Some important judgments on Income Tax, GST, IBC and other corporate laws

CASE-1

• Applicant's Name: Khera Trading Company
• Citation: Advance Ruling No. HAR/HAAAR/2018-19/06

The Haryana Appellate Authority of Advance Ruling (AAAR) bench held that 18% Goods and Service Tax (GST) is payable on pizza topping as pizza topping is not pizza.

BRIEF FACTS

1. The appellant is in the business of distributing various dairy and non-dairy products and is registered with the jurisdictional GST authorities.
2. The product "pizza topping," which is sold by the appellant under the brand "Goodrich," is a proprietary food consisting of water, mozzarella cheese, vegetable oil, and milk solids along with premixes of emulsifiers and stabilizers.
3. It is ideal for use on pizza as a topping of cheese as it provides a smooth, lasting taste and stringiness to the pizza.
4. The applicant submitted that the product "Pizza Topping" contained 14.5 percent mozzarella cheese and 15 percent other milk products, along with other ingredients, forming a type of cheese. Thus, it is classifiable under Chapter Heading 406 (SI. No. 13 of Schedule-II to Notification No. 1/2017 Integrated Tax/Notification No. 1/2017-Central Tax and Notification No. 35/ST-2 as "cheese" and chargeable to GST at the rate of 12%.
5. The applicant has sought an advance ruling on the issue of whether the product "pizza topping" is classifiable under Chapter Heading 0406 [S. No. 13 of Schedule-1 of Notification No. 1/2017-Integrated Tax (Rate) dated June 28, 2017, attracting 5% IGST].
6. The Authority of Advance Ruling held that the "pizza topping" being manufactured by the applicant cannot be classified as "process cheese" under chapter heading 0406, but rather it merits classification under chapter heading 2106 of the schedules to the Customs Tariff Act, 1975, as "Food Preparations not elsewhere specified or included" and chargeable to 18%IGST or 9% CGST and 9% SGST.
7. The appellant contended that the pizza topping contains mozzarella cheese, constituting almost 15 percent of the total product. It forms the main ingredient to which other ingredients are added in small quantities. The product contains 15 percent of other milk products such as milk solids and skimmed milk powder. Thus, almost 30 percent of the product consists of cheese and other milk derivatives.
8. The appellant urged that the essential character of the pizza topping is provided by mozzarella cheese, without which the product will not achieve its cheesy character. Further, milk solids and skimmed milk powder, falling under Chapter 4 of HSN, also constitute essential ingredients. Even after the addition of other ingredients, the topping maintains its basic cheesy character.
9. Accordingly, the product is a type of cheese classifiable under heading 0406, which covers cheese and curd.

THE AAAR, WHILE UPHOLDING THE AAR'S RULING, -observed that "pizza topping" is a product made out of mozzarella cheese, vegetable oil, and milk solids as main ingredients, with premixes of emulsifiers and stabilizers." The mozzarella cheese is blended with other ingredients and heated to the required degree. After heating, the material is transferred to a mould with the requisite capacity for packing the product into pouches containing smaller quantities (1 kg and 200 g). These pouches are sealed and packed in an outer carton. The product cannot be termed "processed cheese."

However, there is no doubt that, being an edible preparation for human consumption, it would merit classification under Chapter 21, i.e., "Miscellaneous Edible Preparations." Once the chapter is decided, a careful examination of different entries under Chapter 21 reveals that the quest for appropriate classification rests finally at 2106 90 99, the residual entry, as the product itself does not find a specific place anywhere else in Chapter 21.

"We thus conclude that the impugned product, viz., "Pizza Topping," would merit classification as "Food preparations not elsewhere specified or included' under Chapter Heading 2106 of the schedule to the Customs Tariff Act, 1975," the AAAR added and GST will be chargable @18%.

CONCLUSION: An applicant can apply for advance ruling even before taking up a transaction (proposed supply of goods or services) or in respect of a supply which is being undertaken. The only restriction is that the question being raised is already not pending or decided in any proceedings in the case of applicant. An advance ruling pronounced by AAR or AAAR shall be binding only on the applicant and on the concerned officer or the jurisdictional officer in respect of the applicant. This clearly means that an advance ruling is not applicable to similarly placed other taxable persons in the State.

CASE-2

M/s. Rayala Corporation Private Limited Vs. Assistant Commissioner of Income-tax, Chennai and Another (High Court of Judicature at Madras) Tax Case No. 91, 99 & 212 Of 2012 & 230 & 231 Of 2007 | 04-10-2013.

SUB: Whether Income from Sub-leasing of properties will be considered as Income from Profits and Gain from Business or Profession (Section 28) or Income form House Property (Section 22).

Tax Case (Appeal) No.91 of 2012, at the instance of the assessee has been admitted on the following substantial questions of law:

(i) Whether the Income Tax Appellate Tribunal is justified in upholding the assessment of the income received by the appellant, by

a) sub leasing of already leased out property;

b) maintenance charges and air conditioning hire charges, as Income from House Property and not income from business having regard to the fact that the Appellant with the view of commercial exploitation, pursuing the main objects of the Company had taken on lease the premises and thereafter sub leased the premises and also provided integrated services such as maintenance and air conditioning services?

(ii) Whether the income earned by the Appellant by commercial exploitation of sub leasing leased premises in terms of the Memorandum and Articles of Association of the Appellant Company and providing integrated services such as maintenance and air conditioning services and further investing the returns in real estate development is assessable as Income from Business under Section 28 or income from house property under Section 22?

FACTS OF CASE

The assessee herein a company mainly derived income from sub lease of rental properties, maintenance charges, interest income being interest on deposits, A.C. service charges and miscellaneous income. The assessee had shown the receipts from leasing out of property etc., as income from business by claiming expenses towards salaries, wages, bonus, administrative expenses etc., for the relevant assessment years.

The assessment for the assessment years 2003-04, 2006-07 and 2008-09 were taken up for scrutiny, the Assessing Officer held that the rental income by way of sub-lease of properties located at No.781-785, Anna Salai, Chennai, hereinafter referred to as "Annasalai property" and No.144/7, Old Mahabalipuram Road, Kottivakkam, Chennai - 41, hereinafter referred to as "Kottivakkam property" were assessable as "income from house property".

APPEAL BEFORE CIT (APPEAL)

Consequently, the Assessing Officer disallowed the expenses claimed and allowed deductions under Section 24 of the Income Tax Act (I.T. Act) as per permissible under law. Aggrieved by such order, the assessee preferred appeals before the Commissioner of Income Tax (Appeals) [CIT (A)].

The CIT (A) held that the income from sub-lease of the space allotted in the Anna Salai property and the lease rent in respect of factory premises rented out along with machinery and equipment at Kottivakkam are assessable as "income from house property". As regards the rental income from Anna Salai property, the CIT(A) held that it had been taken on lease at a concessional rent from the developer of the building in the capacity of the owner of the land and the lease was for 33 years, renewable once in five years, the assessee was deemed to be the owner of the superstructure taken on lease from the developer and hence the income from property subleased to various tenants for office premises was assessable as "income from house property".

Apart from the above reasons, the CIT (A) relied on the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd., (supra), assessed the income for the relevant assessment year under the head of "income from house property". The additions claimed for the properties during the relevant assessment year were rejected. The CIT (A) followed the above decisions for the assessment year 2008-09 and dismissed the appeal by order dated 27.07.2011.

DECISION OF TRIBUNAL

Challenging these orders, the assessee preferred appeal before the Tribunal. The Tribunal dismissed the appeals filed for the assessment year 2003-04, by order dated 22.09.2006 following the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd., (supra). Following the said order, the appeals in respect of the assessment years 2004-05, 2006-07 and 2008-09 were dismissed by the Tribunal, by orders dated 26.04.2007, 02.11.2011 and 06.02.2012.

Appeals before this Court by the assessee.

THE HON'BLE HIGH COURT OF CHENNAI

• The substantial questions of law framed in these appeals are as to whether the income received by the assessee by way of sub-lease of the Anna Salai property, collection of maintenance charges, A.C., hire charges etc., would be income from "business" or income from house property", similar is the question in respect of Kottivakkam property.
• Before we examine the issue on the facts placed before us, it has to be pointed out that the Assessing Authority in the order of assessment for the assessment year 2003-04 has made a reference that insofar as Kottivakkam property was concerned, the assessee company had leased out the factory premises, machinery and equipment to Mr.Ranjith Prathap and his associates and receiving lease rental from them and concluded that the income has to be treated as "income from house property".

This finding was confirmed by CIT (A) and in doing so, the Commissioner (Appeals) referred to an earlier order in I.T.A.No.60 of 2005, dated 29.11.2004. In the said order in paragraph 7.17, it has been observed that the assessee had stopped its business during 1993 and there is no intention of continuing the same and the assessee leased out the factory building along with furniture and fittings, plant and machinery to Mr.Ranjith Prathap and was receiving rent, since September 1993 and the rent was revised during 1996 and subsequently in 1997.

Further, it has been observed that as there was no intention to resume business and the written down value (WDV) of the plant and machinery as on 01.04.2000, was only Rs.6,777/-, which is insignificant and therefore, he concluded that what was leased essentially was only the factory building, furniture and fixtures and hence the income from such lease was to be assessed as "income from house property".

• It is seen that though such finding had been recorded to effect that the lease was in respect of the factory shed, machinery and equipment, we find that no documents were placed before the Assessing Authority to establish this fact. The copy of the lease agreement dated 16.03.2003, alone has been produced before us and from the said document, we find that the property which had been leased, was factory shed and RCC building constructed on the land. Therefore, the finding given by the Assessing Officer for the assessment year 2003-04, that the lease was along with plant and machinery is not supported by any document and there is nothing on record to show that the lease in respect of Kottivakkam property was along with plant and machinery. Therefore, it is the submission of the learned counsel for the assessee that in the absence of any such material, the matter requires to be remitted back to the Assessing Officer to examine this aspect.
• In the case of CIT vs. Chennai Properties and Investments Ltd., reported in [2008] 303 ITR 33 (Mad), the question of law formulated was whether the Tribunal was right in holding that the amenity charges received in respect of let out property should be treated as "income from other sources". The Division Bench of this Court while dismissing the appeal took note of the decision in the case of Tarapore and Co. v. CIT reported in [2003] 259 ITR 389 (Mad) wherein it was held that the actual rent received by the assessee would constitute the basis for determining the annual value and it was that value which would have to form the basis for determining income from "house property" and for allowing the deduction from income from "house property" to the extent permitted under the other provisions of the Income-tax Act. In making such computation, there was no provision to add other amounts received by the owner of the building and held that the Tribunal was right in holding that the receipts from service charges were liable to be assessed as income from other sources and not "income from house property".
• In the case on hand, the Assessing Authority, Commissioner (Appeals) as well as the Tribunal have recorded a factual finding that the assessee closed down the manufacturing business with no evidence of revival and the income from the land and building has to be treated as "income from house property".
• Section 27 (iiib) of I.T. Act defines Owner of house property, for the purposes of Sections 22 to 26 of the I.T.Act, as a person, who acquires any rights excluding rights by way of lease from month to month or for a period not exceeding one year in respect of any building or part thereof, by virtue of any transaction as referred in clause (f) of Section 269UA of the I.T. Act [which defines transfer in the relation to any immovable property to mean transfer of such property by way of lease for a term of not less than 12 years], shall be deemed to be the owner of that building or part thereof. The rental lease agreement dated 06.05.2002, has been produced which is a sublease agreement between the assessee and M/s. J&B Software India Pvt., Ltd., from which it is seen that the lease deed dated 09.10.1981, entered into between the assessee and M/s.Vira Properties in respect of the Anna Salai property is for a period of 33 years with option of five times consecutive renewals of the same for the similar period.
• The Finance Act 1987, which came into effect from 01.04.1988, enlarged the definition of owner so as to include persons, who acquire rights in or with respect of any building or part thereof by virtue of transaction, falling under Section 269UA (f) of the I.T. Act, by doing anything, which has effect of transferring to or enabling their enjoyment of such property by him. The exclusion being month to month lease or lease for less than one year. In the assessees case the lease is for 33 years with renewals for five consecutive times for the same period and the assessee would squarely fall within the definition of deemed to be the owner of house property as defined under Section 27(iiib) of the I.T. Act.
• The Honble Supreme Court in the case of CIT v. P. V. S. Beedies Pvt. Ltd. reported in [1999] 237 ITR 13 (SC) among other things held that where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back or to restart the same and if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.
• The Tribunal pointed out that based on the materials (which may include the accounts itself, the Assessing Officer evidently has not scrutinised earlier), rightly the Assessing Officer invoked the jurisdiction under Section 147 of the I.T. Act. Thus, read in the context of the decision of the Apex Court in the case of CIT vs. Kelvinator of India Ltd., reported in [2010] 320 ITR 561 (SC), which has been referred to in the Delhi High Court decision, we hold that the proceedings under Section 147 are rightly initiated.
• As regards the question on the assessment under proper head of income useful reference could be made to the recent decision of the Division Bench of this Court in Commissioner of Income-Tax vs. Ideal Garden Complex P. Ltd., (supra). The assessee in the said case, a company incorporated with an object of carrying on business in real estate, developing landed properties etc.

The assessee claimed the income derived from letting out the properties was "business income" and not to be taxed as "income from house property". While passing the assessment order under Section 143(1)(a) of the I.T. Act, originally the Assessing Officer accepted the claim of the assessee, however proceedings under Section 147 of the I.T. Act was invoked on the basis of decision of this Court in the case of Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation reported in [1995] 215 ITR 424. The assessees raised their objections, which were rejected by the Assessing Authority holding that the transaction being one of exploitation of the property as an owner and not by way of exploitation of business asset, the rental receipts have to be assessed under the head "income from house property".

The appeal was allowed by CIT(A), and the Revenue preferred appeal before the ITAT. The Tribunal rejected the Revenues appeal and the Revenue filed the Tax Case before this Court.

The Division Bench after referring to the decisions on the point rejected the contentions raised by the assessee and held that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a businessmans point of view and before invoking Section 22 of the I.T. Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent.

It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset, the contention of the assessee could not be accepted. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but business income.

DECISION OF COURT

Thus, by applying the decision of this Court in the case of CIT vs. Ideal Garden Complex (supra), to the facts as found by the Assessing Officer that the assessee company has stopped its business activities long back and is not carrying out any other business activity and the assessee has parted with the commercial assets and confined solely to receive some income by virtue of ownership thereof by lease or otherwise and the act of leasing was the outcome of the assessees decision to get out of the business, we accept the case of the Revenue that the income receipt from letting out of the property was rightly assessed by the Assessing Officer as "income from house property". We make it clear that in so far as the Kottivakkam Property, it was submitted that the written down value of the machinery was only Rs.6,777/-, however, we have remitted the same to the Assessing Authority to verify the aspect whether the lease was together with machinery and equipments.

For all the above reasons, we hold that the proceedings initiated under Section 147 of the I.T. Act is valid. Accordingly, the appeal on this ground fails and the question is answered in favour of the Revenue and T.C.(A).No.230 of 2007, stands rejected.

In the result,

1. the assessment of the income in respect of the Anna Salai property as income from house property" is affirmed.
2. Insofar as the Income from Kottivakkam property for the assessment year 2003-04, the matter is remanded to the Assessing Authority to consider the entire materials for the purpose of ascertaining as to whether the lease of the Kottivakkam property, was together with plant, machinery and equipment.
3. Accordingly, the appeals in T.C.(A).No.231 of 2007 and T.C.(A).Nos.91, 99 & 212 of 2012 are partly allowed except that what has been rejected.
4. The substantial questions of law framed in T.C.(A).N.230 of 2007 is answered in favour of the Revenue and the appeal is dismissed. No costs.

CONCLUSION

From above decision of Hon'ble High Court , it is clear that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a business man's point of view and before invoking Section 22 of the I.T. Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent. It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but business income.

CASE-3

• Mak Data P. Ltd. v. CIT (2013) 358 ITR 593 (SC).
• Sub: Can an assessee who has surrendered his income in response to the specific information sought by the Assessing Officer in the course of survey, be absolved from the penal provisions under section 271(1)(c) for concealment of income?

FACTS

The assessee-company filed its return of income for the A.Y. 2012-13 declaring an income of Rs. 16.17 lakh along with tax audit report. The assessee's case was selected for scrutiny and notices were issued under section 143(2) and section 142(1). During the course of assessment proceedings, it was noticed by the Assessing Officer that certain documents, namely, share application forms, bank statements, memorandum of association of companies, affidavits, copies of income-tax returns and assessment orders and blank share transfer deeds duly signed, had been found in the course of survey proceedings under section 133A conducted on December 16, 2011, in the case of a sister concern of the assessee, and the same were impounded.

The Assessing Officer issued a show cause notice dated October 26, 2014 to the assessee seeking specific information regarding the documents pertaining to share applications found in the course of survey, particularly, blank transfer deeds signed by persons who had applied for the shares.

In its reply to the show cause notice, the assessee made an offer to surrender a sum of Rs. 40.74 Lakhs by way of voluntary disclosure without admitting any concealment or any intention to conceal and subject to non-initiation of penalty proceedings and prosecution. The Assessing Officer, however, completed the assessment bringing the sum of ` 40.74 lakhs to tax and levied penalty under section 271(1)(c) for concealment of income and not furnishing true particulars.

SUPREME COURT'S OBSERVATIONS

The Apex Court observed that the assessee had stated that the surrender of the additional sum was with a view to avoid litigation, to buy peace and to channelize the energy and resourcestowards productive work and to make amicable settlement with the Income tax Department.

The Court observed that these types of defences are, however, not recognized under the statute. It further observed that the survey was conducted and documents were impounded ten months before the assessee filed its return of income. The Court opined that had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year.

Consequently, it was clear that the assessee had no intention to declare its true income. It was the statutory duty of the assessee to record all the transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year.

There was no illegality in the IT Department initiating penalty proceedings. The Supreme Court affirmed the decision of the Delhi High Court in the case of CIT v. Mac Data Ltd. (2013) 352 ITR 1.

It was further held by the Supreme Court that the Assessing Officer has to satisfy himself whether or not penalty proceedings should be initiated during the course of assessment proceedings and the Assessing Officer is not required to record his satisfaction in a particular manner or to reduce it into writing.

APEX COURT'S DECISION

The Apex Court was, therefore, of the view that surrender of income in this case is not voluntary, in the sense, that the offer of surrender was made in view of detection made by the Assessing Officer in the survey conducted in the sister concern of the assessee.

CONCLUSION

It is a statutory duty of every assessee to record all transactions of business in books of account and disclose his/her income from all sources and pay the applicable tax according to the provisions of taxation laws. An assessee on being caught in the survey by the department for concealing income or not declaring its true income, does not absolved from his liability to pay penalty by surrendering concealed income. The penalty u/s. 271(1) (c) of the Income Tax Act, 1961 will be applicable to him/her.

CASE-4

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VS. CIT (SUPREME COURT)

SECTIONS: Section 9(1)(vi): Royalty – Sum paid by Indian Companies – Sale of Software – Not taxable in India – No TDS Liability [S. 195 of Income tax Act, 1961; Art 12 of DTAA, S. 14(a), S. 14(b), S. 30 of Copyright Act, 1957]

FACTS

Facts of the lead case are, the appellant, Engineering Analysis Centre of Excellence Pvt. Ltd. (EAC), is a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America.

The Assessing Officer by an order dated 15.05.2002, after applying Article 12(3) of the Double Taxation Avoidance Agreement (DTAA), between India and USA, and upon applying section 9(1)(vi) of the Income Tax Act, 1961 (Act), found that what was in fact transferred in the transaction between the parties was copyright which attracted the payment of royalty and thus, it was required that tax be deducted at source by the Indian importer and end-user, EAC.

Since this was not done for both the assessment years, EAC was held liable to pay the amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with interest under section 201(1A) of the Income Tax Act amounting to Rs. 15,76,567. The appeal before the Commissioner of Income Tax (CIT) was dismissed by an order dated 23.01.2004. However, the appeal before the Income Tax Appellate Tribunal (ITAT) succeeded vide an order dated 25.11.2005.

An appeal was made from the order of the ITAT to the High Court of Karnataka by the Revenue. The High Court held that since no application under section 195(2) of the Income Tax Act had been made, the resident Indian importers became liable to deduct tax at source, without more, under section 195(1) of the Income Tax Act.

ISSUE

The appeals are grouped into four categories:

1. The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer;
2. The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users;

3. The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users;
4. The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.

HELD THAT

The definition of royalties contained in Article 12 of the DTAAs that there is no obligation on the persons mentioned in section 195 of the Income-tax Act, 1961 to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright.

The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories.

CONCLUSION

Taxability of computer software in the content of disputes in various cases. In old regime the authorities are on different footings to decide whether it is a good or service. Some state governments considered it as good and applied VAT on them. Now the question in this case was that the payment made by Indian Suppliers on purchase of computer software to the foreign manufacturers or suppliers be considered as royalty payment and same be taxable under provisions of Section 9(1)(vi) of the Income tax Act,1961 and TDS will be deducted under Section 195 of the Act or not. The Supreme Court clearly held that the payment made to foreign suppliers by Indian purchaser of software does not fall within the definition of payment of Royalty and hence no taxable event arises on such payment. Thus, TDS is not deductible under provisions of Section 195 of the Income Tax Act, 1961.

CASE-5

Shiv Bhagwan Gupta vs. ACIT (ITAT Patna)

SECTION 271AAB : Penalty –Search -Undisclosed income –Levy of penalty not mandatory – Opportunity of hearing must be given – No assessment required for initiation of penalty– Since, the assessee has neither made any surrender of any undisclosed income during the search action nor the penalty has been initiated on the basis of undisclosed income found during such search action, the appeal of the assessee stands allowed– Levy of penalty deleted [ S. 132 ].

SECTION 271AAB provides that:

Penalty where search has been initiated.- (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,-

(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee-

(i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived;

(ii) substantiates the manner in which the undisclosed income was derived; and

(iii) on or before the specified date-

(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and

(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;

(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee-

(i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and

(ii) on or before the specified date-

(A) declares such income in the return of income furnished for the specified previous year; and

(B) pays the tax, together with interest, if any, in respect of the undisclosed income;

(c) a sum which shall not be less than thirty per cent but which shall not exceed ninety per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).

(2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).

(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.

Explanation.- For the purposes of this section,-

(a) "specified date" means the due date of furnishing of return of income under sub-section (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be;

(b) "specified previous year" means the previous year-

(i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or

(ii) in which search was conducted;

(c) "undisclosed income" means-

(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has-

(A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or

(B) otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search; or

(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.'

FACTS

That a search action under section 132 of the Act was carried out at the premises of the assessee/appellant on August 07, 2014. During the search action jewellery in the shape of gold bars, coins was found from the locker of the assessee. The assessee could explain about the source of investment in respect of the part of the said bullion and jewellery. The assessee could not explain the source of assets worth Rs. 21,97,221/- with bills and vouchers. The assessee, however, explained that the said jewellery was accumulated out of gifts received by the assessee on the eve of marriage and other ceremonies/occasions from time to time. The assessee, thereafter, included the value of the above stated jewellery in the computation of income and offered the same for taxation.

The Assessing Officer in the assessment proceedings noted that the assessee in the return of income has disclosed income of Rs.21,79,222/- on account of undisclosed jewellery. He, therefore, initiated penalty proceedings under section 271AAB of the Act and levied the minimum penalty at 10 per cent of the said declared income of the assessee.

The ld. CIT(A), however, observed that the levy of penalty under the provisions of section 271AAB of the Act was mandatory and accordingly confirmed the penalty so levied by the AO.

HELD

The Tribunal relied on the decision of Co-ordinate Chandigarh Bench of the Tribunal in the case of M/s SEL Textiles Ltd. Vs DCIT ITA No. 695/Chd/2018 order dated April 18, 2019 wherein it was held that levy of penalty u/s 271AAB of the Act is not mandatory.

It has also been noted that the Legislature has consciously used the word 'may' in contradistinction to the word 'shall' in the opening words of Section 271AAB of the Act. That the choice of the expression 'may' and not 'shall' in the opening Section of 271AAB shows that the Legislature did not intend to make the levy of penalty statutory, automatic and binding on the Assessing Officer but the Assessing Officer has been given discretion in the matter of levy of penalty. It has also been held that the penalty u/s 271AAB will not be attracted if the surrendered income would not fall in the definition of 'undisclosed income' as defined under explanation to section 271AAB of the Act. Therefore, from plain reading of section 271AAB of the Act, it is evident that the penalty cannot be imposed unless the assessee is given a reasonable opportunity and assessee is being heard.

Further, the provisions of section 271AAB of the Act are self-contained and are not dependent upon commencement or finalization of the assessment proceedings.

Since, the assessee has neither made any surrender of any undisclosed income during the search action nor the penalty has been initiated on the basis of undisclosed income found during such search action, the appeal of the assessee stands allowed.

BRIEF POINTS ON WHICH DECISION BASED

A perusal of the above reproduced relevant part of the assessment order reveals that the assessing officer has not mentioned about unearthing of any undisclosed income as defined u/s 271AAB of the Act during search action carried out at the premises of the assessee.

In my view, the income declared by the assessee in the return of income or found or ITA No.194/Pat/2019 A.Y.2015-16 Shiv Bhagwan Gupta Vs. ACIT, C.C.-1, PAT Page 10 assessed by the Assessing officer in the assessment proceedings may be relevant for assessment of the income under section 68 /69 and other related provisions of the Act and also for the levy of penalty under section 271(1)(c) of the Act in view of the relevant provisions of section 68/69 and 271(1)(c) of the Act.

However, for the levy of penalty u/s.271AAB, the case must fall within the four corners of the definition of expression "undisclosed income" as defined u/s 271AAB itself.

The assessee in this case is an individual and has earned income from partnership firm and interest income. The assessee has neither earned any business income nor earned any income exceeding Rs.50 lakhs so as to require mandatory filing of personal assets and liabilities or to maintain books of accounts; even the assessee is not required to otherwise disclose any such income to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; the alleged income is not any income represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course. Assessee has neither made any surrender of any undisclosed income during the search action nor the penalty has been initiated on the basis of undisclosed income found during such search action. In view of the above factual position, the impugned order of the AO imposing the penalty on the assessee under section 271AAB of the Act does not pass the mandate of the provisions of section 271AAB of the Act, therefore, the same being bad in law is hereby quashed.

CASE-6: IMPACT OF WAIVER OF LOAN OR LIABILITY ON DEPRECIATION CLAIM

ISSUE FOR CONSIDERATION

When a loan taken for acquiring a depreciable capital asset or a part of the purchase price of such capital asset is waived in a year subsequent to the year of acquisition, an issue that arises with respect to waiver of loan or part of the purchase price is whether the depreciation claimed in the past on that portion of the cost of the asset which represents the waiver of the purchase price, or which had been met from the loan waived, can be added / disallowed u/s 41(1) / 43(6) in the year in which that amount of the loan / purchase price has been waived, and whether the written down value (WDV) of the block of the assets concerned needs to be reworked so as to reduce it by the amount of loan / purchase price waived.

The Hyderabad Bench of the Tribunal has held that while section 41(1) would not apply, the depreciation claimed in the past needs to be added as income and the WDV is also required to be reworked in such a case. As against this, the Bengaluru Bench of the Tribunal has held that waiver of loan taken to acquire a depreciable asset does not have any consequences in the year in which the loan has been waived off, insofar as claim of depreciation is concerned.

BINJRAJKA STEEL TUBES LTD.'s CASE

The issue had earlier come up for consideration of the Hyderabad Bench of the Tribunal in the case of Binjrajka Steel Tubes Ltd. vs. ACIT 130 ITD 46.

• In this case, the assessee had purchased certain machinery from M/s Tata SSL Ltd. for a total consideration of Rs. 6 crores.
• Since the machinery supplied was found to be defective, the matter was taken up with the supplier for replacement and after protracted correspondence and a legal battle, the supplier agreed to an out-of-court settlement.
• As per this settlement, the liability of the assessee which was payable to the supplier to the extent of Rs. 2 crores were waived.
• During the previous year relevant to assessment year 2005-06, the assessee gave effect to this settlement in its books of accounts by reducing the cost of machinery by Rs. 2 crores. Consequently, the depreciation for the year had also been adjusted, including withdrawal of excess charged depreciation of earlier years amounting to Rs. 1,19,01,058.
• While making the assessment, the A.O. added back the amount of Rs. 2 crores as income of the assessee u/s 41(1), and this was confirmed by the CIT(A).
• Before the Tribunal, the assessee submitted that the remission of liability of Rs. 2 crores which was written back was not taxable u/s 41(1) because cessation of liability was towards a capital cost of asset and, hence, it was a capital receipt.
• On the other hand, the Department argued that the assessee had claimed the depreciation on Rs. 6 crores from the year of acquisition of the asset.
• From the date of inception of the asset, depreciation was allowed by the Department on the block of assets, and when the assessee received any amount as benefit by way of reduction of cost of acquisition, the amount of benefit had to be offered for taxation as per the provisions of section 41(1).
• The Tribunal referred to the provisions of section 41(1) and held that it could be invoked only where any allowance or deduction had been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently, during any previous year, the assessee had obtained any amount or some benefit with respect to such loss, expenditure, or trading liability.
• The benefit of depreciation obtained by the assessee in the earlier years could not be termed as an allowance or expenditure claimed by the assessee in the earlier years.
• Hence, any recoupment received by the assessee on this count could not be taxed u/s 41(1).
• Accordingly, the Tribunal rejected the Revenue's contention that the assessee had obtained the benefit of depreciation in the earlier years as allowance in respect of expenditure incurred by it when it bought the plant and machinery and the Rs. 2 crores liability waived by the supplier of the machinery in the year under consideration was liable to be taxed as deemed income within the purview of section 41(1).
• Though the issue raised before the Tribunal was only with regard to the taxability of the amount waived u/s 41(1), it further dealt with the issue of adding back of depreciation which was already claimed on the said amount. For the purpose of dealing with the said issue of disallowance of depreciation, which was not raised before it, the Tribunal placed reliance on the decision of the Calcutta High Court in the case of Steel Containers Ltd. vs. CIT [1978] 112 ITR 995, wherein it was held that when the Tribunal finds that disallowance of a particular expenditure by the authorities below is not proper, it is competent to sustain the whole or part of the disputed disallowance under a different section under which it is properly so disallowable.
• On the merits of the issue of disallowance of depreciation, the Tribunal held that depreciation already allowed in past years on the amount which was waived by the supplier under the settlement with the assessee had to be withdrawn and added back in the year under consideration, as otherwise, the assessee would get double benefit which was not justified.
• Accordingly, the A.O. was directed to add the amount of depreciation claimed in past years on the amount of Rs. 2 crores as income u/s 28(iv) as the value of benefit arising from the business.
• After reducing the said amount of depreciation granted earlier from the amount of Rs. 2 crores, the Tribunal further directed that the balance amount was to be reduced from the closing WDV of the block of assets, without giving any reasoning or relying on any relevant provision of the Act.

CONCLUSION

It is to be noted that provisions of Section 41(1) provides that there should have been allowance or deduction claimed by the Assessee in any Assessment Year as a loss, expenditure or trading liability incurred by the Assessee. Subsequently, if any remission or waiver is granted in respect of which such an allowance/deduction has been claimed, then the Assessee is liable to pay tax on the amount waived/ remitted under Section 41(1) of the Income Tax Act,1961. The waiver of loan taken or liability of the assessee will not be considered as deduction /allowance taken by the assessee in previous AYs and hence amount of loan or liability waived is not considered as income of the assessee. In case of depreciable assets , the depreciation which has been claimed on the amount of liability must be added back and considered as income u/s. 28 of the Income Tax Act,1961 and the balance amount of Rs. 2.00 Crores will be reduced from the WDV of the assets or block of asset.

CASE-7

• Commissioner Of Income Tax vs Gita Duggal on 21 February, 2013
• THE HIGH COURT OF DELHI AT NEW DELHI
• Judgment delivered on: 21.02.2013- ITA 1237/2011

SUB: WHETHER SEVERAL INDEPENDENT UNITS CAN CONSTITUTE "A RESIDENTIAL HOUSE"

BRIEF FACTS

1. The assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors.
2. In consideration of granting the development rights, the assessee received Rs. 4.00 crores and two floors of the new building.
3. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4.00 crores received by the assessee.
4. The assessing officer held that the two floors which were given to the assessee by the developer and on which the developer had incurred construction cost were independent of each other and self-contained and therefore they cannot be considered as one unit of residence. Accordingly, he held that the assessee was not eligible for the exemption under Section 54. Dealing with the claim for relief under Section 54F, the assessing officer held that the exemption would be available only in respect of one unit, since the two residential units were independent of each other and the assessee cannot therefore claim exemption on the footing that both constituted a single residence. In this view of the matter he recomputed the capital gains by making an addition of `98,20,722/-.
5. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s 54.
6. ON APPEAL, THE CIT(APPEALS) agreed with the assessee's contention and following the judgment of the Karnataka High Court cited above, held that the assessee was eligible for the deduction under Section 54 in respect of the basement, ground floor, first floor and the second floor. He accordingly, allowed the appeal.

DECISION OF HON'BLE TRIBUNAL

7. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that ld. counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of the Hon‟ble Karnataka High Court in the case of CIT & Anr. Vs. Smt. K.G. Rukminiamma in ITA No.783 of 2008 vide order dated 27.8.2010 wherein it was held as under: -

" The context in which the expression „a residential house‟ is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that: it refers to a single residential house, if, that was the intention, they would have used the word "one." As in the earlier part, the words used are buildings or lands which are plural in number and that: is referred to as "a residential house", the original asset. An asset newly acquired after the sale of the original asset also can be buildings or lands appurtenant thereto, which also should be "a residential house." Therefore, the letter „a‟ in the context it is used should not be construed as meaning "singular." But, being an indefinite article, the said expression should be read in consonance with the other words „buildings‟ and „lands‟ and, therefore, the singular „a residential house‟ also permits use of plural by virtue of Section 13(2) of the General Clauses Act. - CIT V. D. Ananda Bassappa (2009) 223 (kar) 186: (2009) 20 DTR (Kar) 266 followed."

8. Upon careful consideration, we find that the contentions of the assessee that the issue is covered in favour of the assessee are correct. Accordingly, we do not find any infirmity or illegality in the order of the Ld. Commissioner of Income Tax (Appeals) and hence, uphold the same."

APPEAL BEFORE HON'BLE HIGH COURT

9. In the present appeal before us, the revenue has proposed the following questions as substantial questions of law which in its opinion arise out of the order of the Tribunal.

"A) Whether the Hon'ble ITAT has erred in deleting the addition of `98,20,772/- under section 54F of the Income Tax Act, 1961 as made by the Assessing Officer?

B) Whether the Hon'ble ITAT has erred in law and facts in holding that the assessee should be given deduction under section 54 of the Income Tax Act, 1961?"

10. As held in B. Ananda Bassappa (SLP dismissed) & K G Rukminiamma, the Revenue's contention that the phrase "a" residential house would mean "one" residential house is not correct. The expression "a" residential house should be understood in a sense that building should be of residential in nature and "a" should not be understood to indicate a singular number.

11. Also, Section 54/54F of the IT Act, 1961 uses the expression "a residential house" and not "a residential unit".

12. Section 54/54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use.

13. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement.

14. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement.

15. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house.

16. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house.

17. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s 54/54F. It is neither expressly nor by necessary implication prohibited.

CONCLUSION

From above decision it is clarified that there is nothing in Section 54/54F which specify that the residential house should be constructed in a particular manner. Any person will construct his house according to his need and on the basis of future requirements. The house build may consist of one unit or it may consist of several separate units. The exemption under Section 54/54F should not be denied on the basis of that concerned residential premises consists of several independent units. The physical structure of a building cannot come in way of providing exemption under Section 54/54F. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems that the income tax authorities cannot insist upon that requirement. A building consisting several independent units will not be allowed to be an impediment while claiming exemption under section 54/54F. it means that a building consisting several units will be considered as a single residential house for provisions of Section 54/54F of the Income Tax Act,1961.

Footnotes

SECTION 54 OF Income Tax Act,1961 provides that

Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the

1. Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or
2. Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property

Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short-term capital gain.

SECTION 54 OF Income Tax Act,1961 provides that 

Any Gain arising to an individual or HUF from the sale of any Long-Term Asset other than Residential Property shall be exempt in full, if the entire net sales consideration is invested in

1. Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
2. Construction of 1 Residential House within 3 years after the date of such transfer.

CASE-8

• CIT V. M. VENKATESWARA RAO (2015) 370 ITR 212
• HON'BLE APPELLATE TRIBUNAL, AP

QUESTION: Can capital contribution of the individual partners credited to their accounts in the books of the fir

m be taxed as cash credit in the hands of the firm, where the partners have admitted their capital contribution but failed to explain satisfactorily the source of receipt in their individual hands?

FACTS OF THE CASE

The assessee-firm was constituted in the year 1982 and its return for the assessment year 1993-94 was selected for scrutiny under section 143(3).

The controversy was in relation to the capital contribution of ten partners aggregating to Rs. 76.57 lakhs.

The assessee-firm's explanation that the partners have paid various amounts towards contribution of their share in the capital was not accepted by the Assessing Officer, since the source of income for the partners was not explained.

PLEASE NOTE THAT: It is settled law that a partnership firm is an assessable entity distinct from the individual partner. The books of account of a partnership cannot be treated as those of the individual partner. And in the case of the firm, the books maintained by the firm should show a cash credit entry and the firm's explanation should be found unsatisfactory, then only Section 68 will entitle the ITO to include the amount of the entry as the income of the assessee-firm. The above position of law is enunciated from the principle that a partnership firm is an assessable entity distinct from its individual partners constituting the firm.

IN CIT V. DAULAT RAM RAWATMULL, the Supreme Court held that the fact that the depositor had not been able to give a satisfactory explanation regarding the source of deposit would not be decisive even of the matters as to whether the depositor was or was not the owner of the amount, that a person could still be held to be the owner of a sum of money even though the explanation furnished by him regarding the source of that money was found to be incorrect, and that from the simple fact that the explanation regarding the source of the money had been found to be false, it would be a remote and farfetched conclusion to hold that the money belonged to the assessee.

IN CIT V. KISHORILAL SANTOSHILAL IT WAS HELD THAT:

In the case of cash credits in the accounts of a firm

(i) there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party;
(ii) the burden to prove the identity, capacity and genuineness is on the firm;
(iii) if the cash credit is not satisfactorily explained, the Income-tax Officer is justified to treat it as income from undisclosed sources;
(iv) the firm has to establish that the amount was actually given by the lender;
(v) the genuineness and regularity in the maintenance of accounts has to be taken into consideration by the taxing authorities, and
(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by Section 68 of the Income-tax Act, 1961, can be invoked.

The absence of a satisfactory explanation by the assessee about the nature and source of the sum credited.

THE COMMISSIONER (APPEALS) observed that the amounts credited in the names of four partners were valid and that cash credits in the accounts of six other partners in the books of the firm were to be considered afresh by the Assessing Officer.

ISSUE UNDER CONSIDERATION

The issue before the High Court was whether the Assessing Officer was justified in treating the capital contribution of partners as income of the firm by invoking section 68?

HIGH COURT'S OPINION

Section 68 directs that if an assessee fails to explain the nature and source of credit entered in the books of account of any previous year, the same can be treated as income. In this case, the amount sought to be treated as income of the firm is the contribution made by the partners to the capital. In a way, the amount so contributed constitutes the very substratum for the business of the firm and it is difficult to treat the pooling of such capital as credit.

It is only when the entries are made during the course of business, they can be subjected to scrutiny under section 68.

Where the firm explains that the partners have contributed capital, section 68 cannot be pressed into service. At the most, the Assessing Officer can make an enquiry against the individual partners and not the firm when the partners have also admitted their capital contribution in the firm.

The High Court made reference to decision in the case of CIT v. Anupam Udyog 142 ITR 130 (Patna) where it was held if there are cash credits in the books of the firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partner, then, in the absence of any material to indicate that they are the profits of the firm, the cash credits cannot be assessed in the hands of the firm, though they may be assessed in the hands of individual partners.

In Lakshmichand Baijnath v. The Commissioner of Income-tax, West Bengal it was held that if there is no source of income other that business for which the assessee has maintained books which disclose cash credits, the presumption is that the cash credits represent income from the same business. Thus, in Commissioner of Income-tax v. Margaret's Hope Tea Co. Ltd. the cash credits appearing in the books of the assessee whose main activity was the cultivation, manufacture and sale of tea, was held to be treated as income of the assessee from its tea business.

As decided in Abhyudaya Pharmaceuticals v Commissioner of Income Tax12, wherein the earlier decision in the case of Jaiswal Motor Finance was followed on the point that if there are cash credit entries in the books of the assessee firm in which accounts of an individual partner exists, and it is found as a fact that the cash was received by the firm from its partners then in the absence of any material to indicate that the same were profits of the firm, it could not be assessed in the hands of the firm.

In the case of Kapur Brothers [1979] 118 ITR 741 (All) and Jaiswal Motor Finance [1983] 141 ITR 706 (All) is conflicting, but on a meaningful reading thereof, would show that they were rendered in different factual the ratio laid down in the case of Kapur Brothers [1979] 118 ITR 741 (All) will be applicable in a case where a partner brings capital amount at the formation of the firm itself, before the commencement of business by the firm. It would not be applicable in a case where the deposit is reflected in the account books of the firm during the currency of the business of the firm.

The underlying idea in the case of Kapur Brothers [1979] 118 ITR 741 (All) is that when the assessee ­firm has no business, it cannot possibly have any income. Therefore, in such a case the question of presumption of income of the assessee ­firm would not arise generally. But it is not appropriate when the assessee­ firm is earning income from its business and in that situation the assessee­ firm has to explain the cash credit standing in its account. If the above line of distinction is kept in mind, we find that both the decisions are standing on a different factual background.

HIGH COURT'S DECISION

The High Court, accordingly, held that the view taken by the Assessing Officer that the partnership firm has to explain the source of income of the partners as regards the amount contributed by them towards capital of the firm, in the absence of which the same would be treated as the income of the firm, was not tenable.

CONCLUSION 

We are aware that provisions of Section 68 of the Income Tax Act, 1961 are applicable on entries made during the course of business of an entity. The court has also cleared that in case if there found cash credits in books of account of the firm in any partner's account and there is nothing to prove that cash credits are profits of the company, in this case the cash credits will be assessed in the hands of respective partner and not in hands of firm. Please note that in case of cash credit found in the books of account of firm as Capital Contribution by the partners of the firm. Then provisions of Section 68 are not applicable. It will be applicable only those entries which arises during the course of business of firm.

Footnotes

THE PROVISIONS RELATING TO TAX TREATMENT OF CASH CREDIT ARE GIVEN IN SECTION 68. As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.

In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

(a) the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer has been found to be satisfactory. The above discussed provisions of share application money, share capital, etc., shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB).

CONDITIONS TO BE SATISFIED FOR APPLICABILITY OF SECTION 68

From the reading of section 68, following conditions can be stated to attract the applicability of section 68:

1. Assessee has maintained 'books' There has to be credit of amounts in the books maintained by the taxpayer of a sum during the year.
2. The taxpayer offers no explanation about the nature and source of such credit found in the books or the explanation offered by the taxpayer in the opinion of the Assessing Officer is not satisfactory.
3. If the taxpayer is a closely held company and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

• the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and

CASE-9

1. Ashish Tandon v. ACIT (2019) 103 taxmann.com 315 / 199 TTJ 137 / 176 DTR 353 (Ahd.) (Trib.).
2. HELD THAT - Sale of a technical concept, that the assessee developed on his own, with respect to website malware monitoring, assessable as business income.

FACTS OF CASE

A technical concept was conceptualized by assessee-employee to safeguard websites from getting infected with malware against consideration and thereafter, an agreement was entered into between assessee, employer-Indusface India, Indusface Canada, and Trend Micro USA, for sale of all rights in concept so developed/against consideration and claim of assessee was that amount received by assessee from Trend Micro was a capital gain in his hands, but as it had no cost of acquisition, this capital gain was not taxable in nature.

Sale of technical concept claimed as capital receipt as no cost of acquisition was incurred.

THE TRIBUNAL

Dismissing the appeal of the assessee the Tribunal has applied test of human probabilities to decide whether what is apparent is real. Since a perusal of Asset Purchase Agreement clearly shows that dominant intention of purchaser for making payment to assessee was to prevent him from engaging in any business which could have competed with business purchased by Trend Micro from sellers and hence amount received by assessee is revenue receipt in his hands and is taxable as business income under S. 28(va).

Further, in any case, cost of acquisition, in case of non-compete rights, under S. 55(2)(a) is to be taken as NIL, and, as a corollary thereto, entire receipts is to be taxed in hands of assessee.

Tax authorities are not required to put on blinkers while looking at documents. They are entitled to look into the surrounding circumstances to find out the reality.

Footnotes

Section 28(va) of Income Tax Act,1961- any sum, whether received or receivable, in cash or kind, under an agreement for-

(a) not carrying out any activity in relation to any business or profession; or

(b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:

Provided that sub-clause (a) shall not apply to-

1. any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head "Capital gains";
2. any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.

Explanation. -For the purposes of this clause, -

(i) "agreement" includes any arrangement or understanding or action in concert, -

(A) whether or not such arrangement, understanding or action is formal or in writing; or

B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

Section 55(2a) of Income Tax Act,1961- For the purposes of sections 48 and 49, "cost of acquisition", -

1. in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business
2. or a right to manufacture, produce or process any article or thing
3. or right to carry on any business, tenancy rights, stage carriage permits or loom hours, -

1. in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
2. in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49, shall be taken to be nil ;

2. such explanation in the opinion of the Assessing Officer has been found to be satisfactory. If all the above conditions exist, sum so credited may be charged to tax as income of the taxpayer of that year.

PLEASE NOTE THAT

As per Section 115BBE, income tax shall be calculated at 60% where the total income of assessee includes following income:

a) Income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D and reflected in the return of income furnished under Section 139; or

b) Which is determined by the Assessing Officer and includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is not covered under clause (a).

Such tax rate of 60% will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess). Provided that such 6% penalty shall not be levied when the income under Section 68, 69, etc., has been included in return of income and tax has been paid on or before the end of relevant previous year.

No deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE.

CASE-10

EY Global Services Limited (W.P.No. 11957 of 2016) and EYGBS (India) Private Limited (W.P.No. 12003 of 2016) (Delhi HC)

Held That : Amount received for providing software-access to EY network firms not taxable as royalty

1. The taxpayer, a UK-based company, is engaged in providing technology, other support services and software licenses to its member firms in countries all over the world. The taxpayer entered into an agreement with its Indian member firm (EYGBS), engaged in providing back-office support and data processing services, for 'right to benefit from the deliverables and/or services'.
2. Both, the taxpayer and EYGBS moved applications before Authority of Advance Ruling (AAR) over taxability of services and software payments provided under the agreement.
3. The AAR held that services provided under the agreement were not taxable as Fees for Technical Services (FTS). The consideration, however, received for software was taxable as royalty and would be liable to Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act, 1961 (IT Act).
4. Following this, the taxpayer and EYGBS filed a writ petition before the Delhi High Court (HC) and submitted that the case was covered by the Supreme Court (SC) ruling in Engineering Analysis Centre of Excellence Private Limited [Civil (Appeal) 8733-8734 of 2018 (SC)] (EAC).
5. On the other hand, the Income Tax Department (ITD) submitted that, as per the agreement, a standard facility was created under a license from the third-party vendors which was used by all entities, where the owner of the computer program lawfully enabled the use of the confidential information contained therein.
6. This makes the transaction taxable as royalty under India-UK DTAA.

THE DECISION

The Delhi HC followed the SC ruling in EAC and held that payment received by the taxpayer for providing access to computer software to its member firms in India does not amount to royalty under the domestic law as well as India-UK DTAA on the following grounds:

1. For taxing the payment received by the taxpayer from EYGBS as royalty, it is essential to show a transfer of copyright in the software to do any of the acts mentioned in Section 14 of the Copyright Act, 1957 and a license conferring no proprietary interest on the licensee, does not entail parting with the copyright.
2. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as 'royalty'.
3. EYGBS merely received the right to use the software procured by the taxpayer from third-party vendors which cannot be taxed as royalty.

CONCLUSION

The Delhi High Court categorically observed that the scope of the Supreme Court judgement in EAC is not restricted to the four categories of facts discussed in the judgement and it goes beyond to cover cases where there is a 'transfer of a right to use the copyright in software' without there being a 'transfer of copyright in the software'.

CASE-11

• Bekaert Industries Private Limited (ITA No. 1003/PUN/2017) (Pune ITAT)
• Fees for 'using' IT Infrastructure taxable as Royalty; Transaction not covered by EAC ruling

BRIEF FACTS

• Taxpayer, a Company, paid IT support service fees to N.V. Bekaert SA, its Belgian associate enterprise (AE) for AY 2012-13.
• However, the AO disallowed the expenditure on account of failure to deduct TDS.
• On appeal, the Pune ITAT, noting the pricing mechanism, observed that the costs incurred by the AE in setting up and maintaining the IT Infrastructure facility had been allocated to group entities with a mark-up. Thus, the payment made by the taxpayer to its AE, being its share in the total costs, was for the use of the IT Infrastructure facility set up by the latter and not for availing any particular IT service from its AE.
• Further, the Pune ITAT held that the IT infrastructure set up by the AE was in the nature of equipment covered Explanation 2 to Section 9(1)(vi) (iva) and thus, it falls within the ambit of 'Royalty' under Section 9(1)(vi).
• As regards taxability under the DTAA, Pune ITAT referred to Article 12(3)(a) of India-Belgium DTAA and stated that there is no material difference in the definition of the term `Royalty' under Section 9(1)(vi) of the Act. The DTAA insofar as clause (iva) of Explanation 2 deals with payment of consideration for use or right to use of any industrial, commercial or scientific equipment.
• Thus, the Pune ITAT held that payment made by the taxpayer to its AE for using the IT Infrastructure facility set up by the AE falls within the ambit of royalty under Section 9(1)(vi). Also, under Article 12 of India-Belgium DTAA confirmed the disallowance under Section 40(a)(i) for default in deducting TDS on such transaction.
• Further, the Pune ITAT rejected the taxpayer's submission that since the department applied Karnataka HC ruling in Samsung Electronics Company Ltd. 345 ITR 494 (Kar.) overruled by SC in EAC, Pune ITAT could not view the transaction from a different angle.
• The ITAT observed that the SC ruling in EAC applies only on copyright royalty cases and not on industrial royalty cases. Thus, the transaction of availing access to the IT Infrastructure facility set up by its AE, is income from royalty.

CONCLUSION

For relying on the decision of SC in case of EAC, it is pertinent to take note of factors like the agreement language, nature of service/ license provided, the language used in the DTAA and the nature of royalty in question.

CASE-12

1. Kanoria Chemicals & Industries Ltd (ITA No. 2184/Kol/2018) (Kolkata ITAT)
2. Educational cess held not deductible under Section 40(a)(ii)

BRIEF FACTS

1. Recently, the ITAT held that education cess is not deductible under Section 40(a)(ii) of the IT Act.
2. The ITAT perused the provisions of the Finance Act, 2004 and Finance Act, 2011 and observed that it has been specifically provided that 'education cess' is an additional surcharge levied on the income-tax.
3. As per the provisions of Section 40(a)(ii) of the IT Act, 'any rate or tax levied' on profits and gains of business or profession shall not be deducted in computing the income chargeable under the head profits and gains from business or profession.
4. The taxpayer relied upon CBDT Circular No. 91/58/66-ITJ(19) dated May 18, 1967, wherein it has been interpreted that 'Cess' shall not be disallowable.
5. Further, the taxpayer placed reliance on the decision of the Hon'ble Bombay HC in Sesa Goa Limited v. JCIT (2020) (117 taxmann.com 96) and decision of the Hon'ble Rajasthan HC in Chambal Fertilizers & Chemicals Ltd v. JCIT (ITA No. 52/2018) wherein the High Courts relying on the aforesaid CBDT circular allowed claim of deduction of education cess.
6. The ITAT took note of the provisions of the Finance Act, 2004 and Finance Act, 2011 wherein education cess was mentioned as an additional surcharge to finance the Government's commitment to universalize quality basic education.
7. The ITAT also took note of the decision of the Hon'ble SC of India in CIT v. K. Srinivasan (1972) (83 ITR 346) wherein it was held that surcharge and additional surcharge are part of the income-tax.
8. Further, the ITAT remarked that the decision of the Hon'ble SC of India and the provisions of Finance Act, 2004 and Finance Act, 2011 were not brought to the knowledge of the two High Courts.
9. In view of the above, since decision of the Hon'ble SC prevails over that of the High Courts, the ITAT respectfully followed the decision of the Hon'ble SC (supra) and held that education cess is not deductible under Section 40(a)(ii) of the IT Act.

CONCLUSION

The issue regarding deduction of education cess under Section 40(a)(ii) of the IT Act has been a subject matter of litigation over the years with various appellate authorities passing divergent rulings. The aforesaid decision of the ITAT has been contrary to the favourable decision in Sesa Goa Limited and Chambal Fertilizers & Chemicals Ltd (Supra). Further, it may be noted that a special leave petition has been filed before the Hon'ble SC in the case of Chambal Fertilizers & Chemicals Ltd (Supra) which is currently pending before the Hon'ble SC.

CASE-13

• Mr. Chander Mohan Lall (ITA No. 1869/Del/2019)
• Legal fees paid to foreign attorney not chargeable to tax as FTS(Financial & Technical Services)

BRIEF FACTS

• The taxpayer had claimed deduction of payment to various persons/entities outside India towards legal/ professional fee and no tax was deducted on the same.
• The Tax Officer (TO) disallowed the said deduction under Section 40(a)(i) of the IT Act for non-deduction of tax at source.
• The ITAT observed that certain payments were made towards court and application fees which were in the nature of reimbursement made for official purpose and the same cannot come within the purview of either professional or technical services.
• Accordingly, the ITAT held that for such payments there was no obligation on the taxpayer to deduct tax at source.
• The ITAT took note of the nature of professional services rendered by the non-resident attorneys outside India and observed that the payments received by them cannot be treated as income received in India, or deemed to be received in India, or income which accrues or arises in India. Accordingly, the ITAT stated that the only category under which the payments can be chargeable to tax is income deemed to accrue or arise in India.
• On an examination of the various provisions of the IT Act, the ITAT observed that the domestic law provisions recognize legal/professional services and FTS as two distinct and separate categories. Therefore, payments made to non-resident attorneys cannot be regarded as FTS under Section 9(1)(vii) of the IT Act.
• Further, the ITAT observed that Section 40(a)(ia) encompasses both, FTS and fees for professional services, however, Section 40(a)(i) of the IT Act is applicable only in case of failure to deduct tax on payments made for FTS. In view of the same, the ITAT noted that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per Section 5 and Section 9 of the IT Act.
• The ITAT relied on its coordinate bench ruling in NQA Quality Systems Registrar Ltd. v. DCIT (92 TTJ 946), wherein it was held that professional services are a category distinct from technical services and held that payments made to non-resident attorneys being not in the nature of FTS, there was no obligation on the taxpayer to deduct tax at source.

CASE-14

• Rajeev Suresh Ghai (ITA No. 6290/Mum/2019)
• Difference between consideration and stamp duty value on invoking Section 50C of the IT Act, cannot be attributed to gift.

BRIEF FACTS

1. Taxpayer, an individual, jointly owned a property (50%) along with his wife.
2. Taxpayer sold the property to his relative i.e. his wife's brother for INR 59 lakhs, his share INR 29.50 lakhs.

CASE-15

Commissioner of GST and C. Ex. v. M/s. Citibank N.A. [TS-542-SC-2021-ST]

Taxability of intercharge fee by issuing bank in pre-GST regime.

FACTS OF THE CASE

The assessee is a bank and had received interchange fees which is a fee earned by credit card issuing banks while participating in a credit card transaction. The manner in which a credit card purchase transaction occurs is diagrammatically described below:

The parties enabling this transaction are:

• The issuing bank (IB) – Issues the credit card, thereby extends credit to the customer. Earns interchange fee in the process, which is part of the Merchant Discount Fee (MDF) deducted by the acquiring bank while paying the merchant.
• The acquiring bank (AB) – The merchant's bank, provides the point-of-sale machine (POS) enabling the merchant to acquire business and charges MDF, which includes the element of interchange fees.
• The Card Association/Network, such as Visa, Mastercard etc. which operates the digital system on which credit card settlement takes place.
• Card Holders - The card holder is the customer to whom the IB issues a credit card and who purchases goods at the merchant establishment using credit card.
• merchant Establishment - The merchant sells goods or services to card holders (buyers). The merchant is provided with POS machines by the AB to enable it to accept card payments, for a fee called MDF which is pre-agreed and deducted at the time of settlement of the transactions.

3. AO invoked provisions of Section 50C and held that stamp duty value (SDV) of the property amounting to INR 89.27 lakhs must be adopted as the sales consideration for calculating capital gains.
4. On appeal before CIT(A), taxpayer contended that the difference between the sale consideration and SDV should be treated as gift to relative as per Explanation (e) to Section 56(2)(vii) of the IT Act.
5. However, CIT(A) disregarded taxpayer's contention and referred the matter to Department Valuation Officer (DVO), who determined that value of the property at INR 70.54 lakhs resulting in the taxpayer's share at INR 35.27 lakhs.
6. Further, CIT(A) also noted that no gift deed was made at the time of sale and also nowhere in the sale deed it was mentioned that the difference in the sale consideration and the SDV will be treated as gift.
7. Aggrieved by the said order, taxpayer filed an appeal before ITAT.
8. On perusal of Section 50C of the IT Act, ITAT notes that there is no scope for making any adjustment for the gift while determining the full value of consideration under the deeming provisions of Section 50C.
9. Accordingly, ITAT dismissed taxpayer's appeal for applying Section 56(2)(vii) to the excess of stamp duty valuation.

The manner of settlement of card transactions and Service tax charged thereon is illustrated as under:

1. Card holder swipes card at POS for purchase of goods worth INR 200
2. Card Association/Network initiates settlement process
3. IB retains interchange fee of INR 4 and transfers INR 196 to AB
4. AB retains INR 6 as consideration for its services. AB pays Service tax (say at the rate of 14%) on total MDF of INR 10 (INR 6 + INR 4 retained by IB) and transfers balance INR 188.6 to Merchant establishment.
5. AB pays Service tax of INR 1.4 to Government treasury
6. Card holder pays Rs. 200 to IB

ISSUE

• The issue before the Hon'ble Supreme Court was whether the interchange fees earned by the IB is liable to be separately taxed as 'Credit card, debit card, charge card or other payment card service' (CCS) under Section 65(33a) read with Section 65(105)(zzzw) of the Finance Act, 1994 (Finance Act) for the period October 2007 to March 2015.

JUDGEMENT (POINTS OF CONSENT)

• Intercharge fee constitutes consideration for settling of card payments and would attract Service tax. The service falls within the scope of CCS under Section 65(33a)(iii) of the Finance Act during the period prior to 01.07.2012 and would constitute "service" under Section 65B(44) of the Finance Act thereafter.
• The reasoning in the Tribunal's order in ABN Amro's case was unsustainable.
• Interchange fees is not akin to interest on loan.
• Once tax is already paid on interchange fees by the AB, it cannot once again be collected from the IB since that would lead to double taxation.

JUDGEMENT (POINTS OF DISSENT)

CONCLUSION

• Thus, both judges have given dissenting views on the taxability of intercharge fees and the issue may be finally decided by a third member / larger bench of the Supreme Court.
• However, it is also equally important to note that both judges have held that double taxation must be avoided. Thus, Service tax would not be payable on interchange fees, provided it can be demonstrated with cogent evidence that AB have discharged Service tax on entire MDF, including interchange fees.

CASE-16

• Meritas Hotels Pvt. Ltd. Vs. State of Maharashtra [TS-675-HC(BOM)-2021-GST]
• Time limit for filing appeal to be reckoned from date of communication.

FACTS OF THE CASE

• There was a delay on part of the Petitioner in filing Goods and Services Tax (GST) returns for the month of February 2019 on account of a financial crunch. The same was filed by the Petitioner on June 14, 2019. In the meanwhile, a notice dated March 26, 2019 was issued to the Petitioner for non-filing of return for February 2019.
• Thereafter, an assessment order dated 20.04.2019 was issued in Form GST ASMT-13 under Section 62 of the Central Goods and Services Tax Act, 2017 (CGST Act) for fixing the liability of tax amount along with applicable interest and penalty.
• The said order was not uploaded on GST portal but the scanned copy of the order was sent to the General Manager of the Petitioner Company vide email dated April 20, 2019.
• However, the General Manager failed to inform the management which became aware of the assessment order on July 1, 2019 after the bank account of the Petitioner Company was attached on July 1, 2019.
• Subsequently, the Petitioner obtained the certified true copy of the assessment order on November 6, 2019 and being aggrieved attempted to file an appeal manually on November 20, 2019. The said order was uploaded on the portal on January 8, 2020 and pursuant thereto, the Petitioner again made an attempt to file the appeal online on January 10, 2020 but the appeals were not entertained owing to delay in filing appeal.
• Hence the Writ Petition.
• The Petitioner inter alia argued that the period of three months for presenting appeal under Section 107 shall be computed from January 8, 2020 as prior thereto, the physical true copy of the assessment order was not served on the Petitioner nor the same was uploaded on the GSTN portal. Thus, refusal to accept and entertain the appeal on the ground of delay in filing thereof is unjustified.

ISSUE

Whether the period of limitation for the purpose of filing an appeal under Section 107(1) of the said CGST Act would commence from the date when the impugned assessment order is uploaded on the GSTN portal or from the date of service upon the General Manager of the Petitioner Company vide email dated April 20, 2019.

JUDGEMENT

1. The Hon'ble High Court inter alia held that in terms of Section 107 of the CGST Act, an appeal to the appellate authority has to be filed within three months from the date of communication of the impugned assessment order.
2. In the present case, the order was communicated to General Manager vide email dated April 20, 2019 and the failure on the part of the General Manager to inform the Petitioner Company regarding receipt of the order would not have the effect of extending the period of limitation prescribed under Section 107(1) of the CGST Act.
3. Further, referring to Rule 108 of the CGST Rules, the Hon'ble Court held that while Rule 108 prescribes that an appeal has to be filed electronically, it nowhere prescribes that the appeal is to be filed only after assessment order is uploaded on GSTN portal online.
4. The Hon'ble High Court relying on various judgements including the case of Assistant Commissioner (CT) LTU, Kakinada Vs. Glaxo Smith Kline Consumer Health Care Limited 2020 SCC OnLine SC 440 inter alia held that as the Petitioner failed to avail of the remedy for filing of an appeal within the period prescribed under Section 107 of the CGST Act, the appeal was rightly not accepted and entertained by the appellate authority.

CASE -17

• Tarun Jain vs. Directorate General of GST Intelligence DGGI [TS-645-HC(DEL)-2021-GST]
• GST offences not grave enough to demand custodial interrogation.

FACTS OF THE CASE

• The Petitioner is one of the directors in M/S Jetibai Grandsons Services India Pvt. Ltd. (Company). The Respondent alleged that the Company made most of its purchases from three firms which further received these goods from various firms, most of which have been found to be non-existent and had no inward supplies. The Respondent therefore alleged that the Company along with these three firms was involved in fraudulently availing and passing on ineligible/fake Input tax credit.
• Numerous summons were issued to the Petitioner. On apprehending arrest, the Petitioner filed an application for anticipatory bail before Court of Additional Sessions Judge, Patiala House Court, New Delhi which rejected the said application vide order dated 09.10.2021.
• Being aggrieved, the Petitioner approached the Hon'ble High Court.

JUDGEMENT

• The Hon'ble High Court noted that the maximum penalty imposable for committing offences under Section 132(1)(b) and (c) is imprisonment for a term which may extend to five years and with fine.
• Further, as per Section 132(5), the offences specified in clause (a) or (b) or (c) or (d) of Section 132(1) and punishable under Section 132(1)(i) are cognizable and non-bailable.
• The Hon'ble Court also stated that Section 138 of the CGST Act further dilutes the heinousness of offences under the CGST Act and makes every offence under the CGST Act compoundable except for certain circumstances specified under the proviso of Section 138.
• The Hon'ble Court observed that there is no embargo under the CGST Act restraining the Petitioner from seeking pre-arrest bail. The Court noted that economic offences are considered grave in nature and to deter persons from indulging in such offences, criminal sanctions such as arrest are imposed, however, the power to arrest shall be subject to necessary safeguards.
• The Court held that the offences under the CGST Act are not grave to an extent where the custody of the accused can be held to be sine qua non.
• It further held that custodial interrogation is neither warranted nor provided for by the statute and that detaining the Petitioner in Judicial Custody would serve no purpose rather would adversely impact the business of the Petitioner.
• Basis the above findings, the Hon'ble Court allowed the anticipatory bail application filed under Section 438 of Code of Criminal Procedure subject to satisfaction of stringent conditions some of which are laid down hereunder:
  1. The Petitioner to furnish personal bond for INR 5 lacs with two solvent sureties
  2. He shall surrender his passport and under no circumstances leave India without prior permission of the Investigating Officer
  3. He shall cooperate in the investigation and appear when summoned;
  4. He shall not directly or indirectly make any inducement, threat, or promise to any person acquainted with the facts of the case;
  5. He shall provide his mobile number and keep it operational at all times;
  6. He shall drop a PIN on Google map to ensure that his location is available to the Investigating Officer;
  7. He shall commit no offence whatsoever during the period he is on bail.

CASE-18

• Tata Steel Ltd. & Anr. Vs. State of West Bengal [TS – 539-HC-2021 (CAL)-VAT]
• Purchasing dealers can claim refund of excess CST collected on inter-state purchase of HSD

FACTS OF THE CASE

1. The Petitioners were purchasing HSD from IOCL situated in the State of West Bengal for use in its mining units situated in the State of Jharkhand at a concessional rate of tax under Section 8(3) of the Central Sales Tax Act, 1956 (CST Act) against issuance of "C" Form to IOCL.
2. However, due to non-issuance of "C" Forms by State of Jharkhand, such concessional rate was denied by the State of West Bengal during the period July 1, 2017 to October 2018. Thus, during the said period, IOCL collected and deposited CST at full rate.
3. Thereafter, the High Court of Jharkhand vide its interim Order dated May 17, 2018 further upheld by final order dated August 28, 2019 in the assessee's own case directed the State of Jharkhand to issue "C" Forms to the Petitioner.
4. It further held that Petitioners would be entitled to claim refund of excess CST from sellers or from respective State Government.
5. The Order dated August 28, 2019 was upheld by Hon'ble Supreme Court vide order dated September 13, 2021.
6. Thereafter, the Petitioners obtained "C" Forms from the State of Jharkhand and submitted to IOCL for further submission with State of West Bengal, yet the State of West Bengal did not refund the excess CST so collected through IOCL.
7. Being aggrieved, this Petition is filed by the Petitioners challenging the actions of State Government of West Bengal in refusing to refund the differential amount of CST collected through IOCL.

JUDGEMENT

• The Hon'ble Court inter alia held that since the Petitioners actually suffered and were subject to excess CST, the Petitioners are persons aggrieved and can challenge denial of refund of differential CST. They have locus standi to file a Writ Petition for refund of excess CST.
• The Court also remarked that "State cannot behave like an unfair private businessman and practice unjust enrichment by taking undue advantage of its own wrong in justification of its action of depriving the petitioners benefit of their statutory right to purchase HSD oil at concessional rate of tax".
• It was further held that in the absence of any specific prohibition under the statute, revenue should not get entangled in the cobweb of procedures and deprive the legitimate claim of the Petitioners.

Accordingly, the Hon'ble Court directed the State of West Bengal to refund the amount of excess CST so collected along with interest at rate of 10% per annum to the Petitioners after inter alia verification of "C" Forms submitted by IOCL

CASE-19

• LGW Industries Ltd & Ors. vs. Union of India & Ors. [TS-728-HC(CAL)-2021-GST]
• Denial of input tax credit is not justifiable if supplier appeared to be fake after completion of purchase transaction.

FACTS OF THE CASE

1. Various notices were issued to the assessee for denial of input tax credit along with a demand of interest and penalty on the purchases made from various suppliers.

2. This was made on the grounds that such suppliers are not registered taxable persons (RTP) as the registration of such suppliers was cancelled with retrospective effect covering the transaction period in question.
3. The assessee argued that the transactions in question were genuine and valid by relying upon;
   • Government portal showed registrations of suppliers as valid and existing at the relevant time of transactions in question;
   • payments for all purchases in question were made through proper banking channels;
   • no cogent evidence to establish collusion between supplier and purchasers (iv) invoice-wise details of all the purchases in question were available on the GST portal in form GSTR-2A of the assessees.
4. Accordingly, the assessee argued that they had undertaken due diligence in verifying the genuineness of the supplier at the relevant time and the assessee could not be faulted if they appeared to be fake later on.

JUDGEMENT

The Hon'ble High Court remanded the matter to consider afresh and allow benefit of ITC to the assessee after considering the documents submitted by the assessee demonstrating that;

(a) payments on purchases in question were actually paid to the suppliers with GST;

(b) the transactions and purchases were made before the cancellation of registration of the suppliers;

(c) assessee had complied with statutory obligation of verification of identity of the suppliers and

(d) all purchases are supported by valid documents.

CASE-20

• Hindustan Petroleum Corporation Ltd. [ TS-577-HC-2021(BOM)-EXC
• Appeal involving limitation issue maintainable before High Court

FACTS OF THE CASE

1. The Respondent-assessee received non-duty paid Superior Kerosene Oil (SKO) from their refinery and cleared the same on payment of duty to Public Distribution System dealers and other Oil Marketing Companies.
2. The Appellant – Revenue - issued a notice alleging that the Respondent – Assessee - paid Central Excise duty on a value lesser than that recovered by them from the other oil marketing companies in contravention of Section 4(1)(a) of the Central Excise Act 1944 (Excise Act).
3. The Appellant demanded differential duty by invoking extended period of limitation.
4. On adjudication, the demand raised in the notice was upheld and being aggrieved the Respondent filed an appeal before Hon'ble CESTAT.
5. CESTAT vide Order dated 31.10.2017 upheld the allegations on merits but set aside the demand on limitation.
6. Being aggrieved, the Appellant- revenue filed an appeal before Hon'ble High Court.
7. However, the Division Bench of High Court raised a question of maintainability of the appeal under Section 35G of the Excise Act and owing to conflicting views, referred the matter to the Larger bench.

JUDGEMENT

1. The Court observed that the CESTAT Order, to the extent it confirmed demand of duty, interest and penalty on merits, has attained finality in as much as no appeal was filed by the Respondent- Assessee against such Order. Thus, only the issue of limitation is raised in the Central Excise appeal filed by the Appellant - Revenue.
2. The Court observed that the presence of a question of law having a direct and/or proximate nexus to the determination of the applicable rate of duty or the value of the goods for the purposes of assessment of duty is a sine qua non for admission of the appeal before Supreme Court under Section 35L of the Excise Act.
3. The Court opined that the issue of limitation - in this case - being purely question of fact or a mixed question of fact and law - disclosed in decision of the Tribunal- would thus not be a decision in rem but has to be in personal.
4. Thus an appeal would not lie before Supreme Court.
5. Hon'ble High Court also stated that the Tribunal set aside the demand under extended period purely based on findings of facts inter se and that such issue of limitation did not involve a question of general/public importance falling under Section 35L of the Excise Act.
6. Hon'ble High held that the issue of limitation raised in this Central Excise Appeal has no direct or proximate relationship to the rate of duty and the value of goods for purposes of assessment and therefore, appeal is maintainable in the High Court as per Section 35G of the Excise Act.

CASE-21

• Macquarie Global Services Pvt. Ltd. [ TS-529-CESTAT-2021-ST ]
• Provider of back-office services and IT & ITES services does not constitute "intermediary".

FACTS OF THE CASE

1. The assessee had filed refund claim under Rule 5 of the CENVAT Credit Rules, 2004 (Credit Rules) for refund of unutilized credit used for providing back-office support services and IT and ITeS to its various overseas group entities.
2. However, on noticing certain reimbursements claimed by the Appellant in its Transfer pricing documentation, the Department alleged that the functions performed by the Appellant related to facilitating the payment on behalf of associated entities.
3. Thus, the Appellant constitutes "intermediary" under Rule 2(f) of the Place of Provision Rules, 2012 (POPS Rules).
4. The Department also alleged that place of provision of such services falls in India as per Rule 9 of the POPS Rules and services so provided do not constitute export of services as per Rule 6A of the Service Tax Rules, 1994 (ST Rule). It rejected the refund claim.
5. The assessee argued that they do not fall within the definition of "Intermediary Services" as laid down in the case of Orange Business Solutions Pvt. Ltd [2019 (27) GSTL 523 (T-Chand)] and Circular No 159/15/2021-GST dated September 20, 2021.
6. The assessee also argued that the Department cannot reclassify the services in a refund claim filed by the assessee.

JUDGEMENT

• The Hon'ble Tribunal observed that the issue for consideration before both the authorities was validity of refund claims filed under Rule 5 of Credit Rules, and not whether the services provided by them were the "intermediary services".
• The original authority, however, misdirected himself, by considering the nature of the output services, to determine the eligibility of the refund claim.
• Relying on various judgements, the Hon'ble Tribunal stated that for a person to be said to be "intermediary", there should be two distinct services and three persons involved. The intermediary should be the person who is facilitating the provision between the other two persons.
• The Hon'ble Court held that while considering the issue on the ground of "intermediary services" both the authorities have at no stage identified the three persons, and have solely relied upon certain analysis in the transfer pricing document. Basis this, the Court held that the service provided by the Appellant do not qualify as a service under "Intermediary Services".

CASE-22

• Unik Traders [ TS-548-HC-2021(MAD)-CUST ]
• DRI officer is not "proper officer" for assessment of imported goods

FACTS OF THE CASE

1. The assessee imported Areca Nuts from Mynamar and before commencement of assessment, the Assistant / Additional Commissioner of Customs (customs officers) collected test samples for testing.
2. The assessee also executed a test bond of the value of consignments before customs officers.
3. However, before the assessment could be completed by customs officers, DRI officers stalled the assessment and clearance of goods.
4. The issue in the present case is

• Whether the imported consignments of Areca nuts is to be classified under Chapter 0802 or under Sub Heading 2106 of the Customs Tariff Act,1975 (Tariff Act).
• Also, whether the DRI officers are "proper officers" as defined Section 2(34) of the Customs Act, 1972 (Customs Act).

JUDGEMENT

• Relying on Section 2(34) of the Customs Act read with Notification No.40/2012-Cus (N.T.) dated 02.05.2012, the Court held that the Deputy Commissioner or the Assistant Commissioner of Customs are designated as "proper officer" for various functions under the Customs Act including for the purpose of assessment of imported consignment and not DRI officers.
• The Court opined on the determination as to whether prohibition of imported goods can be carried only by a "Proper Officer" and cannot be usurped by DRI officers.
• The Court also stated that merely because DRI officers have powers to investigate by itself, will not mean that they can insist on a "hands off approach" by a competent proper officer who have been given the powers to assess Bill of Entry filed by an importer.
• If DRI officers felt the import was without proper license or of prohibited goods, the DRI officers could have informed the Customs officers which are designated proper officers to make a proper assessment.
• The Court held that the "proper officer" who has been given the task to assess the Bill of Entry - which involves both classification and valuation and determination as to whether the import of the goods is prohibited - should be allowed to pass appropriate Order under the Custom Act. Such proper officers can rely on the information which may be passed on by the DRI officers while assessing the goods.
• Accordingly, the High Court directed the Customs officers to complete assessment in a time bound manner.

CASE-23

ADVANCE RULING

• Premier Sales Promotion Pvt. Ltd. [TS-714-AAAR(KAR)-2021-GST]
• Vouchers constitute goods and not actionable claims.

FACTS OF THE CASE

1. The assessee is engaged in the trading of vouchers having pre-defined face value to its merchants.
2. The assessee supplies various types of vouchers such as 'gift vouchers', 'cashback vouchers' and 'open vouchers' redeemable at specified merchants for purchase of goods or services.
3. The assessee purchases vouchers from entities authorized by RBI to issue vouchers on payment of consideration and sells the vouchers to its clients for a consideration.
4. The Authority for Advance Ruling (AA) held that the trading of vouchers is a supply in terms of Section 7(1)(a) of the CGST Act and amounts to supply of goods and GST will be levied as per S.No. 453 of the Notification No. 1/2017 – CGST dated 28.06.2017.
5. The assessee has assailed the Ruling before the Appellate Authority for Advance Ruling (AAAR) primarily on the ground that vouchers are consideration for purchase of goods and services and consideration cannot be held as "goods".

ADVANCE RULING

• The AAAR stated that the vouchers are a form of payment instruments recognized by RBI and in the instant case vouchers are bought and sold by the assessee on principal-to-principal basis and the assessee does not require RBI authorization for trading in these vouchers.
• The Authority observed that "money" is inter alia defined under Section 2(75) of the CGST Act to include a payment instrument used as consideration to settle an obligation.
• The Authority noted that "money" settles an obligation but the vouchers in the hands of the assessee does not settle any obligation but creates one. The settlement of the obligation occurs only at the time when ultimate beneficiary uses the voucher to purchase goods or services. Basis this, the Authority held that the vouchers in question do not constitute "money".
• The Authority thereafter held that vouchers in question are movable property as they have a monetary value and are capable of being transferred and thereby constitute "goods" under the CGST Act.
• The Authority also observed that actionable claims cover two types of claim;
  1. claim to an unsecured debt and
  2. beneficial interest in a movable property.
• The Authority opined that the vouchers are not claim to any debt and in present case, voucher is in possession of claimant at the time of claim and hence, cannot be considered as actionable claim.
• In view of the above, the AAAR upheld the order passed by the Authority for Advance Ruling and dismissed the appeal filed by the assessee.

CASE-24-IBC,2016

• Case Name : Dena Bank (now Bank of Baroda) Vs. C. Shivakumar Reddy and Anr. (Supreme Court of India)
• Appeal Number : Civil Appeal No. 1650 of 2020
• Date of Judgement/Order : 04/08/2021
• Related Assessment Year :
• Courts : Supreme Court of India

THERE IS NO BAR TO AMENDMENT OF PETITION FILED U/s. 7 OF IBC,2016

DECISION: No bar to amendment of petition u/s 7 of IBC ,2016 until final order; judgment and/or decree for money in favour of the financial creditor would give rise to a fresh cause of action

THE MAIN QUESTION INVOLVED IN BEFORE THE HON'BLE SUPREME COURT OF INDIA WAS AS-

"Whether a petition under Section 7 of IBC,2016 would be barred by limitation, on the sole ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability to the appellant Bank, within a period of three years prior to the date of filing of the Section 7 petition, by making a proposal for a one time settlement, or by acknowledging the debt in its statutory balance sheets and books of accounts.

FURTHER OTHER QUESTIONS INVOLVED WERE-

• Whether a final judgment and decree of DRT in favour of financial creditor, or the issuance of a Certificate of Recovery in favour of financial creditor, would give rise to a fresh cause of action to financial creditor to initiate proceedings under Section 7 IBC within three years from the date of the final judgment and decree, and/or within three years from the date of issuance of the Certificate of Recovery.
• Whether there is any bar in law to the amendment of pleadings, in a petition under Section 7 IBC, or to the filing of additional documents, apart from those filed initially, along with the Section 7 petition in Form-1.

An Apex Court bench of Justices Indira Banerjee and V Ramasubramanian on 4^th August 2021said that an application under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgement of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years. Such acknowledgment can be by way of statement of accounts, balance sheets, financial statements and offer of one-time settlement.

The Apex Court clarified that this is only applicable if there was an acknowledgement of the debt by the corporate debtor before the expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.

The bench also held that a judgment and/or decree for money in favour of the financial creditor, passed by DRT or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor. The financial creditor can, however, initiate proceedings under Section 7 of IBC for initiation of the Corporate Insolvency Resolution Process within three years from the date of the judgment if the dues of the corporate debtor to the financial debtor remained unpaid.

The Apex Court also observed that there is no bar in law to the amendment of pleadings in an application under Section 7 of the IBC, or to the filing of additional documents, apart from those initially filed along with the application under Section 7 of the IBC in Form-1.

"In the absence of any express provision which either prohibits or sets a time limit for filing of additional documents, it cannot be said that the Adjudicating Authority committed any illegality or error in permitting the Appellant Bank to file additional documents.

The Apex Court further clarified that depending on the facts and circumstances of the case, when there is inordinate delay, the Adjudicating Authority might, at its discretion, decline the request of an applicant to file additional pleadings and/or documents, and proceed to pass a final order…"

CONCLUSION

From above decision of the Apex Court it was clarified a judgment and/or decree for money in favour of the financial creditor, passed by DRT or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor. The financial creditor can, however, initiate proceedings under Section 7 of IBC for initiation of the Corporate Insolvency Resolution Process within three years from the date of the judgment if the dues of the corporate debtor to the financial debtor remained unpaid.

CASE -25

• INSOLVENCY & BANKCRUPTCY ACT,2016
• Leo Edibles & Fats Limited Vs. Tax Recovery Officer (Central)- Hyderabad [2018] 99 taxmann.com 226/259 Taxmann 387 Andhra Pradesh & Telangana High Court.
• SUB: WHETHER INCOME TAX ATTACHMENT ORDER WILL BE CONSIDERED AS BAR ON SALE OF ASSETS OF A COMPANY IN LIQUIDATION UNDER IBC,2016.

FACTS OF THE CASE

The petitioner purchased an immovable property in the liquidation proceedings of VNR Infrastructures Limited. The Sub-Registrar refused to register the property in the name of the petitioner on behest of Income Tax Department., which claimed a charged on immovable property pursuant to attachment proceedings against which this writ petition was filed.

The High Court noted that it entails construction and interpretation of the provisions of the Code ,2016 in juxtaposition to the Income Tax Act,1961.

It was observed that "It is clear that the Income Tax -Department does not enjoy the status of a secured creditor, on par with secured creditor covered by a mortgage or other security interest, who can avail the provisions of Section 52 of the Code. At best it can only claim a charge under the attachment order in terms of the provisions of Section 281 of the Act,1961."

As regards the purpose of attachment, it referred to the judgement in Ananta Mills Ltd. (High Court Gujarat) and Prem Lal Dhar (Privy Council), where it has been held that attachment only prohibits private alienation of the property, but the attaching creditor does not acquire any interest in the property.

It noted that Section 178 of the Income Tax Act,1961 provide for a priority in appropriation of the amounts set aside by the liquidator for clearance of tax dues. However, liquidation of a company will be held under different provisions of different act.

PLEASE NOTE THAT: In liquidation of a company under IBC,2016, provisions of Section 178 of the Income Tax Act, 1961 stands excluded by virtue of amendment in Section 178(6) of the Act, 1961 with effect from 1^st November ,2016, in accordance of the provisions of Section 247 read with Third Schedule of the Code,2016. Therefore, from above amendment it was cleared that Income Tax Department can no longer claim a priority in respect of clearance of tax due of the said company, in case said company is undergoing liquidation under provisions of Code,2016.

THE HIGH COURT held that the tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within ambit of Section 53(1) (e) of the Code. It further held that the Income Tax Department cannot claim any priority merely because the order of attachment dated 27^th October,2016 was long prior to the initiation of liquidation proceedings under the Code,2016 against VNR Infrastructure Limited. Further Section 36(3)(b) of the Code indicate in no uncertain terms that the liquidation estate assets may or may not be in possession of the Corporate Debtor, including but not limited to encumbered assets. Therefore ,even if the order of attachment constitutes an encumbrance on the property , it still does not have effect of taking it out of preview of Section 36(3)(b) of the Code ,2016.

The said order of attachment, therefore cannot be taken as bar for completion of sale under a liquidation proceeding under the Code,2016. The Income Tax Department necessarily submit its claim to the liquidator for consideration as and when the distribution of assets, in terms of Section 53(1) of the IBC,2016 is taken up.

CONCLUSION

The above judgement clarified that Income Tax Department cannot be same as a Secured Creditor in case of tax dues of a company liquidation under provisions of IBC,2016. An Attachment order of Income Department on any asset of Corporate Debtor not conferred any interest in favour of department ,therefore attachment order only acts as a prohibition on private alienation of concerned property and it does not affect consideration of property by the liquidator for the purpose of liquidation. The provisions of IBC,2016 will overriders provisions of Income Tax Act,1961 in this respect. The Income Tax Department has to submit its claim for tax dues with the liquidator same as other creditors in the process of liquidation according to the provisions of Section 53(1) of IBC,2016.

Footnotes

SECTION 36 OF IBC,2016 DEALS WITH: LIQUIDATION ESTATE

(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: -

(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;

(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;

(c) tangible assets, whether movable or immovable;

(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;

(e) assets subject to the determination of ownership by the court or authority;

(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;

(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;

(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and

(i) all proceeds of liquidation as and when they are realised.

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -

(a) assets owned by a third party which are in possession of the corporate debtor, including-

(i) assets held in trust for any third party;

(ii) bailment contracts;

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;

(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and

(v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator;

(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;

(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;

(d) assets of any Indian or foreign subsidiary of the corporate debtor; or

(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.

SECTION 52: SECURED CREDITOR IN LIQUIDATION PROCEEDINGS

52. (1) A secured creditor in the liquidation proceedings may-

(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or

(b) realise its security interest in the manner specified in this section.

(2) Where the secured creditor realises security interest under clause (b) of sub-section (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either-

(a) by the records of such security interest maintained by an information utility; or

(b) by such other means as may be specified by the Board.

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

(5) If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force.

(6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (5) may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being in force.

(7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall-

(a) account to the liquidator for such surplus; and

(b) tender to the liquidator any surplus funds received from the enforcement of such secured assets.

(8) The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate.

(9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.

SECTION 53 OF IBC,2016.

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:

The following dues shall rank equally between and among the following: -

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

SECTION 178 OF INCOME TAX ACT "COMPANY IN LIQUIDATION"

178. (1) Every person-

(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company,

(hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company.

(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.

3) The liquidator-

(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been  notified by the Assessing Officer under sub-section (2) ; and

(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :

Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.

(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :

Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.

(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally.

(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

CASE-26-INSOLVENCY & BANKCRUPTCY ACT,2016

• BANK OF MAHARASHTRA AND ORS. v. VIDEOCON INDUSTRIES LTD AND ORS.
• Decision dated: 5 February 2022
• Citation: 2022 SCC online NCLAT 6

HELD THAT

The business decisions taken by the CoC in exercise of its commercial wisdom are non-justiciable by the NCLT or the NCLAT. Thus, the CoC is vested with a duty of trust and care, and that its decision on commercial matters is nonjusticiable.

BRIEF FACTS

1. Videocon group was founded in the year 1984 and Videocon Industries Limited ("VIL") is a listed company on the National Stock Exchange and the Bombay Stock Exchange.
2. Videocon groups's telecom business had obtained 21, 2G telecom licences, which were cancelled at a later date.
3. VIL and Bharat Petroleum Corporation Limited had jointly bought oil and gas assets through a "joint venture".
4. VIL availed loan facilities from aconsortium of bankers led by the State Bank of India, wherein VIL was repaying the agreed upon instalments to the consortium of lenders till 2015.
5. From May 2016, VIL, along with 13 other companies of Videocon group, were classified as 'SMA2' due to late payment of instalments in the year 2016 and onwards.
6. SBI filed an application under Section 7 of the IBC to initiate the CIRP against 15 entities of the Videocon group. It further filed an application for the substantive consolidation of the corporate debtors.
7. The NCLT passed a consolidation order and partially allowed SBI's application, directing the consolidation of 13 out of the 15 Videocon Group companies.
8. A Trademark Licence Agreement ("TLA") was executed between the appellant, Electrolux Home Products INC Singapore, and Electrolux Kelitor Limited which were merged into the corporate debtor.
9. The agreement specified that the appellant was entitled to terminate the TLA if the corporate debtor underwent any event that resulted in the Dhoot family no longer being in control. Thus, the Appellants were entitled to terminate the TLA once the corporate debtor was admitted to the CIRP, as the Dhoot family lost control of the corporate debtor.
10. The CIRP against the corporate debtor was initiated from 11.06.2018. The appellant filed an application before the NCLT seeking a declaration that the termination of the TLA was valid and a direction that the resolution professional be prohibited from using the trademark in any manner.
11. The NCLT, in the impugned order, held that the TLA should continue for at least a year from the date of approval of the plan, as per the existing terms and conditions as a transitional agreement.
12. The appeals before the NCLAT arose out of this order passed by the NCLT, wherein it had approved the resolution plan submitted by the resolution applicant. Multiple appeals were filed before the NCLAT under Section 61 of the IBC to quash and set aside the impugned order.

ISSUES

1. Whether the NCLT could direct the parties to continue the TLA as a transitional agreement?
2. Whether the Adjudicating Authority ("AA") can make modifications to the resolution plan without remanding it back to the CoC?

DECISIONS

ISSUE NO. 1

• For the first issue, the NCLAT relied on the judgement of the Hon'ble Supreme Court in the case of Tata Consultancy Services Limited v. Vishal Ghisulal Jain Resolution Professional. SK Wheels Pvt. Ltd., 2021 SCC OnLine SC 1113, wherein the Apex Court had observed that the NCLT does not have any residuary jurisdiction to entertain the contractual dispute that had arisen dehors the insolvency of the corporate debtor.
• Therefore, the NCLAT, in the instant case, held that the NCLT had made an error in permitting the TLA to continue as a transitional arrangement for a year, and that it was upon the parties to decide the continuity of the same, as per mutual understanding.
• Thus, the matter was remanded back to the CoC for review in accordance with the law.

ISSUE NO. 2

• As far as the second issue was concerned, the NCLAT took cognizance of the several reasons that were mentioned by the financial creditors for remanding the matter back to the CoC for its reconsideration.
• This primarily included safeguarding the interest of all the stakeholders and the public money.
• It further observed that, in the instant case, the CoC was primarily composed of public sector banks and financial institutions dealing with public money, whereby they were acting as custodians of public trust and discharging a statutory role.
• It further held that the CoC is vested with a duty of trust and care, and that its decision on commercial matters is non-justiciable.
• The NCLAT relied on the principle that commercial wisdom is totally in the domain of the CoC, and that the business decisions taken by the CoCs are non-justiciable by the NCLT or the NCLAT.

THE APEX COURT FINALLY HELD THAT

While in the present case, the second issue formulated by this Court has no bearing, we would like to issue a note of caution to the NCLT and NCLAT regarding interference with a party's contractual right to terminate a contract. Even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor. In Gujarat Urja (supra), this Court held thus:

"176. Given that the terms used in Section 60(5)(c) are of wide import, as recognised in a consistent line of authority, we hold that NCLT was empowered to restrain the appellant from terminating PPA. However, our decision is premised upon a recognition of the centrality of PPA in the present case to the success of CIRP, in the factual matrix of this case, since it is the sole contract for the sale of electricity which was entered into by the corporate debtor. In doing so, we reiterate that NCLT would have been empowered to set aside the termination of PPA in this case because the termination took place solely on the ground of insolvency. The jurisdiction of NCLT under Section 60(5)(c) of IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause like Article 9.2.1(e) herein, if such termination will not have the effect of making certain the death of the corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor's sole contract (as was the case in this matter's unique factual matrix).

177. The terms of our intervention in the present case are limited. Judicial intervention should not create a fertile ground for the revival of the regime under Section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of PPA which is the sole contract of the corporate debtor, governing the supply of electricity which it generates, it will pull the rug out from under CIRP, making the corporate death of the corporate debtor a foregone conclusion." (emphasis supplied)

We accordingly set aside the judgment of the NCLAT dated 24 June 2020. The proceedings initiated against the appellant shall stand dismissed for absence of jurisdiction. The appeal is disposed of in the above terms with no order as to costs.

CASE-27: INSOLVENCY & BANKCRUPTCY ACT,2016

• M/S. VISISTH SERVICES LIMITED v. S. V. RAMANI
• Decision dated: 11 January 2022
• Citation: 2022 SCC Online NCLAT 24

HELD THAT

A 'going concern sale' on an 'as is where basis' does not dissolve the corporate debtor, rather, it forms a part of the liquidation estate wherein the entire business, including assets and liabilities, including all contracts, licences, concessions, agreements, benefits, privileges, rights, or interests, is transferred to the purchaser. Therefore, it was concluded that the sale of a company as a 'going concern' means sale of both its assets and liabilities if it is stated on 'as is where is basis'.

BRIEF FACTS

• On 12.10.2018, an Application under Section 10 of the Code filed by the Corporate Debtor was admitted by the Adjudicating Authority.
• On 19.07.2019, an Order of Liquidation was passed, and Mr. S. V. Ramani/the first Respondent was appointed as Liquidator.
• On 01.09.2019, the Liquidator issued advertisements inviting Bids from prospective buyers through e-Auction for sale of the Company under Liquidation as a 'Going Concern'.
• The Appellant purchased e-Auction Process Information Document from the Liquidator upon payment of Rs. 5 Lakhs.
• On 04.09.2019, the Appellant issued an email to the Liquidator seeking clarifications on several issues with respect to e-Auction process and proposed different payment terms and specified in the email that their offer of acceptance was conditional to extinguish claims of Financial Creditors, Tax Department, Operational Creditors, Provident Fund Employees, and other contingent liabilities.
• On 05.09.2019, the Liquidator issued two emails to the Appellant informing that the Terms and Conditions of the Bid Document could not be changed or revised after public notification. M/s. State Bank of India (SBI) had also replied to the email and clarified the conditions.
• The Appellant submitted EMD of Rs. 37,10,000/- to the Liquidator. On 08.09.2019, the Appellant sent an email to the Liquidator stating that if any litigation arises from any source, the EMD amount and the bidding document purchase amount was to be refunded within three days.
• On 26.09.2019, the Liquidator issued a provisional sale letter dated 25.09.2020 in favour of the Appellant upon receipt of communication from SBI confirming that it was the highest successful bidder in the eAuction.
• On 29.10.2019, the Appellant addressed a letter to the Liquidator stating the Provisional Letter of Sale was inconsistent with the terms of payment specified by the Appellant and sought for refund of the money paid with the interest.
• On 09.01.2020, an Affidavit was filed by the Appellant in the Application preferred by the Liquidator before the Adjudicating Authority seeking direction for 'Approval of the Sale' as a 'Going Concern' and sought for approval without transfer of any liabilities and if there exists any impediment, the Appellant sought for withdrawing from the Bid and the refund of the amount paid.
• By the Impugned Order, the Adjudicating Authority has dismissed the Application preferred by the Appellant and also disposed of the Application CA (IB) No. 1313/KB/2019 filed by the Liquidator with the following directions:

"i) The Liquidator shall issue fresh invitation to the bidder to provide balance sale consideration within such time as per clause (12) of Schedule I of Regulation 33.

ii) In case of payment of the full amount the liquidator shall execute certificate of sale or sale deed to transfer the assets in the manner specified in the terms of sale as per bidding document following clause (13) of the Schedule I of Regulation 33; iii). In case of failure to pay the balance sale consideration he is at the liberty to cancel the sale in favour of the bidder by forfeiting the EMD and the amount paid towards the price of biding document and to proceed with sale as per Regulation 32-A; (Emphasis Supplied)

• The NCLT denied the relief to the appellant.
• The Present Appeal has been filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as 'Code'), by M/s. Visisth Services Limited (Hereinafter referred as 'Appellant') against the Impugned Order dated 07^th August 2020 passed by National Company Law Tribunal, Kolkata Bench, Kolkata, in CA (IB) No. 1313/KB/2019 connected with C.P.(IB) No.-898/KB/2018.

Section 61: Appeals and Appellate Authority

(1) Notwithstanding anything to the contrary contained under the Companies Act 2013, any person aggrieved by the order of the Adjudicating Authority under this part may prefer an appeal to the National Company Law Appellate Tribunal.

(2) Every appeal under sub-section (1) shall be filed within thirty days before the National Company Law Appellate Tribunal:

Provided that the National Company Law Appellate Tribunal may allow an appeal to be filed after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing the appeal, but such period shall not exceed fifteen days.

(3) An appeal against an order approving a resolution plan under section 31 may be filed on the following grounds, namely:-

(i) the approved resolution plan is in contravention of the provisions of any law for the time being in force.

(ii) there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period.

(iii) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board.

(iv) the insolvency resolution process costs have not been provided for repayment in priority to all other debts; or

(v) the resolution plan does not comply with any other criteria specified by the Board.

(4) An appeal against a liquidation order passed under section 33, or sub-section (4) of section 54L, or sub-section (4) of section 54N, may be filed on grounds of material irregularity or fraud committed in relation to such a liquidation order.

(5) An appeal against an order for initiation of corporate insolvency resolution process passed under sub-section (2) of section 54-O may be filed on grounds of material irregularity or fraud committed in relation to such an order.

ISSUES

1. Whether the sale of corporate debtor as a 'going concern' in liquidation proceedings includes its liabilities?
2. Whether the appellant herein can withdraw from the bid after payment of the EMD, and seek for refund of the amount paid on the ground that the offer made by the bidder was a 'conditional offer'?

DECISION

ISSUE NO. 1

For the primary issue, while relying upon Regulation 32A of the IBBI (Liquidation Process) Regulations, 2016 and the IBBI Discussion Paper dated 27.04.2019 on the corporate liquidation process, the NCLAT held that as per Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016, a 'going concern sale' on an 'as is where basis' does not dissolve the corporate debtor, rather, it forms a part of the liquidation estate wherein the entire business, including assets and liabilities, including all contracts, licences, concessions, agreements, benefits, privileges, rights or interests, is transferred to the purchaser.

REGULATION 32 of IBBI (Liquidation Process) Regulations, 2016

Sale of Assets, etc.

The liquidator may sell-

(a) an asset on a standalone basis.
(b) the assets in a slump sale.
(c) a set of assets collectively.
(d) the assets in parcels.
(e) the corporate debtor as a going concern; or
(f) the business(s) of the corporate debtor as a going concern:

Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate.

REGULATION 32A PROVIDES THAT

Sale as a going concern.

(1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses.

(2) For the purpose of sale under sub-regulation (1), the group of assets and liabilities of the corporate debtor, as identified by the committee of creditors under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 shall be sold as a going concern.

(3) Where the committee of creditors has not identified the assets and liabilities under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.

(4) If the liquidator is unable to sell the corporate debtor or its business under clause (e) or (f) of regulation 32 within ninety days from the liquidation commencement date, he shall proceed to sell the assets of the corporate debtor under clauses (a) to (d) of regulation 32.

Therefore, it was concluded that the sale of a company as a 'going concern' means sale of both its assets and liabilities if it is stated on 'as is where is basis'.

ISSUE NO. 2

As for the second issue, the NCLAT held that the appellant accepted all the conditions, and that it was a case of concluded contract where no refund of EMD amount is possible. The NCLAT particularly noted the terms and conditions and observed that after paying the EMD amount and accepting the bid, the appellant cannot now say that it was not a concluded contract. If the appellant had had any apprehensions and conditions about the liabilities, the appellant could have exercised their choice of not participating in the bid.

Having participated, the appellant cannot propose certain conditions after their participation and putting in their bid. In essence, the appellant/ bidder cannot wriggle out of the contractual obligations arising out of acceptance of his bid, and thereby, the appellant cannot be entitled to the EMD amount, or the amount paid towards the bid purchase document, if he does not comply with the terms of the contract.

Thus, the appeal failed and was dismissed.

The Apex Court referred below mentioned judgements

1. The Hon'ble Supreme Court of India in 'Pawan Kumar Agarwal Vs. Association of Management Studies and Anr.; Meerut Development Authority 2009(6) SCC 171 has observed in Paragraph 26 as follows:

"26. A tender is an offer. It is something which invites and is communicated to notify acceptance. Broadly stated it must be unconditional; must be in the proper form, the person by whom tender is made must be able to and willing to perform his obligations. The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. However, a limited judicial review may be available in cases where it is established that the terms of the invitation to tender were so tailor made to suit the convenience of any particular person with a view to eliminate all others from participating in the bidding process.

2. The Hon'ble Apex Court in 'Punjab Urban Planning and Development Authority and Ors. Vs. Raghu Nath Gupta and Ors' (2012) 8 SCC 197 has referred to another Judgement of the Hon'ble Supreme Court in 'UT Chandigarh Admn. Vs. Amarjeet Singh', (2012) 8 SCC 202 and observed as follows:

"The Apex Court after having referred to the Judgement of this Court in Shantikunj Investment Case, this Court held as follows:

"19. ….In a public auction of sites, the position is completely different. A person interested can inspect the sites offered and choose the site which he wants to acquire and participate in the auction only in regard to such site. Before bidding in the auction, he knows or is in a position to ascertain, the condition and situation of the site. He knows about the existence or lack of amenities. The auction is on `as-is-where-is-basis'. With such knowledge, he participates in the auction and offers a particular bid. There is no compulsion that he should offer a particular price…..

20. Where there is a public auction without assuring any specific or amenities, and the prospective purchaser/lessee participates in the auction after having an opportunity of examining the site, the bid in the auction is made keeping in view the existing situation, position, and condition of the site. If all amenities are available, he would offer a higher amount. If there are no amenities, or if the site suffers from any disadvantages, he will offer a lesser amount, or may not participate in the auction. Once with open eyes, a person participates in an auction, he cannot thereafter be heard to say that he would not pay the balance of the price/premium or the stipulated interest on the delayed payment, or the ground rent, on the ground that the site suffers from certain disadvantages or on the ground that amenities are not provided."

17. We are of the view that the judgment in Amarjeet Singh is a complete answer to the various contentions raised by the respondents. We may reiterate that after having accepted the offer of the commercial plots in a public auction with a superimposed condition i.e. on "asis-where-is" basis and after having accepted the terms and conditions of the allotment letter, including instalment facility for payment, the respondents cannot say that they are not bound by the terms and conditions of the auction notice, as well as that of the allotment letter. On facts, we have found that there was no inordinate delay on the part of PUDA in providing those facilities.

18. We are of the view that the High Court was not justified in holding that the respondents are not liable to pay the interest, penal interest and penalty for the period commencing from 1-6-2001 to 31-12-2002 for the belated payment of instalments. Consequently, the judgments of the High Court are set aside, and the writ petitions would stand dismissed and the appeals would stand allowed as above. There will be no order as to costs." (Emphasis Supplied)

CONCLUSION

From above discussion and decision of Apex Court it is clear that a Bidder cannot wriggle out of the contractual obligations arising out of acceptance of his Bid and not entitled to refund of EMD amount and the amount paid towards Bid-purchase documents if does not comply with the terms and conditions of the Bid. The court further approve the decision of NCLAT that in case of sale of a company as a 'going concern' means sale of both its assets and liabilities if it is stated on 'as is where is basis'.

CASE-28: INSOLVENCY & BANKCRUPTCY ACT, 2016

• M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LIMITED Vs. M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED
• Citation: 2022 SCC Online 142
• Sub: Whether operational creditor includes a purchaser of goods and services.

Introduction

In a recent judgment, the Supreme Court of India, while keeping up the efforts of plugging various loopholes in Insolvency & Bankruptcy Code, 2016 ("Code"), decided an interesting legal issue relating to the scope of Section 5(20) of the Code, which provides the definition of "operational creditor".

The Apex Court, in the case of Consolidated Construction Consortium Limited vs. Hitro Energy Solutions Private Limited, was seized of the following legal questions:

1. Whether the Appellant is an Operational Creditor under the Code even though it was a 'purchaser';
2. Whether the Respondent took over the debt from the Proprietary Concern; and
3. Whether the application under Section 9 of the Code is barred by limitation.

FACTUAL BACKGROUND

• In this case, a project was awarded to a company namely M/s Consolidated Construction Consortium Limited ("Appellant") by Chennai Metro Rail Limited ("CMRL") for light fittings.
• The Appellant, in turn, placed three purchase orders, all dated June 24^th, 2013, for purchasing the abovementioned product with a sole proprietorship firm M/s Hitro Energy Solutions, ("proprietary concern").
• The proprietary concern was required to supply the light fittings manufactured by a company M/s Thorn Lighting India Pvt. Ltd. ("TLIPL").
• On being awarded the purchase orders, the proprietary concern requested the Appellant, for an advance of Rs. 50,00,000/-. On the request of the Appellant, CMRL issued a cheque of Rs. 50,00,000/-, in favour of the proprietary concern as advance payment in lieu of the abovementioned purchase orders.
• Subsequently on January 2^nd, 2014, CMRL terminated the contract for light fittings.
• The Appellant communicated the above fact to the proprietary concern on the same day.
• The proprietary concern, who, in the meantime had encashed the cheque of Rs. 50,00,000/-, denied the fact that they were informed about the termination on the same day.
• Since the contract was terminated, CMRL demanded refund of the amount of Rs. 50,00,000/- paid by them as advance, from the Appellant and also threatened that on Appellant's failure to do so, CMRL would deduct the said amount from the payment of the Appellant, due under some other head.
• The Appellant, thereafter, immediately refunded the amount of Rs. 50,00,000/- to CMRL from its own sources and intimated the said fact to the proprietary concern.
• The Appellant also demanded the refund of Rs. 50,00,000/- from the proprietary concern.
• In the meantime, on January 28^th, 2014, the Respondent company was incorporated and in its Memorandum of Association ("MoA"), one of the objects was, "To take over the existing Proprietorship firm Viz. M/s Hitro Energy Solutions having its registered office at Chennai." Since, the aforesaid amount was not refunded by the Respondent, therefore, on July 23^rd, 2016, Appellant again requested the Respondent to refund the same, and also undertook to indemnify the Respondent, if at all, CMRL raised any claim against the Respondent for the refund of the amount of Rs. 50,00,000/-.
• The Respondent, on July 25^th, 2016, denied the request of Appellant on the ground that, they would refund the amount directly to CMRL as they were the ones who had paid the Respondent.
• The Respondent further stated that the information about the termination of the contract between CMRL and Appellant was received by them, only vide the Appellant's letter dated July 23^rd, 2016. Subsequently, in a joint meeting held between the representatives of Appellant, Respondent and TLIPL, the Respondent again agreed to refund the above amount, subject to Appellant arranging a letter from CMRL, to the effect that no claim would be made by them against the Respondent.
• The Appellant, thereafter, arranged one letter from CMRL, whereby, it was stated that the payment of Rs. 50,00,000/- was made to the Respondent on behalf of Appellant, duly debiting Appellant's account.
• However, despite the above, no payment was made by the Respondent and the Appellant, vide its letter dated February 27^th, 2017, once again demanded refund of the amount along with the interest @18% per annum.
• The Respondent, however, vide its reply dated March 2^nd, 2017, refused to make any payment, based on a completely new plea that the light fittings ordered by the Appellant were lying in their warehouse completely unused and the same resulted into losses to the Respondent.
• The Appellant, thereafter, proceeded to issue a demand notice dated July 18^th, 2017, under Section 8 of the Code and demanded payment of 'debt' amounting to Rs. 83,13,973/- fallen due and payable as on such date. The Respondent, however, vide its letter dated July 28^th, 2017, denied that any debt was payable by them.
• Hence, the Appellant filed an application under Section 9 of the Code before the National Company Law Tribunal ("NCLT") seeking initiation of Corporate Insolvency Resolution Process against the Respondent.

Decisions of NCLT & NCLAT

• Before NCLT, the Respondent in addition to the contentions mentioned above, also contended that there was no privity of contract between them and the Appellant as the proprietary concern was a separate legal entity.
• The NCLT, vide its judgment dated December 6^th, 2018, rejected the contentions of the Respondent and proceeded to initiate the CIRP of the Respondent.
• The Respondent, feeling aggrieved, filed an appeal before National Company Law Appellate Tribunal ("NCLAT"). The NCLAT vide judgment dated December 12^th, 2019, reversed the judgment of NCLT and held that the Appellant, being a 'Purchaser', cannot be said to be an Operational Creditor under the Code, as it never supplied any goods or provided any services to the Corporate Debtor i.e., the Respondent.

FINDINGS AND CONCLUSION BY SUPREME COURT

• Being aggrieved by the above judgment of NCLAT, the Appellant filed the appeal under Section 62 of the Code before the Supreme Court of India.
• The Supreme Court discussed various provisions of the Code and various judgments in order to conclude as to what can be considered as an 'Operational Debt' and who can be considered as an 'Operational Creditor' under the Code. The Court inter alia examined the provisions contained in Section 5(20) and 5(21) of the Code and concluded that:

Section 5(21) defines 'operational debt' as a claim in respect of provision of goods and services. The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver.

Perusal of CIRP Regulation 7(2)(b)(i) & (ii), reveals that the regulation is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and corporate debtor, including the ones who received the goods or services.

It leaves no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.

It was, therefore, held that the Appellant was an 'operational creditor' in terms of Section 5(20) of the Code, even if it was a purchaser.

The Court, thereafter, dealt with other contentions of the Respondent and held the following:

• The Court while rejecting Respondent's contention that it suffered losses, held that the Respondent on many occasions agreed to refund the amount of Rs. 50,00,000/- and hence, adverse inference is to be drawn against the Respondent.
• The Court also rejected the contention of no privity of contract between the Appellant and the Respondent on the ground that MoA of the Respondent clearly stated that they intended to take over the proprietary concern and no change or amendment in the same was carried out in terms of Section 13 of the Companies Act, 2013.
• Respondent would be considered as having taken over the proprietary concern in terms of its MoA.
• The Court also proceeded to reject the contention that the debt was barred by limitation. While relying on its earlier judgment in B.K. Educational Services (P) Ltd. vs. Parag Gupta & Associates, the Court held that the limitation did not commence when the debt became due but from the date when the default occurred, as the default is defined under Section 3(12) of the Code as the non-payment of the debt by the corporate debtor when it has become due.
• Therefore, the claim of the Appellant was found to be within the period of limitation, on the ground that although the cheque of Rs. 50,00,000/- was issued on November 7^th, 2013, but the default occurred on March 2^nd, 2017, when the Respondent denied the demand of the Appellant to refund the debt.

Based on the above, the appeal was allowed and the judgment passed by NCLT was upheld by the Supreme Court of India.

CONCLUSION

The above judgment is another step forward towards filling in the loopholes in the Insolvency Laws by the Supreme Court of India. The Court settled another controversy relating to the operation debt and operational creditors by clarifying that the persons who receive any goods or services, are also operational creditors and not only the suppliers or service providers. It was also reiterated that in order to attract the provisions of the Code, the debt should not only be due, but should also be payable.

CASE-29

• NEGOTIABLE INSTRUMENTS ACT,1881
• SURINDER SINGH DESWAL @ COL S S & ORS VS VIRENDER GANDHI (2020)
• Criminal Appeal No. 1936-1963 of 2019
• The Supreme Court of India

As you are aware that Negotiable Instruments Act,1881 is an Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques.

"PROMISSORY NOTE."- A "Promissory note" is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

"CHEQUE". - A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

It means a negotiable instrument is a piece of paper that entitles a person to pay a sum of money that is transferable from one person to another by endorsement and delivery. The main objective before introducing the Negotiable Instrument Act, 1881 is to legalize the system under which these instruments can deliver from one person to another the same as that of ordinary goods.

These instruments help in avoiding the carriage of hefty amounts and reduce the risk of theft or robbery. The Negotiable Instrument Act was amended and introduced two new provisions, Section 143A and Section 148 to deal with the delay tactics of drawers of dishonored cheque due to easy filing of the appeal and obtaining stay on the proceedings which leads to the enforcement of Section 138 of the Act.

The amendment came into force on 1st September 2018.

Section 143A and Section 148 are discussed in detail.

OVERVIEW OF THE ACT

The Negotiable Instrument Act, 1881 came into existence to define and amend the laws related to the promissory notes, bills of exchange, and cheques. In India, there is always a problem of pending cases in the court and almost 20% of cases are related to the cheque dishonor dispute under Section 138 of the Negotiable Instrument Act, 1881.

The Central government through the Negotiable Instrument (Amendment) Act of 2018 has inserted several new provisions. The amendment of the Act helps in addressing the issues of undue delay, efficacy, and efficiency in the case related to the dishonor of cheques.

From Section 143A and 148 of the Act, the court has the power to direct the drawer to provide interim compensation during the pendency of criminal complaints and civil appeals. The recovery of fine shall be the same as under Section 421 of the Code of Criminal Procedure, 1973, and in case of acquittal court is empowered to direct the complainant to repay the amount as per the interest rate prescribed by the Reserve Bank of India (RBI) .

SECTION 143A OF NIA,1881

Power to direct interim compensation-

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the Court trying an offence under Section 138 may order the drawer of the cheque to pay interim compensation to the complainant-

(a) in a summary trial or summon case, where the drawer pleads not guilty to the accusation made in the complaint; and

(b) in any other case, upon framing charges.

(2) The interim compensation under sub-section (1) shall not exceed twenty per cent of the amount of the cheque.

(3) The interim compensation shall be pad within sixty days from the date of the order under sub-section (1), or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the drawer of the cheque.

(4) If the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer the amount of interim compensation, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial years, within sixty days from the date of the order, or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the complainant.

(5) The interim compensation payable under this section may be recovered as if it were a find under section 421 of the Code of Criminal Procedure, 1973 (2 of 1974). (6) The amount of fine imposed under section 138 or the amount of compensation awarded under section 357 of the Code of Criminal Procedure, 1973 (2 of 1974).

SECTION 148 OF ACT

This Section talks about the interim compensation at the appellant stage. As per Section 148, the appellate court may direct the drawer in an appeal against conviction under Section 138 to deposit before the appellate court a part of fine or compensation as an award by the trial court which shall be a minimum of 20% of the fine or compensation within 60 days from the date of order passed by the appellant court or further within the period of not exceeding 30 days directed by the appellant on showing sufficient cause by the drawer. It provides the deposit of sum which shall be a minimum of 20% of fine or compensation awarded by the trial court has retrospective effect.

ISSUES

1. Whether the Sessions Court was justified to direct the appellants to deposit Rs.9,40,24,999/- under Section 148 NI Act?
2. Do Sections 143A and 148 of the NI Act have a retrospective effect?

BRIEF FACTS

1. Appellants no.1 and 2 along with the respondent were partners of a firm called GLM Infratech Pvt. Ltd.
2. A cheque was issued by the appellants to the respondent on 31.03.2014, amounting to Rs. 45,84,915/- as a part payment on his retirement dues.
3. Similarly, 63 other cheques were also issued for the same transaction mentioned above in favour of the respondent.
4. However, on 06.04.2015, when the respondent deposited the cheque, it was dishonored along with the other 63 cheques on account of insufficient funds.
5. Subsequently, the respondent filed a complaint under Section 138 of the Negotiable Instrument Act, 1881 (NI Act) before the Judicial Magistrate of the First Class.
6. 28 complaints were filed in total against the two appellants.
7. On 13.11.2018, both the appellants were found guilty under Section 138 NI Act and sentenced to 2 years of imprisonment.
8. The Magistrate also directed the appellants to pay the entire amount involved in the case of dishonor of total 64 cheques and plus 1% of the entire amount as interest and litigation expenses.
9. The appellants, aggrieved by this, appealed to the Sessions Court under Section 389 CrPC for suspension of the sentence.
10. The Sessions Court agreed to suspend their sentence till the pendency of the appeal, on a condition that they furnish a bail bond and surety bond of Rs.50,000/- and also deposit Rs.9,40,24,999/- (i.e., 25% of compensation amount decided by the trial court) that is to be paid to the complainant, before 28.01.2019.
11. In response, the appellants approached before the High Court of Punjab and Haryana under Section 482 CrPC against the order of Sessions Court to deposit Rs.9,40,24,999/-. Nevertheless, the appeal was dismissed.
12. Hence, the appellants, invoking Article 136, moved to the Supreme Court of India.

ARE SECTIONS 143 A AND 148 RETROSPECTIVE OR PROSPECTIVE

The first case to discuss this issue is Ginni Garments & another v. Sethi Garments (2019), the Punjab and Haryana High Court held that Section 143A of the Negotiable Instrument Act has prospective effect whereas Section 148 has retrospective effect and will apply to the pending appeals on the date of enforcement of the provision.

The reason was given by the Court to hold Section 143A as prospective were-

• The amended provision provides for enforcement of recovery of interim compensation by way of the coercive procedure and creates the obligation of the accused.
• By virtue of interim compensation if a person is not having the means to pay such a hefty amount the consequences under this Section will be devastating, irrevocable, and irreparable.

That's why this Section should be prospective as it aware the accused of such consequences in advance and it cannot be applied to the cases where the trial is going on when this provision is not existing.

Section 148 is retrospective and the reason given by the Court is –

• The provision of recovery of fine or compensation from the appellant already exists in the existing procedure relating to recovery therefore the Section 148 of the Act has to be treated purely as a procedural which is also beneficial for the appellant.
• Therefore, the provision of this Section shall govern all the appeals pending on the date of enforcement of Section 148 of the Act.

JUDGEMENT

1. The learned counsel for the appellant challenged the order of the lower court directing them to pay 25% of the compensation amount. He said that the order of the lower court is invalid because the cheque was dishonored in the year 2015 and Section 143A and 148 NI Act were inserted into the Act by an amendment in the year 2018 and they have a prospective effect only.

2. To prove his point he relied upon G.J. Raja vs. Tejraj Surana (2019).

The Hon'ble Supreme Court in G. J. Raja Vs. Tejraj Surana, has examined the amended Section 143A of the Act, 1881 and held that it is prospective effect and not retrospective effect. The relevant para of the judgment is reproduced below: -

"19. It must be stated that prior to the insertion of Section 143-A in the Act there was no provision on the statute book whereunder even before the pronouncement of the guilt of an accused, or even before his conviction for the offence in question, he could be made to pay or deposit interim compensation. The imposition and consequential recovery of fine or compensation either through the modality of Section 421 of the Code or Section 357 of the code could also arise only after the person was found guilty of an offence.

That was the status of law which was sought to be changed by the introduction of Section 143A in the Act. It now imposes a liability that even before the pronouncement of his guilt or order of conviction, the accused may, with the aid of State machinery for recovery of the money as arrears of land revenue, be forced to pay interim compensation. The person would, therefore, be subjected to a new disability or obligation. The situation is thus completely different from the one which arose for consideration in ESI Corpn. v. Dwarka Nath Bhargwa, (1997) 7 SCC 131.

23. In the ultimate analysis, we hold Section 143A to be prospective in operation and that the provisions of said Section 143A can be applied or invoked only in cases where the offence under Section 138 of the Act was committed after the introduction of said Section 143A in the statute book. Consequently, the orders passed by the Trial Court as well as the High Court are required to be set aside. The money deposited by the Appellant, pursuant to the interim direction passed by this Court, shall be returned to the Appellant along with interest accrued thereon within two weeks from the date of this order."

Therefore, the word "may" be treated as "shall" and is not discretionary, but of directory in nature, therefore, the learned Judicial Magistrate First Class has rightly passed the interim compensation in favour of the complainant.

3. He further contended that failure to deposit 25% of the amount of compensation will not lead to the end of the order suspending the sentence. On the other hand, he said the respondents have an open option to recover the amount according to the provision prescribed in Section 421 of CrPC.

4. After going through the facts of the case and listening to both the parties, the Supreme Court rejected all the contentions of the appellants. Based on the 'statements of object and reasons' of the NI Act, it was quite evident that a purposive interpretation of this Section was required, otherwise, it would defeat its object and purpose. It held that the object of the legislation was to give Section 148 a retrospective effect. It also said that the case of G.J. Raja does not help the appellants.

5. Apart from this, Section 143A makes a provision for interim compensation. It said that it applies at the trial stage that is even before the pronouncement of guilt or order of conviction.

6. Hence, if the accused is found innocent, the drawer has to pay back the interim compensation he has received.

7. The Apex Court held that this provision was made with the intention to have a prospective effect. On the second contention, the Supreme Court upheld the order of the High Court and clearly stated that if the appellant fails to deposit 25% of the amount of compensation to the complainant, then the order of suspension of sentence shall be deemed to have been vacated.

8. Hence, a legal proposition was established that when a suspension of sentence is granted by a trial court on a condition, then non-compliance with that condition will result in the suspension of the sentence.

POWER TO GIVE INTERIM COMPENSATION OR RELIEF IS DIRECTORY AND NOT DISCREATIONERY

PLEASE NOTE THAT: The Hon'ble High Court in (Rajesh Soni Vs Mukesh Verma (Chhattisgarh High Court) present facts of the case after interpreting the word 'may' have held that granting of 20% compensation under Section 143A of the Negotiable Instruments Act, 1881 is totally valid as the said provision is not discretionary in nature.

THE COURT WHILE DECIDING ABOVE CASE CONSIDERED BELOW MENTIONED CASES

1. As held by Hon'ble Madras High Court in G.R. Enterprises & another Vs. P. Anbazhagan, and drew attention of this Court towards para 18 of the judgment, which reads as under: -

"18. A careful reading of the order passed by the Court below shows that the Court below has focused more on the issue of the prospective / retrospective operation of the amendment. The Court has not given any reason as to why it is directing the accused persons to pay an interim compensation of 20% to the complainant. As held by this Court, the discretionary power that is vested with the trial Court in ordering for interim compensation must be supported by reasons and unfortunately in this case, it is not supported by reasons. The attempt made by the learned counsel for the respondent to read certain reasons into the order, cannot be done by this Court, since this Court is testing the application of mind of the Court below while passing the impugned order by exercising its discretion and this Court cannot attempt to supplement it with the reasons argued by the learned counsel for the respondent."

2. The Hon'ble Supreme Court, while examining 'may' used (in Section 143A) 'shall' and have effect of directory in nature in case of Bachahan Devi & another Vs. Nagar Nigam, Gorakhpur & another, which reads as under: -

"18. It is well-settled that the use of word "may" in a statutory provision would not by itself show that the provision is directory in nature. In some cases, the legislature may use the word 'may' as a matter of pure conventional courtesy and yet intend a mandatory force. In order, therefore, to interpret the legal import of the word "may", the court has to consider various factors, namely, the object and the scheme of the Act, the context and the background against which the words have been used, the purpose and the advantages sought to be achieved by the use of this word, and the like. It is equally well-settled that where the word 'may' involve a discretion coupled with an obligation or where it confers a positive benefit to a general class of subjects in a utility Act, or where the court advances a remedy and suppresses the mischief, or where giving the words directory significance would defeat the very object of the Act, the word 'may' should be interpreted to convey a mandatory force. As a general rule, the word "may" be permissive and operative to confer discretion and especially so, where it is used in juxtaposition to the word "shall", which ordinarily is imperative as it imposes a duty. Cases however, are not wanting where the words "may" "shall", and "must" are used interchangeably. In order to find out whether these words are being used in a directory or in a mandatory sense, the intent of the legislature should be looked into along with the pertinent circumstances.

19. The distinction of mandatory compliance or directory effect of the language depends upon the language couched in the statute under consideration and its object, purpose and effect. The distinction reflected in the use of the word `shall' or 'may' depends on conferment of power. Depending upon the context, 'may' does not always mean may. 'May' is a must for enabling compliance of provision but there are cases in which, for various reasons, as soon as a person who is within the statute is entrusted with the power, it becomes [his] duty to exercise [that power]. Where the language of statute creates a duty, the special remedy is prescribed for non-performance of the duty."

20. If it appears to be the settled intention of the legislature to convey the sense of compulsion, as where an obligation is created, the use of the word "may" will not prevent the court from giving it the effect of Compulsion or obligation. Where the statute was passed purely in public interest and that rights of private citizens have been considerably modified and curtailed in the interests of the general development of an area or in the interests or removal of slums and unsanitary areas. Though the power is conferred upon the statutory body by the use of the word "may" that power must be construed as a statutory duty. Conversely, the use of the term 'shall' may indicate the use in optional or permissive sense. Although in general sense 'may' is enabling or discretional and "shall is obligatory, the connotation is not inelastic and inviolate." Where to interpret the word "may" as directory would render the very object of the Act as nugatory, the word "may must mean 'shall'.

21. The ultimate rule in construing auxiliary verbs like "may and "shall" is to discover the legislative intent; and the use of words `may' and 'shall' is not decisive of its discretion or mandates. The use of the words "may" and `shall' may help the courts in ascertaining the legislative intent without giving to either a controlling or a determinating effect. The courts have further to consider the subject matter, the purpose of the provisions, the object intended to be secured by the statute which is of prime importance, as also the actual words employed."

CONCLUSION

From above discussion and judgements of various High Courts it is clear that the provisions of Section 143A of the NIA,1881 will be applicable prospectively and provisions of Section 148 are applicable retrospectively. It is important to note that the power given to the court to award Interim Compensation to the applicant is Directory and not Discretionary. Since NIA,1881 had been implemented to create a culture of trust and honesty in business transactions while using negotiable instruments by the parties. Any act which falls under provisions of Section 138 of NIA ,1881 is a criminal offence and culprit may be punishable with an imprisonment of two years or double the amount of cheque involved or with both.

CASE-30

• PROHIBITION OF BENAMI PROPERTY TRANSACTIONS ACT, 1988.
• V. Vasanthakumar v. Union of India
• Madras High Court
• W.P.No.13429 of 2018 - Dated: 1 April, 2022
• SUBJECT: This writ petition challenged Sections 9 and 32(2)(a) of the Prohibition of Benami Property Transactions Act, 1988.

IMPORTANT PROVISIONS

1. Benami Transaction (Prohibition) Amendment Act, 2016; Section 32(2)(a) - Member of Indian Legal Service cannot be appointed as judicial member.
2. Section 9 of the Prohibition of Benami Property Transactions Act, 1988 - Qualifications for appointment of Chairperson and Members of Joint Secretary or equivalent post in that Service.
3. Section 32(2)(a) of the Prohibition of Benami Property Transactions Act, 1988 - Qualifications for appointment of Chairperson and Members of Appellate Tribunal.
4. Article 14 of the Constitution of India - provides for equality before law.
5. Article 226 of the Constitution of India - empowers the Hon'ble High Courts to exercise power through issuance of writs – habeas corpus, mandamus, quo warranto, prohibition and certiorari or any appropriate writ.

SECTION 9 OF Prohibition of Benami Property Transactions Act, 2016- Provides qualifications for appointment of Chairperson and Members

(1) A person shall not be qualified for appointment as the Chairperson or a Member of the Adjudicating Authority unless he, -

(a) has been a member of the Indian Revenue Service and has held the post of Commissioner of Income-tax or equivalent post in that Service; or

(b) has been a member of the Indian Legal Service and has held the post of Joint Secretary or equivalent post in that Service.

(2) The Chairperson and other Members of the Adjudicating Authority shall be appointed by the Central Government in such manner as may be prescribed.

(3) The Central Government shall appoint the senior most Member to be the Chairperson of the Adjudicating Authority.

Section 32: Qualifications for appointment of Chairperson and Members of Appellate Tribunal

(1) A person shall not be qualified for appointment as Chairperson of the Appellate Tribunal unless he is a sitting or retired Judge of a High Court, who has completed not less than five years' of service.

(2) A person shall not be qualified for appointment as a Member unless he -

(a) in the case of a Judicial Member, has been a Member of the Indian Legal Service and has held the post of Additional Secretary or equivalent post in that Service;

(b) in the case of an Administrative Member, has been a Member of the Indian Revenue Service and has held the post of Chief Commissioner of Income tax or equivalent post in that Service

(3) No sitting Judge of a High Court shall be appointed under this section except after consultation with the Chief Justice of the High Court.

(4) The Chairperson or a Member holding a post as such in any other Tribunal, established under any law for the time being in force, in addition to his being the Chairperson or a Member of that Tribunal, may be appointed as the Chairperson or a Member, as the case may be, of the Appellate Tribunal under this Act.

ARTICLE 14 OF THE CONSTITUTION OF INDIA

Equality before law The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.

ARTICLE 226 OF THE CONSTITUTION OF INDIA

226. Power of High Courts to issue certain writs

(1) Notwithstanding anything in Article 32 every High Court shall have powers, throughout the territories in relation to which it exercise jurisdiction, to issue to any person or authority, including in appropriate cases, any Government, within those territories directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibitions, quo warranto and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III and for any other purpose.

(2) The power conferred by clause (1 ) to issue directions, orders or writs to any Government, authority or person may also be exercised by any High Court exercising jurisdiction in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories

(3) Where any party against whom an interim order, whether by way of injunction or stay or in any other manner, is made on, or in any proceedings relating to, a petition under clause (1 ), without;

(a) furnishing to such party copies of such petition and all documents in support of the plea for such interim order; and

(b) giving such party an opportunity of being heard, makes an application to the High Court for the vacation of such order and furnishes a copy of such application to the party in whose favour such order has been made or the counsel of such party, the High Court shall dispose of the application within a period of two weeks from the date on which it is received or from the date on which the copy of such application is so furnished, whichever is later, or where the High Court is closed on the last day of that period, before the expiry of the next day afterwards on which the High Court is open; and if the application is not so disposed of, the interim order shall, on the expiry of that period, or, as the case may be, the expiry of the aid next day, stand vacated.

(4) The power conferred on a High Court by this article shall not be in derogation of the power conferred on the Supreme court by clause (2 ) of Article 32.

BRIEF FACTS

Petition filed under Article 226 of the Constitution of India praying for a Writ of Declaration to declare Section 9 of the Prohibition of Benami Property Transactions Act, 1988 (Act 45 of 1988, as amended by the Benami Transactions (Prohibition) Amendment Act, 2016) pertaining to qualification of appointment of Judicial Member and Section 32(2)(a) of the Prohibition of Benami Property Transactions Act, 1988 (Act 45 of 1988 as amended by the Benami Transactions (Prohibition) Amendment Act, 2016) as unconstitutional as it runs counter to the doctrine of Separation of Powers, which is the basic structure and in violation of Article 14 of the Constitution of India.

THE ORDER

• This writ petition challenges Sections 9 and 32(2)(a) of the Prohibition of Benami Property Transactions Act, 1988 [for brevity, "the Act of 1988"], as amended by the Benami Transactions (Prohibition) Amendment Act, 2016.
• The petitioner, appearing in person, and learned Additional Solicitor-General appearing for the respondent submit that so far as the challenge to the constitutional validity of Section 9 of the Act of 1988 is concerned, the writ petition has become infructuous, as Section 9 of the Act of 1988 has been deleted.
• In view of the above, the issue that now remains to be considered is the constitutional validity of Section 32(2)(a) of the Act of 1988.
• The petitioner, appearing in person, submitted that the qualification for appointment as a Judicial Member of the Appellate Tribunal given under Section 32 of the Act of 1988 is now hit by the judgment of the Apex Court in the case of Union of India v. R.Gandhi, President, Madras Bar Association, (2010) 11 SCC 1. It is precisely for the reason that for the post of Judicial Member of the Appellate Tribunal, under the Act of 1988, a Member of Indian Legal Service who has held the post of Additional Secretary or equivalent post has been made eligible, while as per the judgment of the Apex Court cited supra, the post of Judicial Member should be manned only by a person who served as a Judge or a member of the Bar and not by a member of Indian Legal Service. In view 2 of the above, the provision of Section 32(2)(a) of the Act of 1988 is hit by the said judgment and, thus, challenge to it has been made.
• Referring to a judgment of the Division Bench on the same issue in Shamnad Basheer v. Union of India and others, 2015 2 LW 941, the prayer is reiterated because therein a similar challenge was made to Section 85 of the Trademarks Act, 1999, besides Section 116 of the Patents Act, 1970. Section 85 of the Trademarks Act was containing a similar provision for appointment of the Judicial Member as stipulated under Section 32(2)(a) of the Act of 1988. The provisions therein, i.e., Sections 85(2)(b) and 85(3)(a) of the Trademarks Act, 1999, were declared to be unconstitutional as those provisions made a member of the Indian Legal Service eligible for appointment for the post of Chairperson or Judicial Member of the Intellectual Property Appellate Board.
• A further reference of another judgment of the Division Bench of this court in the case of Revenue Bar Association v. Union of India, 2019 4 LW 689, has been given. Therein, the challenge was to Sections 109 and 110 of the Central Goods and Service Tax Act, 2017. It was regarding the constitution of the Appellate Tribunal and qualification and appointment of the members. The provision making a member of Indian Legal Service eligible to be appointed as Judicial Member in the Goods and Services Tax Appellate Tribunal was held to be unconstitutional.
• Accordingly, the prayer is to declare Section 32(2)(a) of the Act of 1988 to be unconstitutional and to suitably amend the provision so as to make a person who had served as a Judge or the member of the Bar to be eligible to be appointed as Judicial Member of the Appellate Tribunal.
• The writ petition was seriously contested by the side opposite. It is submitted by learned Additional Solicitor General that the members of the Indian Legal Service can be appointed as Judicial Member of the Appellate Tribunal and Section 32(2)(a) of the Act of 1988 should not be declared to be unconstitutional merely based on the judgment of the Apex Court in the case of Union of India v. R.Gandhi, President, Madras Bar Association, supra.
• Learned Additional Solicitor General further submitted that the provision under challenge does not offend any constitutional provision and that the government was empowered to legislate on the subject-matter. The challenge to the provision of the Act of 1988 has been made without raising the issue of the nature required for such challenge. A mere reference of judgment of the High Court and the Supreme Court for that purpose would not be sufficient to hold a provision to be unconstitutional. The prayer was made, accordingly, to dismiss the writ petition.
• We have considered the rival submissions of the parties and perused the records.
• A challenge has been made to Section 32(2)(a) of the Act of 1988. Thus, the said provision is quoted hereunder: "32. Qualifications for appointment of Chairperson and Members of Appellate Tribunal.- 3 (1) A person shall not be qualified for appointment as Chairperson of the Appellate Tribunal unless he is a sitting or retired Judge of a High Court, who has completed not less than five years' of service. (2) A person shall not be qualified for appointment as a Member unless he- (a) in the case of a Judicial Member, has been a Member of the Indian Legal Service and has held the post of Additional Secretary or equivalent post in that Service; (b) in the case of an Administrative Member, has been a Member of the Indian Revenue Service and has held the post of Chief Commissioner of Income tax or equivalent post in that Service. (3) No sitting Judge of a High Court shall be appointed under this section except after consultation with the Chief Justice of the High Court. (4) The Chairperson or a Member holding a post as such in any other Tribunal, established under any law for the time being in force, in addition to his being the Chairperson or a Member of that Tribunal, may be appointed as the Chairperson or a Member, as the case may be, of the Appellate Tribunal under this Act." [emphasis supplied]
• Section 32(2)(a) of the Act of 1988, quoted above, postulates the qualifications for appointment of a Judicial Member and, as per the said provision, a Member of the Indian Legal Service who held the post of the Additional Secretary or equivalent post in that service is eligible for appointment as a Judicial Member in the Appellate Tribunal. In view of the provision aforesaid, other than the member of the Indian Legal Service, none else other than given under sub-section (3) to Section 32 of the Act of 1988 would be eligible to be appointed as Judicial Member of the Tribunal.
• The Apex Court while delivering the judgment in the case of Union of India v. R.Gandhi, President, Madras Bar Association, supra, had dealt with similar provisions so as the Division Benches in the two judgments, i.e., Shamnad Basheer v. Union of India and others; and, Revenue Bar Association v. Union of India, supra.
• To analyze the issue, we need to understand the concept of separation of powers which was otherwise dealt with by the Apex Court in the case of Indira Nehru Gandhi v. Raj Narain, 1975 Supp SCC 1. It was held that Indian Constitution indeed does not recognize the doctrine of separation of powers in its absolute terms, but the function of the different parts or the branches of the government have been sufficiently differentiated and, consequently, it can very well be said that our constitution does not contemplate assumption, by one organ or part of the State, of functions that essentially belong to another.
• The aforesaid being the position, the concept of separation of powers is to be analyzed so as to hold that the powers that remain in the realm of the administration should be exercised by them and similarly the exercise of power by the Legislature should be within its sphere, making the judicial system independent. The independence of the judicial system remains a vital issue and for that emphasis was made that there would be separation of powers, so that independence of judiciary is maintained. It is after referring to the three organs which have been given in the constitution to provide basic 4 structure comprising the Executive, Legislature and the Judiciary. It is through each of these organs that the sovereign will of the people has to operate and manifest itself and not through only one of them. Keeping aforesaid in mind, the judgment was rendered by the Apex Court in Union of India v. R.Gandhi, President, Madras Bar Association, supra, on an identical issue raised before us.
• The constitution of the Selection Committee and for that even the qualification needs incorporation of such a provision which may keep the judicial independence. Qua the Technical Member of the Tribunal, appropriate qualification can be provided by the Legislature, but when the qualification for the post of Judicial Member is to be provided, it should be keeping in mind the independence of the judicial system and, accordingly, the Apex Court while delivering the judgment in the case of Union of India v. R.Gandhi, President, Madras Bar Association, supra, held that only Judges and advocates can be considered for appointment as Judicial Member of the Tribunal. Paragraph 120 of the said judgment is quoted hereunder for ready reference:

"120. We may tabulate the corrections required to set right the defects in Parts I-B and I-C of the Act:

• Only Judges and advocates can be considered for appointment as judicial members of the Tribunal. Only High Court Judges, or Judges who have served in the rank of a District Judge for at least five years or a person who has practised as a lawyer for ten years can be considered for appointment as a judicial member. Persons who have held a Group A or equivalent post under the Central or State Government with experience in the Indian Company Law Service (Legal Branch) and the Indian Legal Service (Grade I) cannot be considered for appointment as judicial members as provided in sub-sections (2)(c) and (d) of Section 10-FD. The expertise in Company Law Service or the Indian Legal Service will at best enable them to be considered for appointment as technical members.
• As NCLT takes over the functions of the High Court, the members should as nearly as possibly have the same position and status as High Court Judges. This can be achieved, not by giving the salary and perks of a High Court Judge to the members, but by ensuring that persons who are as nearly equal in rank, experience or competence to High Court Judges are appointed as members. Therefore, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as technical members of the National Company Law Tribunal. Clauses (c) and (d) of sub-section (2) and clauses (a) and (b) of sub-section (3) of Section 10-FD which provide for persons with 15 years' experience in Group A post or persons holding the post of Joint Secretary or equivalent post in the Central or the State Government, being qualified for appointment as Members of Tribunal, are invalid. ....

(vii) Only clauses (c), (d), (e), (g), (h), and the latter part of clause (f) in sub-section (3) of Section 10-FD and officers of civil services of the rank of the Secretary or Additional Secretary in the Indian Company Law Service and the Indian Legal Service can be considered for purposes of appointment as technical members of the Tribunal.

(viii) Instead of a five-member Selection Committee with the Chief Justice of India (or his nominee) as Chairperson and two Secretaries from the Ministry of Finance and Company Affairs and the 5 Secretary in the Ministry of Labour and the Secretary in the Ministry of Law and Justice as members mentioned in Section 10- FX, the Selection Committee should broadly be on the following lines:

(a) Chief Justice of India or his nominee- Chairperson (with a casting vote);

(b) A Senior Judge of the Supreme Court or Chief Justice of High Court- Member; (c) Secretary in the Ministry of Finance and Company Affairs- Member; and (d) Secretary in the Ministry of Law and Justice - Member. ....

(xii) The administrative support for all Tribunals should be from the Ministry of Law and Justice. Neither the Tribunals nor their members shall seek or be provided with facilities from the respective sponsoring or parent Ministries or Department concerned...." [emphasis supplied]

17. The Apex Court while upholding the creation of the National Company Law Tribunal as well as the Appellate Tribunal held Chapters 1B and 1C of the Companies Act as unconstitutional. The principle laid down in the case of Union of India v. R.Gandhi, President, Madras Bar Association, supra, has application to all the Tribunals and was not rendered on the fact situation alone. It is for that reason a specific direction was given that administrative support for all the Tribunals should be from the Ministry of Law and Justice. The principal issue decided qua the basic structure of constitution ensures the separation of powers and independence of the Judiciary from the clutches of the Executive.

18. The matter was examined by the Division Bench of this court in the case of Shamnad Basheer v. Union of India and others, supra, and considering the issue that the proceedings before the Tribunal would be judicial in nature, the necessity for appointment of a member from the judiciary or the bar was realized. It was for the reason that prior to constitution of the Tribunal, the adjudication of the issue was by the courts. Therefore, with the constitution of the tribunals, they would be discharging the work earlier discharged by the courts and adopting the Westminister policy which prescribes the qualification akin to that of the judicial officer who has been dealing with such matters prior to the constitution of the tribunal. The necessity and importance of a judicial member and, that too, a person who served as a Judge or a member of the Bar was felt and, accordingly, the Division Bench of this Court held certain provisions of the Trademarks Act, 1999 and the Patents Act, 1970 to be unconstitutional. The relevant portion of the judgment in Shamnad Basheer v. Union of India and others, supra, is quoted hereunder:

"9.14. The concern expressed by the petitioner is only to Section 85(3)(a), which deals with appointment of judicial member. We find considerable force in the submission made. Both in S.P. Sampath Kumar v. Union of India ((1987) 1 SCC 124) and Union of India v. R.Gandhi, President, Madras Bar Association, ((2011) 10 SCC 1) this issue has been addressed. In fact, a specific direction has also been issued in R. Gandhi's case in this regard. However high one may be in holding an Executive post, the role of a judicial member, being different, such a person 6 cannot be asked to exercise the function particularly as a Judicial Member without any experience. The matter can be looked at a very different angle as well. Even an experienced lawyer with specialised knowledge and expertise is treated only as a technical member under Section 85(4)(b). If that is the case, merely because someone holds the post in a Government Department, he cannot be bestowed with the eligibility of being appointed as a Judicial Member sans experience. Also such a person cannot be treated on par with a Judicial Officer. We do not understand as to how an Officer working with the Executive would satisfy the requirement of legal training and experience. In other words, when such an Officer cannot become a judge, he cannot also act in the said capacity. We only reiterate the reasoning assigned by the Supreme Court in this regard. Therefore, we have no hesitation in holding that Section 85(3)(a) is unconstitutional, particularly, in the light of the directions (i) and (ii) rendered in Union of India v. R. Gandhi, President, Madras Bar Association, ((2011) 10 SCC 1). Insofar as Section 85(3)(b) is concerned, there is neither any challenge nor do we find any unconstitutionality in it." [emphasis supplied]

19. It is true that the extent of judicial review that can be exercised in a given case is quite limited. Though a constitutional court can declare a provision to be unconstitutional, it should not give any direction to the Legislature to make an amendment in a particular way. The judicial restraint is, therefore, being hailed as a virtue. However, in a case where a direction has been given by the Apex Court to have the judicial independence, it is required to be followed by the High Courts as well as the Executive.

20. In view of the position aforesaid, we hold Section 32(2)(a) of the Act of 1988 to be unconstitutional. The respondents are directed to frame the provision keeping in mind the directions of the Apex Court in the case of Union of India v. R.Gandhi, President, Madras Bar Association, supra. The amended provision may be brought in immediately. With the aforesaid direction, the writ petition is disposed of. There will be no order as to costs.

CASE-31

• SECURITY & EXCHANGE BOARD OF INDIA
• Osians Connoisseurs of Art Pvt. Ltd. v/s SEBI & Another-Civil Appeal No. 19936 of 2017, 77 of 2018- Decided On, 12 February 2020
• Hon'ble Supreme Court of India

Sub: "Collective Investment Scheme" floated by a private trust is illegal.

BRIEF FACTS

1. Two trusts named Yatra Art Fund Trust (Fund I) and Yatra Art Fund II (Fund II) were created under the Indian Trusts Act, 1882, through execution of Indentures of Trust dated 15.06.2005 and 01.12.2006.
2. A perusal of the trust deed shows that both these trust Funds were created for an initial period of 4-4 years, the first Fund ending, after extension of one year, on 15.09.2011. Insofar as the second Trust Fund is concerned, this Trust Fund was also extended and ended on 31.01.2012. It may also be mentioned that these Trusts Funds were established so that investors could invest in works of art. In the Confidential Information Memorandum, it was made clear to the investors that these were investments which were fraught with grave risks and that the investors invest in these Trusts Funds with open eyes knowing of the aforesaid risks.
3. So far as the first Fund was concerned, a total corpus amounting to Rs. 10.95 crores were collected from the investors. We are informed that 50 such investors invested in this Fund. So far as the second Fund is concerned, the total corpus was Rs. 21.92 crores, with 132 persons having so invested.
4. On 18.06.2007, the Securities and Exchange Board of India (hereinafter referred to as `SEBI') first apprised the appellants, who are the trustees of these two Trusts Funds stating that, as these Funds were Collective Investment Schemes, they should apply for certificates of registration insofar as these Funds were concerned.
5. This was responded to by Fund I on 16.07.2007, denying that the activities would amount to the activities of a Collective Investment Scheme.
6. As a result thereof, on 12.10.2007, SEBI issued a Show Cause Notice to show cause as to why the Yatra Art Fund should not register itself with SEBI in the prescribed corporate form, as otherwise the collective investment scheme carried out by the Trust would be illegal. The show cause notice also mentioned that all amounts collected should be refunded within a period of 30 days from the said show cause notice.
7. On 05.11.2007, the appellants responded to the aforesaid show cause notice stating that there was no violation of Section 12 (1B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as `SEBI Act') read with Regulation 3 of SEBI (Collective Investment Scheme) Regulations, 1999 (hereinafter referred to as `CIS Regulations'); and as the appellants were not registered in the form of a company, the Regulations themselves would not apply. Secondly, detailed arguments were made as to why the schemes involved could not be said to be collective investment schemes.
8. One year later, on 03.11.2008, a joint representation to SEBI was made stating that the aforesaid schemes floated by the appellants were not collective investment schemes, reiterating that they were not made in the corporate form.
9. It appears that, at this point of time, SEBI itself was unsure as to whether such funds would amount to collective investment schemes. However, in 2013, the matter was resuscitated and after giving the appellants a hearing, inasmuch as many as nine investors complained with regard to Trust Fund No.2, including an Investors' Association, an order was delivered by the whole-time member of SEBI on 06.11.2015 as follows:

"29. In view of the foregoing, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 and 11B thereof and Regulation 65 of the SEBI (Collective Investment Scheme) Regulation, 1999, hereby issue the following directions:

• Yatra Art fund shall abstain from collecting any money from the investors or launch or carry out any Collective Investment Schemes including the scheme which have been identified as a Collective Investment Scheme in this Order.
• Yatra Art Fund is directed to refund the entire monies collected by it under its scheme to all the investors along with the returns at the rate of 10% per annum, within a period of three months from the date of this Order and thereafter, within a period of fifteen days, submit a winding up and repayment report to SEBI in accordance with the SEBI (Collective Investment Schemes) Regulations, 1999, including the trail of funds claimed to be refunded, bank account statements indicating refund to the investors and receipt from the investors acknowledging such refunds.
• Yatra Art Fund is restrained from accessing the securities market and are prohibited from buying, selling or otherwise dealing in securities market for a period of four (4) years.
• Yatra Art Fund is also directed to immediately submit the complete and detailed inventory of the assets owned by Yatra Art Fund.
• In the event of failure by Yatra Art Fund to comply with the above directions, the following actions shall follow:

- Yatra Art Fund shall remain restrained from accessing the securities market and would further be prohibited from buying, selling or otherwise dealing in securities, even after the period of four (4) years of restraint imposed in Paragraph 29(c) above, till all the monies mobilized through such schemes are refunded to its investors with interest, which are due to them.

- SEBI would make a reference to the State Government/Local Police to register a civil/criminal case against Yatra Art Fund, its promoters, directors and its managers/ persons in-charge of the business and its schemes, for offences of fraud, cheating, criminal breach of trust and misappropriation of public funds; and

- SEBI shall also initiate attachment and recovery proceedings under the SEBI Act and rules and regulations framed thereunder."

10. An appeal was carried to the Securities Appellate Tribunal, which was then disposed of on 21.08.2017, following the Appellate Tribunal's judgment dated 13.10.2015 in Osian's - Connoisseurs of Art Private Limited v. Securities and Exchange Board of India & Anr. It may be pointed out that the Appellate Tribunal set aside the paragraphs of the SEBI's order which required the State Government to make a reference to register civil/criminal cases against the Fund and initiate attachment and recovery proceedings under the SEBI Act and Rules and Regulations. However, insofar as paragraph 29 (b) set out hereinabove of SEBI's order was concerned, the Appellate Tribunal remanded the matter to SEBI, adopting the reasoning contained in the earlier Tribunal judgment of 13.10.2015 as follows:

For the reasons stated in our order in Appeal No. 62 of 2013 decided on October 13, 2015 the present appeals are disposed of in terms set out therein"

11. Having heard Shri K.V. Vishwanathan, learned senior counsel appearing for the appellants and Shri C. U. Singh, learned senior counsel appearing for the respondent-SEBI, for some time, it would not be possible to state that the Schemes in the present case would not be Collective Investment Schemes. It is difficult, therefore, to interfere with the concurrent findings made in this behalf by both SEBI and the Appellate Tribunal.

12. Further, the arguments made by Shri Vishwanathan, learned senior counsel, based upon the language of Section 11AA of the SEBI Act does not commend itself to us. It may be mentioned that Section 11 (2)(c) of the SEBI Act states as follows:

"11 (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for-

(c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;"

13. In 1995, Section 12(1B) was introduced, by which it became clear that no person can sponsor or cause to be sponsored or carry on or cause to be carried on any collective investment scheme unless he obtains a certificate of registration from the Board in accordance with the regulations.

14. What is of importance is to notice that the expression "person" is used by Section 12(1B). However, in 1999, by amendment, Section 11AA was introduced in which it was stated as follows:

"11AA. Collective investment scheme.- (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investment scheme:

Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered under sub-section (3), involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme

(2) Any scheme or arrangement made or offered by any company under which,-

(i) the contributions, or payment made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

(ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.

(2A) Any scheme or arrangement made or offered by any person satisfying the conditions as may be specified in accordance with the regulations made under this Act.

(3) Notwithstanding anything contained in sub-section (2) or sub-section (2A), any scheme or arrangement-

(i) made or offered by a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912) or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State;

(ii) under which deposits are accepted by non-banking financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934;

(iii) being a contract of insurance to which the Insurance Act, 1938, applies;

(iv) providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952;

(v) under which deposits are accepted under section 58A of the Companies Act, 1956;

(vi) under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956;

(vii) falling within the meaning of Chit business as defined in clause (e) of section 2 of the Chit Fund Act, 1982;

(viii) under which contributions made are in the nature of subscription to a mutual fund;

(ix) such other scheme or arrangement which the Central Government may, in consultation with the Board, notify,

shall not be a collective investment scheme."

15. Based on the aforesaid, Shri Vishwanathan argued that it would not be possible for him to fall foul of the law considering that Section 11AA uses the word "company" and not "person", and as his client carried on this business in the form of a Trust, the provisions of SEBI Act would not be attracted at all.

16. This argument would fly in the face of both Section 12(1B) and the CIS Regulations, in particular, Regulation 2(h), which defined a "Collective Investment Management Company" as follows:

"(h) "Collective Investment Management Company" means a company incorporated under the Companies Act, 1956 and registered with the Board under these regulations, whose object is to organise, operate and manage a collective investment scheme;"

Regulation 3 of the CIS Regulations states

"3. No person other than a Collective Investment Management Company which has obtained a certificate under these regulations shall carry on or sponsor or launch a collective investment scheme."

17. The statutory scheme, therefore, is that, if a collective investment scheme, as defined, is to be floated by a person, it could only be done in the form of a collective investment management company and in no other form. This is the reason why Section 11AA uses the expression "company" in sub-Section (2) and not the word "person" (as the CIS Regulations of 1999 had come into force on 15.10.1999; Section 11AA being enacted and coming into force on 22.02.2000).

18. Once the statutory scheme becomes clear, it is clear that the collective investment scheme that was being carried on by the appellants in the form of a private Trust would be in the teeth of the Statute read with the CIS Regulations and would thus be illegal.

19. This being the case, it is difficult to upset any part of SEBI's order that remains after the penultimate part of the order was set aside by the Appellate Tribunal.

20. Since the said dispute wasn't able to be resolved according to the satisfaction of the litigants therefore an appeal was ultimately filed in the Supreme Court.

Section 11AA of the SEBI Act

It was said that in the year 1995 Section 12(1B) was introduced in the SEBI Act which made it clear that 'no person can sponsor or cause to be sponsored or carry on or cause to be carried on any collective investment scheme unless a certificate of registration is obtained by him from the Board in accordance with the regulations,' what is important to be noticed is that this section uses the word "person" whereas in Section 11AA which was introduced by an amendment in the year 1999 and talks about the collective investment scheme it is said that .-

(1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investment scheme.

SUMMARY OF COURT'S DECISION

The court in regard to the contention put by the appellants said that such argument flies in the face of Section 12(1B) and the CIS Regulations particularly Regulation 2(h), which defines a Collective Investment Management Company as "a company formed under the Companies Act of 1956 and registered with the Board under these regulations with the purpose of organizing, operating, and managing a collective investment scheme" and the Regulation 3 of the CIS Regulations states that collective investment scheme can only be carried out, sponsored, or launched by a Collective Investment Management Company that has received a certificate under these regulations.

Therefore it can be said that according to the statutory scheme a collective investment scheme can only be floated by a person in the form of a collective investment management company and not in any other form and this is why, under sub-section 2 of Section 11AA, the term "company" is used instead of "person." The same is not used in section 12(1B) since it was introduced in the year 1995 whereas the CIS Regulation came in force in 1999. Section 11AA was enacted in 2000.

The court then said that as the statutory scheme has become clear it is also clear that the collective investment scheme of appellants which was carried out through a private Trust, would be in violation of the said Statute and the CIS Regulations making it illegal. Thereby in its opinion the SEBIs order cannot be overturned by the court except the part that has been already overturned by the Appellate Tribunal.

CASE-32

• CONSUMER PROTECTION ACT,2019
• M/s. Samrudhi Co-operative Housing Society Ltd. vs Mumbai Mahalaxmi Constructions Pvt. Ltd. -(Civil Appeal No. 4000 of 2019)
• The Hon'ble Supreme Court of India

WHETHER FAILURE TO PROVIDE "OCCUPANCY CERTIFICATE" IS CONSIDERED AS DEFICIENCY OF SERVICE?

An appeal was filed by Samruddhi Co-operative Housing Society Ltd. ('Appellant') against Mumbai Mahalaxmi Construction Pvt. Ltd. ('Respondent') before the Hon'ble Supreme Court of India arising out of an impugned judgement passed by the Hon'ble National Consumer Dispute Redressal Commission ('NCDRC').

The Appellant contention before the Apex Court was that the NCDRC has erred in disposing of the complaint by holding that the complaint is not maintainable as it is not a consumer dispute and is grossly barred by limitation.

The Apex Court allowed the appeal vide its recent judgment dated January 11, 2022 and made various far impacting observations in the appeal.

FACTS OF THE CASE:

The Appellant is a co-operative housing society, whereas the Respondent is a real estate construction company. The Appellant entrusted the Respondent to construct 'A' and 'B' wings in a residential apartment/society owned and managed by the Appellants. The members of the Appellant booked the flats in 1993 and were granted possession in 1997. Before handing over the possession of wings 'A' and 'B', the Respondent failed to obtain the occupation certificate from the municipal authorities for the flats occupied by the members of the Appellant. Because of this failure on part of the Respondent, individual flat owners/members were not eligible for water and electricity connections and consequently, the members of the Appellant have been subjected to increased rates and charges, i.e., property tax at a rate 25% higher than the normal rate and water charges 50% higher than the normal rate.

JUDICIAL HISTORY OF THE CASE

1. In July 1998, the Appellants instituted a consumer complaint against the Respondent before the State Consumer Dispute Redressal Commission Mumbai ("SCDRD") seeking directions for obtaining the occupation certificate ('OC') by the Respondent. After adjudicating the matter for sixteen years, SCDRC passed an order dated August 20, 2014, in favour of the Appellant directing the Respondent to obtain OC within a period of four months and to pay compensation of Rs. 1,00,000/- as reimbursement for extra water charges already paid by the members of the Appellant.
2. Thereafter the Appellant issued a legal notice upon the Respondent to make a payment of Rs. 3,56,42,257/- as outstanding dues, which the Respondent failed to comply with. Subsequently, the Appellant filed an execution petition of the order of SCDRC and, also filed a complaint before the NCDRC against the Respondent for seeking payments of Rs. 2,60,73,475/- and Rs. 20,00,000/- as reimbursement for excess charges and tax paid by the members of the Appellant and the mental agony and inconvenience caused to the members of the Appellant due to the deficiency of services of the Respondent.
3. On December 3, 2018, NCDRC passed an order in favour of the Respondent and held that the complaint was barred by limitation stating that the complaint should have been filed within two years of the accrual of the cause of action i.e., when the municipal authorities asked the Appellant to pay higher charges in the first instance and that refund of the excess amount paid by the Appellant for water charges/services was not payable by the Respondent, as the services were not provided by the Respondent but by municipal authorities and thus the Appellant would not fall under the definition of a 'consumer'.

ISSUES FRAMED AND ANALYZED BY THE HON'BLE APEX COURT OF INDIA

The Supreme Court of India discussed two major issues arising out of the appeal filed by the Appellant against the NCDRC's impugned order:

• Issue 1- Whether the complaint filed by the Appellant before the NCDRC was barred by limitation?
• Issue 2- Whether the complaint filed by the Appellant is valid and maintainable on account of the Appellant being termed as a 'consumer' and Respondent as a 'service provider'?

ANALYSIS

ISSUE 1

To address issue No. 1, the Hon'ble Supreme Court discussed that a continuing wrong occurs when a party continuously breaches an obligation imposed by law or agreement. In terms of the Consumer Protection Act 1986 ("Consumer Act"), a complaint to a consumer forum needs to be filed within two years of the date on which the cause of action has arisen. Further, in terms of Limitation Act 1963, a fresh period of limitation begins to run every moment of time during which the breach continues.

The Apex Court considered section 3 and section 6 of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management, and Transfer) Act, 1963 ('MOFA').

SECTION 3 OF MOFA, imposes certain general obligations on the promoter like making disclosures on the nature of the title to the land, encumbrances, fixture, fittings, etc., and to not grant possession of a flat until an occupancy certification is given by the authorities.

SECTION 6 OF THE MOFA holds the promoter responsible for payments of outgoings till the property is transferred.

The Hon'ble Supreme Court held that both the sections indicate that the promoter has an obligation to provide the OC (Occupancy Certificate )to the flat owners and pay the relevant charges till such OC has been provided.

Owing to the failure of the Respondent to obtain the OC, the members of the Appellant have been constrained to pay higher charges and taxes to the municipal authorities. The Supreme Court held that the continuous failure on part of the Respondent to obtain the OC is a breach of the obligations prescribed in sections 3 and 6 of MOFA amounting to a continuing wrong.

Hence, the Respondent is liable for its continuing wrongs and the Appellant is entitled to damages arising out of continuing wrong and the complaint is not barred by limitation.

ISSUE 2

The Hon'ble Supreme Court discussed the nuances of 'service' and stated that the Consumer Act "defines a 'consumer' as a person that avails of any service for a consideration.

A 'deficiency' is defined as the shortcoming or inadequacy in the quality of service that is required to be maintained by law.'

The Court also referred to a few precedents, viz [Wing Commander Arifur Rahman Khan & Others vs. DLF Southern Homes Private Limited and Others and Pioneer Urban Land Infrastructure Limited vs. Govindan Raghavan], where the Supreme Court has 'held that the failure to obtain an occupancy certificate or abide by contractual obligations amounts to a deficiency in service.'

The Supreme Court held that the Respondent was responsible for transferring the title of the flats to the society along with the OC to the Appellant, and the failure to do so amounts to deficiency in service. Thus, the members of the Appellant are well within their rights as 'consumers' to pray for compensation as a recompense for the continuing wrong caused to the Appellant by the Respondent. The appeal was allowed against the impugned judgement of NCDRC and held that the complaint is maintainable.

CONCLUSION

The decision of Apex Court has brough big relief for members of societies to which Occupancy Certificate has not been provided by the builders/ developers. These societies are required to pay high Property as well as water charges from the Municipal Corporation. In many societies builders have transferred the flats to the members of the societies. The decision of Apex Court is clear that non-providing Occupancy Certificate by builder /developer would be considered as deficiency in service and members of such societies will be considered as " Consumers" under the Consumer Protection Act, 1986.

DISCLAIMER: The information provided in above article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. The views expressed in above article are personal views of the author and same will not be considered as professional advice. In case of necessity do consult with tax consultants for more understanding and clarity on subject matter.