company return goods to supplier, the supplier issues the credit note to the Corporate Debtor which effectively reverse the original tax liability for the supplier and allows the company to reverse the ITC it had claimed on the return goods. (vii) In contrast, sales refer to revenue generated by a company from selling its goods to customers and is required to collect GST from its customers i.e., output tax and finally the company make the payment to government of such calculated GST after adjusting it with ITC available from its own purchases. Sales return, also called as return inward, occur when customers return goods, they have previously purchased which may be due to quality or quantity issues, damaged during transit, deviation from specification on quality issues etc. (viii) As noted earlier, when a customer return goods, the company issue a credit note to the customer which allow the company to reduce its original output tax liability (GST calculated on sales) since the sale has been reversed. (ix) During pleadings before us, the Appellants tried to impress upon that these goods were purchased from the Corporate Debtor in ordinary course of business and the Corp....
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....culations were correctly made in the present case with respect to stipulated Look-back period in the Code. (i) The Code provides specific look back period for different type of avoidance transactions. The look back period, twilight period, or relevant period stipulates as to how far back the Resolution Professional or Liquidator can investigate and challenge transactions to bring assets back into the Corporate Debtor estate. The avoidance transactions are primarily covered under Section 43 (preferential transaction), Section 45 (under value transaction), Section 50 (extortion transaction) and Section 66 (fraudulent transaction) under the Code. (ii) Since, the present appeals are with respect to undervalued transactions, we shall confine our examination only with respect to Section 45 of the Code. The look back period for all transactions covered under Section 43, 45, 50 have been bifurcated into two categories i.e., transactions with related parties and transactions with unrelated parties. As per Code, for related parties, (as defined in Section 5(24) of the Code) look back period has been defined as two years preceding the CIRP date, whereas for unrelated parties, the look bac....
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....bove. (vii) Thus, we agree with the contentions of the Appellants to limited extent based on reworked out figures, which can legally be enforced, as calculated by the Liquidator and submitted to us in the written submissions. (viii) We accept the reworked out figures of the Liquidator and hold that M/s Greenfield Overseas will be entitled to reduce figures of Rs. 2,70,87,587 from Rs. 5.49 Crores (approx..); M/s Arihant International will be entitled to reduce figure of Rs. 77,43,946 from Rs.2.38 Crores (approx.); M/s Marque Global will be entitled to reduced figure of Rs. 20,66,33,868 from Rs. 26.76 Crores. The Respondent will pursue recovery from the Appellants as per Liquidator's reworked out revised figures. 50. Issue No. III Whether the alleged misconduct by the Resolution Professional in some other cases as well as non-approval of forensic auditor by the Adjudicating Authority will have any bearing or impact in the present appeals. (i) Although, no such ground has been taken regarding alleged misconduct of the Liquidator Mr. Anil Goel in the appeals, however, the Appellants, during pleadings as well as in the written submissions, have raised issue regarding conduct of t....
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....eed to understand as to what is the ordinary course of business. Generally speaking, the transactions which are carried by the Corporate Debtor with counter parties, which are related its companies business objective and are carried out on regular basis in furtherance of coil of the company, are to be treated as done in the ordinary course of business. Such factors can be determined based on Memorandum of Association, Annual financial statements, nature of transactions, frequency of transactions to establish that these transactions done time and again like ordinary purchase and sale of raw material for manufacturing industries. There can be dozens of parameters to determine whether transactions were in ordinary course of business or not. (iii) We understand that the Corporate Debtor, Loha Ispat Limited, was primary involved in steel processing and related activities. The Corporate Debtor used to purchase its requirements from suppliers including the Appellants. The Corporate Debtor was involved in serving the requirement of various industries like automobiles, fabrication, packaging, general engineering, manufacturing, white goods, infra, construction, etc. For this purpose, the ....
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....int, they cited the judgment of Gluckrich Capital Private Limited (Supra). (ii) At the outset, we would like to make it clear that the above cited judgment delivered by the Hon'ble Supreme Court of India was with respect to Section 66 of the Code i.e., regarding fraudulent transactions and not with respect to under valued transactions which has been challenged in the present appeals. We must understand that both preferential and under valued transactions involved transfer of assets or an interest therein from the Corporate Debtor to another party. Another party can be a related party or third party. (iii) The intent of Section 45 of the Code is with respect to transactions done by the Corporate Debtor which involves transfer of one or more assets for a consideration the value of which is significantly less. Thus, such third parties, like the Appellants in the present three appeals, become beneficiary of undervalued transactions. We also take into consideration the fact that intention Section 45 of the Code, is to reverse the effect such transfers and bring back assets or their value back to the Corporate Debtor's estate for the benefit of all creditors. We note that transaction....