ASSIGMENT ON…

Recent Judgments Pronounced by the Supreme court On Golden Rule

of Interpretation

Submitted To Submitted By
Dr. Rakesh Meena Name- Ashish Kumar
Roll. No- 210602
Sub- Interpretation of Statues
Class- LL.M
Course- Department of Law
Session- 2021-2022
Semester- 1st
 Introduction

The legislature makes laws with a specific intent in mind. The responsibility of deciphering
that intent lies with the judiciary. This process of getting to know the intent behind the law is
known as statute interpretation. 

Interpretation

According to its dictionary meaning, interpretation is an act of explaining the meaning of a

thing. In legal context, interpretation means the act of interpreting and deciphering the intent
behind a statute. The term ‘interpretation’ has its roots in the Latin word ‘interpretari’ which
means to explain, or to translate. The main aim of interpreting a statute is to determine the
intention behind the law.

Golden Rule

This rule states that if the normal meaning of the word given in a statute gives an absurd
result then the judges are allowed to deviate from that meaning.

Meaning 

This rule gives the words used in a statute their ordinary meaning. But if that ordinary
meaning ends up giving an absurd result which is not according to the intent of the legislature
then the judge can give the word a meaning which makes the statute rational. This is done so
that the statute can remedy the weakness that it was made to cure. There are two cases,

1. If the word is a homograph i.e. it has two meanings, then the meaning which is
suitable will be given. 

2. If the word has only one meaning, then the judge can give a completely different
meaning. 
CASES..

1. Ajit Mohan & Ors. Vs Legislative Assembly National Capital

Territory of Delhi & Ors.
Name of the Case: Ajit Mohan & Ors. Vs Legislative Assembly National Capital Territory
of Delhi & Ors.
Case Number: Writ Petition (C) No.1088 OF 2020
Judges Name: Hon’ble Judges Justice Sanjay Kishan Kaul; and Justice Dinesh Maheshwari
and Hrishikesh Roy J.
Order dated: 08.07.2021

Facts of the case:

 The Facts of the present matter are   that it arises from the communal riots in different
parts of North-East Delhi in February, 2020. During this incident the Legislative
Assembly of NCT of Delhi resolved to form a Committee on Peace and Harmony.
The Committee received several complaints that indicated that Facebook was used as
a platform for channelizing hate and hence jeopardizing communal harmony. 
 Thereafter Delhi Assembly had issued notice for appearance to Mr Ajit Mohan, Vice
President and Managing Director of Facebook India. Mr Ajit Mohan was the first
petitioner in the present writ petition. The first summons indicated that numerous
complaints stating deliberate no-action on the part of Facebook in curbing/handling
hate speech online. Facebook objected to the first summons in the its reply and
requested to recall the summons. This was however rejected by the Delhi Assembly,
and second summons was issued. Mr Ajit Mohan was asked to appear before the
Committee in the ‘spirit of democratic participation and constitutional mandates.’  It
was stated   that non-compliance would indicate a breach of privilege of the
Committee and hence necessary action would be taken.  The second summons
triggered the filing of the present proceedings under Article 32 of the Constitution of
India. It was prayed in the current proceeding that the first and second summons
should be set aside and also that the Delhi Assembly be stopped from taking any
harsh action against the petitioners following the summons.

The Hon’ble Supreme Court held:

1. Before There is no dispute about the right of the Assembly or the Committee to
proceed on grounds of breach of privilege per se. 
2. The power to compel attendance by initiating privilege proceedings is an essential
power. 
3. Members and non-Members (like the petitioners) can equally be directed to appear
before the Committee and depose on oath. 
 4. In the given facts of the case, the issue of privileges is premature. The insertion of
para 4(vii) of the Terms of Reference taken along with the press conference of the
Chairman of the Committee could legitimately give rise to apprehensions in the mind
of the petitioners on account of which a caveat has been made. 
5. Canvassing a clash between privilege powers and certain fundamental rights is also
preemptory in the present case. 
6. The larger issue of privileges vis-a-vis the right of free speech, silence, and privacy in
the context of Part III of the Constitution is still at large in view of the reference to the
larger Bench in N. Ravi v. T.N. Legislative Assembly. 
7. The Assembly admittedly does not have any power to legislate on aspects of law and
order and police in view of Entries 1 and 2 of List II in the Seventh Schedule inter
alia being excluded. Further, regulation of intermediaries is also subject matter
covered by the I.T. Act. 
8. The Assembly does not only perform the function of legislating; there are many other
aspects of governance which can form part of the essential functions of the
Legislative Assembly and consequently the Committee. In the larger context, the
concept of peace and harmony goes much beyond law and order and police, more so
in view of on the- ground governance being in the hands of the Delhi Government. 
9. Para 4(vii) of the Terms of Reference does not survive for any opinion of the
Committee. It will not be permissible for the Committee to encroach upon any aspects
strictly within the domain of Entries 1 and 2 of List II of the Seventh Schedule. As
such, any representative of the petitioners would have the right to not answer
questions directly covered by these two fields.
The writ petition is accordingly dismissed, subject to terms aforesaid.

2. Dr. Jaishree Laxmanrao Patil v Chief Minister

The Maharashtra Socially and Educationally Backward Classes, Act 2018 was challenged in
the Supreme Court citing that the 50% reservation rule in the 1992 Indra Sawhney landmark
case, should be relied upon and the reservation should not be exceeded.

Facts of the case

On November 29th, 2018, the Maharashtra Socially and  Educationally Backward Classes
Act was passed upon the recommendation of the Maharashtra State Backward Classes
Commission. The Gaikwad Committee recommended 12% and 13% reservation for Marathas
in educational institutions and appointments in public services, respectively.  As the Act
exceeded the original quota limit, its validity was challenged before the Bombay High Court
with several writ petitions. During the pendency of these writ petitions, the scope of the
petition was exceeded, and also several other applications were filed for intervention seeking
to justify the validity of the 2018 Act. The Supreme Court accepted these applications and
they were directed to be added as party respondents. 

The contention of parties                                         

The primary arguments which were raised in front of the Bombay High Court were mainly
that, the Act exceeded the 50% limit on the reservation which was brought in the case of
Indra Sawhney v Union of India and that the Act was unconstitutional. Another contention
was that the Gaikwad Commission Report was flawed and unscientific. Moreover, the Act
violates Article 14, Article 16, and Article 19 of the Constitution of India as it gives a special
reservation to the Marathas. And finally, the Act was passed without following the
requirements given in the 102nd Amendment of the Constitution of India. On 27th July 2019,
the Bombay High Court upheld the validity of the Act. On 12th July 2019, the Supreme Court
admitted the Bombay High Court’s decision and chose to not stay the judgment. The
Supreme Court further decided to refer the case to a larger
bench.                                                                                                      

The issues which were raised by the Constitutional Bench were as follows

1. Whether the judgment in the case of Indra Sawhney v. Union of India 1992 needs
to be referred to a larger bench or require re-look by the larger bench in the light of
subsequent Constitutional amendments, judgments, and changed social dynamics
of the society, etc.

2. Whether the State Government on the strength of Maharashtra State Backward

Commission Report chaired by M.C. Gaikwad has made out a case of existence of
extraordinary situations and exceptional circumstances in the state to fall within
the exception carved out in the judgment of Indra Sawhney.
 3. Whether the 102nd amendment to the Constitution of India denies the state
legislature to establish the enactment that decides the socially and economically
backward classes.

4. Whether the state’s power to legislate concerning “any backward class”

under Article 15(4) and Article 16(4) is anyway abridged by Article 342(A) read
with Article 366(26c) of the Constitution of India.

Findings of the court    

The Supreme Court heard the arguments of both the parties for over 10 days and delivered its
judgment which is as follows:-

1. The five-judge bench gave out a 569-page verdict, precluding the need to rethink
the validity of the 1992 Indra Sawhney judgment case, which fixed the 50%
reservation bar.

2. The Supreme Court further said that the 2018 Act violates the principle of equality
mentioned in Article 14 of the Constitution. The exceeding of the reservation limit
without there being any extraordinary circumstances violates Article 14 and
Article 16 of the Constitution of India which makes the enactment ultra vires.

3. The Constitutional Bench upheld the validity of the 102nd amendment which
granted constitutional status to the National Commission for Backward Classes.

4. Justice Bhushan, who headed the Constitutional seat, observed that the condition
for a 50% reservation limit under Article 16(4) wasn’t satisfied in giving 12% and
13% reservation to Marathas in jobs and education.

5. Senior Advocate Pradeep Sancheti was asked to prove whether the Gaikwad
Commission’s report justified extraordinary circumstances. He noted that the
Gaikwad Commission’s Report failed to provide sufficient data or analysis of two
requirements for granting reservations. The two requirements regarding the
Gaikwad Commission Report were:
  A requirement in Article 16(4) was whether there was an inadequacy of
representation from the community. The Commission’s data on this was faulty. It
also failed to note that Marathas were a dominant class.

 Another requirement under Article 335 was to consider the efficiency of

administration. This found no mention in the report.
The other three judges on the bench, Justice Rao, Justice Hemant Gupta and Justice Ravindra
Bhat agreed with Justice Bhushan and Justice Abdul Nazeer that the Maratha Quota was
unconstitutional. However, the three judges did not agree on the point of view of Justice
Bhushan and Justice Abdul Nazeer that the state was empowered to spot the backward classes
for granting quota. Justice Rao stated that there should be one list of socially and
educationally backward classes which should be issued by the  President.

A good precedent

Hence, the Supreme Court struck down the Maharashtra Law giving reservations to the
Maratha Community. The ruling is likely to impact other reservation laws under the category
of exceptional circumstances as well on the reservations of economically weaker sections of
the society that have access to the 50% limit. Before the Supreme Court, the Maharashtra
Socially and Educationally Backward Classes Act, 2018 was turned down by various
commissions and the demand for the reservation of the Maratha Community has been
rejected before. It has been a political issue that has been brought up time and again in recent
years. The quota issue continues to dominate in state politics with the parties promising
quotas to the group. Going forward, the Maharashtra Government has some serious thinking
to do regarding this judgment and the way ahead.

3.  Engineering Analysis Centre Of Excellence Private Limited vs. C.I.T

Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v.
CIT1 holds that payments made to non-resident computer software manufacturers/ suppliers
for the resale/use of the software not taxable as Royalty

Under section 195 of the Act, an obligation is cast on a person making payment to a non-
resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at
the rates in force at the time of payment of such sum or at the time of credit thereof to the
account of the payee, whichever is earlier.
Section 5 of the Act, inter alia, specifies that the 'Total Income' of a non-resident shall include
(i) Income received or deemed to be received in India, by or on behalf of the non-resident; (ii)
Income accruing or arising to the non-resident in India and (iii) Income deemed to be
accruing or arising to the non-resident in India.

Section 9(1)(vi) of the Act inter-alia provides that income by way of royalty payable by an
Indian resident would be deemed to accrue or arise in India if the royalty is for the purpose of
earning any income from any source in India. Explanation 2 to section 9(1)(vi) defines
"royalty" to be a consideration for the transfer of all or any rights (including the granting of a
license) or use of any copyright, literary, artistic or scientific work, patent, invention, model,
design, secret formula or process or trade mark or similar property. In 2012, Explanation 4
was inserted in Section 9(1)(vi) to clarify that the "transfer of all or any rights" in respect of
any right, property or information included and had always included the "transfer of all or
any right for use or right to use a computer software". Hence, the computer software was
included in the definition and within the scope of the words 'right', 'property' or 'information'
as provided under clauses (b) and (c) to Section 9(1)(vi) of the Act

The Tax Treaties entered into by India with other countries define "royalty" to mean
consideration for the use of, or the right to use, any copyright of a literary, artistic or
scientific work. There is no provision like Explanation 4 to section 9(1)(vi)(b) in the Tax
Treaty, which artificially expands the scope of the term 'royalty' by providing that transfer of
all or any rights includes transfer of all or any right for use or right to use a computer
software.

The controversy surrounding the taxation of payments for computer software in international
transactions has been a subject matter of extensive litigation for over two decades in India.
The bone of contention between the taxpayers and the tax authorities has been in relation to
characterization of income from in the hands of non-resident taxpayers as either royalties or
business profits. The tax authorities have generally taken a position that income arising from
grant of software license should be characterized as "royalty", irrespective of the nature of
rights acquired by the customer. The taxpayer's position, on the other hand, has been that in
terms of the tax treaty, income from computer software should be characterized as royalty or
business income on the basis of the nature and extent of rights granted to the customer.
There have been divergent rulings of various Indian courts on taxability of software
payments:

 In favour of Revenue: The Karnataka High Court in the case of CIT v. Samsung

Electronics Co. Ltd: 345 ITR 494 (Kar.) has held that software payments are
taxable as "royalty" if payments made by end users of the computer program who are
granted a license to make copies of the computer program for back-up or archiving
purpose. Similarly, the Authority for Advance Rulings (AAR) in the case of Citrix
Systems Asia Pacific Pty. Ltd. 343 ITR 1 (AAR) has held that payment towards
software in a distribution arrangement is taxable as royalty since it is not possible to
divorce software from the intellectual property of the creator of the software
embedded therein and sale or licensing for use of copyrighted software amounts to the
grant of a right to use a copyright.
 In favour of taxpayer: The Delhi High Court in the case of DIT vs. Ericsson A.B.:
343 ITR 470 (Del.) and the AAR in the case of Dassault Systems K.K.: 322 ITR
125 (AAR) ruled in favor of taxpayers by emphasizing on the distinction between
acquisition of a "copyright right" and a "copyrighted" article. It was held that the
license granted by the taxpayer was limited to those rights that are necessary to enable
the licensee to operate the program. Hence, there is no transfer of copyright or right to
use the copyright to characterize the same as royalty under the Act or the Treaty.
 Reiterating the above principle, the Delhi High Court in the case of DIT vs. Infrasoft
Ltd.: 264 CTR 329 (Del.) on the issue as to whether the retrospective amendment in
section 9(1)(vi) vide Finance Act, 2012 can be read into the tax treaty, held that
retrospective amendment made in the Act cannot be read into the tax treaty since tax
treaty has not been correspondingly amended in line with the amendment made in the
definition of 'royalty' under the Act.

Considering the divergent views of the Courts, the taxpayer/ Revenue moved the Supreme
Court and the Court in the case of Engineering Analysis Centre of Excellence Private Limited
v. CIT (supra) while setting aside the ruling of the High Court of Karnataka in case of CIT vs
Samsung Electronics Co. Ltd (supra) and the AAR in case of Citrix Asia Pacific Pty. Ltd., In
Re (supra), ruled in favour of the taxpayer by holding that the payment made to non-resident
computer software suppliers for the resale/use of the computer software through End User
Licensing Agreement (EULAs)/distribution agreements, is not payment of royalty for the use
of copyright in the computer software under various relevant tax treaties.

A summary of the decision of the Supreme Court is as under:

Facts of the case:

The Supreme Court categorized the batch of appeals into following four categories of
software payments:

 Category 1 – Sale of software directly to an end user by a non-resident

 Category 2 – Sale of Software by a non-resident to Indian distributors for resale to
end customers in India
 Category 3 – Sale of software by a non-resident to a foreign distributor for resale to
end customers in India
 Category 4 – Software bundled with hardware and sold by foreign suppliers to Indian
distributors or end users

(a) Whether payment is for transfer of copyright or use of copyright:

A copyright means an exclusive right to do or to authorize to do certain acts in respect of a
"work", including an exclusive right, inter alia, to reproduce the copyright in the work in any
material form and exploit the same by way of sale, transfer or license etc. Making copies or
adaptation of computer programme to utilise or to make back-up copies as a temporary
protection against loss, destruction or damage to utilise it, does not constitute an act of
infringement of copyright.

A computer program (software) qualifies as a "literary work" for the purposes of the Indian
Copyright Act (ICA). As per Section 30 of the ICA, the owner of copyright in a "literary
work" is entitled to grant any interest in his rights by way of a license in return for a royalty
payment. In cases where a license is granted, an infringement of copyright under the ICA
would take place only when there is any use of the rights contrary to the license so granted.

The Supreme Court analysed the meaning of the term royalty under the Act and relevant tax
treaties along with various decisions of the Courts2 and derived following conclusions:

i. Copyright is an exclusive right, which is negative in nature, being a right to restrict

others from doing certain acts.
 ii. Copyright is an intangible, incorporeal right, in the nature of a privilege. Ownership
of copyright in a work is different from the ownership of the physical material in
which the copyrighted work may happen to be embodied. For example, purchaser of a
book or a CD/DVD, who becomes the owner of the physical article, but does not
become the owner of the copyright inherent in the work, such copyright remaining
exclusively with the owner.
iii. The transfer of the ownership of the physical substance, in which copyright subsists,
gives the purchaser the right to do with it whatever he pleases, except the right to
reproduce the same and issue it to the public, unless such copies are already in
circulation and the other acts mentioned in section 14 of the Copyright Act.
iv. Where the core of a transaction is to authorize the end-user to have access to and
make use of the "licensed" computer software product over which the licensee has no
exclusive rights, no copyright is parted with and consequently, no infringement takes
place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no
difference whether the end-user is enabled to use computer software that is
customised to its specifications or otherwise.
v. A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted
product cannot be construed as a licence to enjoy all or any of the enumerated rights
mentioned in section 14 of the Copyright Act [State Bank of India (SBI) v. Collector
of Customs: 1 SCC 727]

Making a copy or adaptation of a computer program in order to utilize it for the purpose for
which it was supplied, making back-up copies as a protection against loss, does not result in
infringement of copyright under the Copyright Act. Even storage of computer program, per
se, would not result in infringement. Nomenclature of the agreement does not matter and
what is relevant is the real nature of the transaction having regard to the overall terms of the
agreement and surrounding circumstances.

In the present appeals, the terms of some sample agreements with the distributor and end
users of the software were as follows:

 Distributors were granted a nonexclusive, non-transferable license to resell computer

software to end users.
 Distributors did not have a right to use the software
  The agreement specifically stated that the copyright in the software was not
transferred, either to the distributor or to the ultimate end user
 End users were allowed only to use the software and they were restricted from sub-
licensing, transferring, reverse engineering, modifying, or reproducing the software

The Court held that what is "licensed" by the non-resident supplier to the distributor and
resold to the resident end user or directly supplied to the resident end user is, in fact, the sale
of a physical object which contains an embedded computer program. Such sale of goods does
not involve transfer of a copyright in the software. Reliance in this regard was placed on the
decision of the Supreme Court in the case of Tata Consultancy Services: 2005 (1) SCC 308.

(b) Meaning of royalty under the Act or the tax treaty whichever is more beneficial:
The term 'royalty' is exhaustively defined under the Tax Treaties to 'mean' payment made for
the use or right to use any copyright in a literary work. Meaning of the said term under the
Act is different and wider than the Tax Treaty inasmuch as transfer of all or any rights
includes granting of a license, in respect of any copyright of any literary work.

Since the license granted to distributors and end users does not create any interest or right in
the software, grant of such license would not amount to the "use of or right to use" of
copyright and, hence, it would not qualify as royalty under the Tax Treaty.

The Court further observed that the phrase "in respect of" used in the Act means "in" or
"attributable to". Thus, in order to qualify as royalty even under the Act, it is a sine qua non
that there has to be transfer of all or any rights in a copyright by way of license or otherwise.
Since the license granted to the distributors and end users did not involve granting of any
interest in the rights of an owner of a copyright, payment made for such license does not
qualify as royalty both under the Act (upto 2012) as well as the Tax Treaty.

Explanation 4 to section 9(1)(vi) inserted by the Finance Act, 2012, to provide that transfer of
all or any rights includes transfer of all or any rights for use of a computer software, expands
the definition of royalty and may not be considered as clarificatory in nature. Moreover, since
the definition of royalties under the Tax Treaty is narrower and more beneficial, the
provisions of the Act would not be applicable and there would be no obligation to withhold
taxes under section 195 of the Act.
Revenue had sought to rely on the decision of the Supreme Court in PILCOM v. CIT: 271
Taxman 200 (SC) which dealt with section 194E of Act for the proposition that tax has to be
deducted at source irrespective of whether tax is otherwise payable by the non-resident
assessee. The Supreme Court observed that acceptance of such contention of the Revenue
would lead to absurd results since taxes would have to be withheld even where the income is
not chargeable to tax in India which is not the intent of the legislature. Accordingly, the said
decision has no application to the case wherein withholding tax obligations are to be
determined in terms of section 195 of the Act.

(c ) Retrospective amendment – Impossibility of performance of withholding tax obligations:

Explanation 4 to section 9(1)(vi) inserted by the Finance Act, 2012 (with retrospective effect
from 1 June 1976) expands the definition of "royalty" under the Act. A person who made a
payment prior to 2012 cannot be expected to apply the expanded definition of royalty which
was not in existence at the time of making payments to determine withholding obligations
under section 195 of the Act. The substantive amendment to the Act does not compel a
person to do the impossible i.e., when there is a disability that makes it impossible to obey the
law, the alleged disobedience of the law is excused3.

(d) Relevance of OECD Commentaries and India's positions on the OECD Commentary:
Definition of "royalty" under the Tax Treaties is similar to the definition of royalty under the
OECD Model Convention. Hence, reference may be made to the OECD Commentary which
also provides that making a copy or adaptation of a computer program to enable the use of
the software for which it was supplied does not constitute royalty. This also supports that the
payment made by distributors and end users does not qualify as royalty.

Even though the Indian Government has expressed its reservations on the OECD commentary
dealing with royalty, such reservations to the commentary would not affect its relevance
unless the reservations were incorporated into the treaties through bilateral negotiation with
the respective countries4. The Court observed that India had entered or amended tax treaties
with various countries after expressing its reservation, yet the definition of royalty had not
been changed and remained similar to the definition in the OECD Model Convention.
Therefore, the OECD Commentary on Article 12 of the OECD Model Convention will
continue to have persuasive value as to the interpretation of the term "royalties" contained in
the Tax Treaties.
Conclusion:
In terms of Article 12 of the relevant Tax Treaties, the payments made 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, does not constitute royalty since the payment is not for the use of or the right to
use copyright in the computer software. Accordingly, in terms of section 195 of the Act, the
payer is not required to withhold tax at source at the time of making payments to the non-
resident supplier.

Our comments:
The controversy surrounding the taxation of payments for computer software in international
transactions has been a subject matter of extensive litigation for over two decades in India.
Ruling of the Supreme Court in a batch of appeals involving cases of IBM India, Samsung
Electronics, GE India, Hewlett Packard India, Mphasis of the world, is a welcome respite. In
its succinct and well-reasoned decision the SC has settled the vexed issue of characterization
of payments to non-resident vendors for import of software licenses for use or resale in India,
holding as business profits as opposed to royalty and hence in absence of a PE not taxable, as
per the source rule in India - a view which is also aligned to the international understanding.

The Court also laid down that definition of royalty under section 9(1)(vi) of the Act, which
was expanded vide Finance Act, 2012 (with retrospective effect from 01.04.1976) is not
clarificatory in nature and withholding tax liability cannot be fastened on the payer pursuant
to a substantive legislative change (with retrospective effect) which did not subsist at time of
payment by the payer.

Supreme Court also emphasizing on the importance of OECD commentary in interpreting the
Treaties observed that the reservations expressed by the Indian Government may not affect
the application of the tax treaties unless the reservations are incorporated therein. This
requirement of bilateral negotiation and incorporation of changes will safeguard the assessee
from any unilateral amendment made by the Indian Government.

To take the benefit of the aforesaid decision of the Supreme Court, the taxpayers (who have
paid taxes on software by treating the same as royalty), in whose cases litigation is pending
before the appellate authorities, may move an application for admission of additional ground
and seek necessary relief from the said authorities. In cases where no litigation is pending
then the taxpayer may consider moving refund application before the assessing officer.
However, it may be noted, if the income, ie. consideration received for sale of software, is not
taxable as royalty under the Act read with the relevant tax treaty, the same may be subject to
Equalisation Levy.

The ratio decidendi of the aforesaid decision may also apply to payments made for
subscription of database or for satellite bandwidth charges and assist taxpayers in ongoing
disputes.

4... MANISH KUMAR V/S UNION OF INDIA

NAME OF THE CASE Manish Kumar v/s Union of India

CITATION WRIT PETITION(C) NO.26 OF 2020

DATE OF THE CASE 2021.01.19

APPELLANT Manish Kumar

RESPONDENT Union of India and Another

BENCH/JUDGE Rohinton Fali Nariman, K.M. Joseph, Ajay Rastogi

STATUTES / CONSTITUTION Insolvency and Bankruptcy Code (Amendment) Act 2020 , Constitution
INVOLVED

IMPORTANT SECTIONS  / Sections 3, 4, and 10 of the Insolvency and Bankruptcy Code (Amendm
ARTICLES Article 142 of the Constitution of India.

INTRODUCTION  :-
The Supreme Court of India in the judgment of Manish Kumar and others vs. Union of
India ruled against a group of allottees of real-estate projects who had challenged the
amendments to the Insolvency and Bankruptcy Code (Amendment) Act 2020. The Petitions
inter alia challenged the constitutional validity of amendments to Section 7(1) of the
Insolvency and Bankruptcy Code, 2016.
Amendment to Section 7(1) incorporated a proviso that allottees under a real estate project
(financial creditors), desirous of triggering the insolvency resolution process under the Code,
are required to file an application jointly by not less than one hundred of such allottees under
the same real estate project or not less than ten per cent of the total number of allottees under
the same real estate project, whichever is less.

Further, the Petitioners sought to challenge another proviso amending Section 7 (1) of the
Code, that those applications under Section 7 which had not been admitted would stand
withdrawn within thirty days, if the newly declared minimum threshold of one hundred
allottees or ten per cent of the allottees, whichever is lower, was not garnered by the
respective applicants.

However, the SC in what may be viewed as a blow to allottees of real estate projects, has
upheld the provisions amending Section 7 (1) of the Code.

FACTS OF THE CASE :- 

The petitioners have approached the Court under Article 32 of the Constitution of India. They
call in question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment)
Act 2020. Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and
Bankruptcy Code, 2016. Section 4 of the impugned amendment, incorporates an additional
Explanation in Section 11 of the Code. Section 10 of the impugned amendment inserts
Section 32A in the Code. The petitioners have challenged that the second proviso, according
to which a new threshold has been declared for an allottee to move an application under
Section 7 for triggering the insolvency resolution process under the Code. The threshold is
the requirement that there should be at least 100 allottees to support the application or 10 per
cent of the total allottees whichever is less. Moreover, they should belong to the same project.

The Supreme Court has held, “A vested right under a statute can be taken away by a
retrospective law. A right given under a statute can be taken away by another statute. The
Supreme court cannot ignore the fact that there was considerable public interest behind such a
law. The sheer numbers, in which applications proliferated, combined with the results it could
produce, cannot be brushed aside as an irrational or capricious aspect to have been guided by
in making the law.
As regards the compelled withdrawal under the third proviso of the pending applications is
concerned, we hold as follows. Once the Legislature intended that the pending applications
must be made compliant with the threshold requirement, consequences for not doing so had
to be provided. Otherwise, it would have created complete uncertainty and the applicant
would have been dealt with in a manifestly arbitrary manner.

The Supreme Court noted that the legislation, being an economic measure, free play in the
joints, must be accorded to the Legislature. The impugned amendment is reasonable, minimal
and proportionate. The data gathered by the respondent discloses that between June, 2016 and
5th June, 2018, there were 253 cases filed by allottees in the N.C.L.T. However, between 6th
June, 2018 and 28th December, 2019, as many as 2201 cases were filed by the allottees.
Thereafter, pursuant to the Ordinance between December 29th, 2019 and August 26th, 2020,
there is a sharp fall, as, nearly in eight months, only 130 cases were filed. It is pointed out
that the argument, based on estoppel and malice against the Legislature, is untenable. There
can be no estoppel against the Legislature and the decision of this Court in Union of India
and others v. Godfrey Philips India Ltd. 23, is relied on. The concept of transferred malice is
alien in the field of legislation. The right to file an application under Section 7 is a statutory
right and it can be conditioned.

ISSUE RAISED BEFORE THE COURT :-

The petitioners have approached Supreme Court under Article 32 of the Constitution of India.
They call in question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code
(Amendment) Act 2020. 
ARGUMENTS FROM THE APPELLANT SIDE:- The Petitioners contended that the
second proviso to Section 7(1) of the Code was unreasonable, arbitrary, irrational, ultra-vires
the Indian Constitution and violated basic fundamental rights. It was contended that the
amendments resulted in hostile discrimination between the Petitioners and the other financial
creditors, lacking any intelligible differentia. The Petitioners argued that the 1st Amendment
was impractical as there was an information asymmetry. It was also argued that there existed
no platform for the exchange and availability of information with details pertaining to the
allottees. The Petitioners contended that if the aforesaid proviso were upheld, they would for
all practical purposes fall outside the purview of a financial creditor and their status would be
worse than that of an operational creditor.
ARGUMENTS FROM THE RESPONDENT SIDE:- On the other hand, the Respondent’s
raised a counterargument stating that the Amendment Act was perfectly valid and formed
part of an economic measure. The Respondents further contended that the Amendment Act
was introduced to prevent multiplicity of proceedings from being filed and to ease the burden
of pending cases before the already overburdened adjudicating authorities.
i. Preventing multiple individual applications, which has the effect of not only crowding the
docket of the Adjudicating Authority and further holding up a process in which time is of the
essence;

ii. Safeguarding the interest of hundreds or even thousands of allottees who may oppose the
application of a single home-buyer;

iii. Balancing the interest of members of the same sub-Class as also other financial creditors
and other operational creditors. The availability of remedies to the members of the sub-class
under RERA, in the case of allottees;

iv. Lastly, the process becomes smoother and cost effective. Unnecessary financial bleeding
of the corporate debtor who is already in difficulty, is avoided.

RELATED PROVISIONS:-
(1) Section 7(1) of the Code before the amendment read as follows:
7. Initiation of corporate insolvency resolution process by financial creditor:
(1) A financial creditor either by itself or jointly with other financial creditors, or any other
person on behalf of the financial creditor, as may be notified by the Central Government, may
file an application for initiating corporate insolvency resolution process against a corporate
debtor before the Adjudicating Authority when a default has occurred.”
Explanation- For the purposes of this subsection, a default includes a default in respect of a
financial debt owed not only to the applicant financial creditor but to any other financial
creditor of the corporate debtor.
The amendment to the same by Section 3 of the impugned amendment incorporates
3 provisos to Section 7(1), which reads as under:
“Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A)
of section 21, an application for initiating corporate insolvency resolution process against the
corporate debtor shall be filed jointly by not less than one hundred of such creditors in the
same class or not less than ten per cent. of the total number of such creditors in the same
class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an
application for initiating corporate insolvency resolution process against the corporate debtor
shall be filed jointly by not less than one hundred of such allottees under the same real estate
project or not less than ten per cent. of the total number of such allottees under the same real
estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution
process against a corporate debtor has been filed by a financial creditor referred to in the first
and second provisos and has not been admitted by the Adjudicating Authority before the
commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such
application shall be modified to comply with the requirements of the first or second proviso
within thirty days of the commencement of the said Act, failing which the application shall be
deemed to be withdrawn before its admission.

(2) Section 11 before the amendment read as follows:

11. Persons not entitled to make applications. – The following persons shall not be entitled
to make an application to initiate corporate insolvency resolution process under this Chapter,
namely: –
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process twelve
months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution
plan which was approved twelve months before the date of making of an application under
this Chapter; or
(d) a corporate debtor in respect of whom a liquidation order has been made. Explanation 1
[I]. – For the purposes of this section, a corporate debtor includes a corporate applicant in
respect of such corporate debtor.”
The explanation which was inserted through the impugned amendment reads as
follows:
“Explanation II.- For the purposes of this section, it is hereby clarified that nothing in this
section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating
corporate insolvency resolution process against another corporate debtor.
(3) Section 32A inserted through the impugned amendment reads as follows:
32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for
the time being in force, the liability of a corporate debtor for an offence committed prior to
the commencement of the corporate insolvency resolution process shall cease, and the
corporate debtor shall not be prosecuted for such an offence from the date the resolution plan
has been approved by the Adjudicating Authority under section 31 if the resolution plan
results in the change in the management or control of the corporate debtor to a person who
was not—
(a) a promoter or in the management or control of the corporate debtor or a related party of
such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis
of material in its possession, a reason to believe that he had abetted or conspired for the
commission of the offence, and has submitted or filed a report or a complaint to the relevant
statutory authority or Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution
process against such corporate debtor, it shall stand discharged from the date of approval of
the resolution plan subject to requirements of this sub-section having been fulfilled:

Provided further that every person who was a “designated partner” as defined in clause (j) of
section 2 of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as
defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner
incharge of, or responsible to the corporate debtor for the conduct of its business or
associated with the corporate debtor in any manner and who was directly or indirectly
involved in the commission of such offence as per the report submitted or complaint filed by
the investigating authority, shall continue to be liable to be prosecuted and punished for such
an offence committed by the corporate debtor notwithstanding that the corporate debtor’s
liability has ceased under this sub-section.

(2) No action shall be taken against the property of the corporate debtor in relation to an
offence committed prior to the commencement of the corporate insolvency resolution process
of the corporate debtor, where such property is covered under a resolution plan approved by
the Adjudicating Authority under section 31, which results in the change in control of the
corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III
of Part II of this Code to a person, who was not—
(i) a promoter or in the management or control of the corporate debtor or a related party of
such a person; or
(ii) a person with regard to whom the relevant investigating authority has, on the basis of
material in its possession reason to believe that he had abetted or conspired for the
commission of the offence, and has submitted or filed a report or a complaint to the relevant
statutory authority or Court.
Explanation.—For the purposes of this sub-section, it is hereby clarified that,—
(i) action against the property of the corporate debtor in relation to an offence shall include
the attachment, seizure, detention or confiscation of such property under such law as may be
applicable to the corporate debtor;
(ii) nothing in this subsection shall be construed to bar an action against the property of any
person, other than the corporate debtor or a person who has acquired such property through
corporate insolvency resolution process or liquidation process under this Code and fulfils the
requirements specified in this section, against whom such action may be taken under such
law as may be applicable.
(3) Subject to the provisions contained in sub-section (1) and (2), and notwithstanding the
immunity given in this section, the corporate debtor and any person who may be required to
provide assistance under such law as may be applicable to such corporate debtor or person,
shall extend all assistance and co-operation to any authority investigating an offence
committed prior to the commencement of the corporate insolvency resolution process.
JUDGEMENT :-
1st Amendment
The Bench comprising of Justices R.F. Nariman, N. Sinha and K.M. Joseph observed that on
the basis of existence of default against one applicant and in the event the corporate
insolvency resolution process of the corporate debtor is unsuccessful, liquidation would
commence, which not the objective of the Code. If a single allottee, , is allowed to move a
Section 7 application, the interests of all the other allottees may be jeopardised and the entire
project put in peril. Considering the issue of the arbitrariness and practicality of the minimum
threshold of allottees suffering the same fate under the same real estate project coming
together to jointly file a Section 7 application, the Court held that the rationale behind 1st
Amendment is to promote the object of the Code and streamline the working of the Code.
One of the Petitioners argued that the minimum threshold as laid down under the Amendment
Act should not be limited to the same real estate project but applicable for all projects being
executed/developed by a Promoter. The SC held that this would make the task of the
applicant more cumbersome. It was held that an individual allottee was always free to avail of
other remedies in its arsenal including under the Real Estate (Regulation and Development)
Act, 2016 , the Consumer Protection Act, 2019, or by filing a civil suit, and the Amendment
Act would not exhaust the Petitioners’ alternative remedies.

The SC further clarified that it does not matter whether a person has one or more allotments
in the name of his family; all independent allotments would qualify as separate allottees and
would be accounted for in the calculation of hundred allottees/one-tenth of the allottees. It
was then clarified that in case of a joint allotment to more than one person, the allotment is to
be treated as a single allotment.  This clarification was to make clear the object of the
Amendment Act, which is to ensure that there is a critical mass of persons ‘who agree that the
time is ripe’ to invoke the Code.

In respect to the contention on different default dates of each allottee, the SC held that any
number of applicants, without any amount being due to them, could move a Section 7
application, provided that they are financial creditors and the default is in the sum of one
crore, even if the one crore amount is owed to none of the applicants but to any other
financial creditor. It is not necessary that there must be a default qua any of the applicants.

The SC observed that if the Legislature, after taking into consideration the sheer magnitude
of provisos in question which would encompass a significant number of a group of creditors,
finds it to be within the ambit of intelligible differentia, distinguishing the allottees from the
other financial creditors; the SC would not be inclined to sit in judgment over the wisdom of
such a measure. Reliance was placed on the doctrine of separation of powers stating that the
presumption would be that the democratically elected representatives of the people drafting
our legislation, would be conscious of every fact which would go to sustain the
constitutionality of the law.

Addressing the concern of whether the condition of allottees were not rendered equivalent to
or even worse off than an operational creditor, the SC distinguished basis that the developer
is the debtor, as an allottee funds his own apartment by paying amounts in advance. An
operational creditor has no interest regarding the financial soundness of the corporate debtor.
However, the allottee of a real estate project is vitally concerned with the financial health of
the corporate debtor.

2nd Amendment
The SC upheld the amendment and rejected the arguments put forth by the Petitioners. Whilst
acknowledging that the period of thirty days to comply with the requirement of the minimum
threshold could have been fairer and longer, the SC was unable to conclude that the thirty-day
time limit was impossible to comply with. Prescribing a time limit in regard to pending
applications, cannot be described as arbitrary, as otherwise, it would result in an endless and
uncertain procedure. Further, withdrawal of the proposed applicant as contemplated under the
Code, will not stand in the way of invoking the same default and filing the application afresh.

In summation, the SC upheld the provisos on the basis that they satisfied the litmus test to be
justified as reasonable classification introduced in furtherance of the objects of the Code and
that the case was not one of no intelligible differentia.

CONCLUSION :-
The Judgment marks another key milestone in the overall progression and development of the
Code. The SC upon reviewing the data made available to it, in all its wisdom has determined
that the Amendment Act would not only further streamline the insolvency process as
envisaged under the Code but would also serve as a blockade against frivolous applications
filed by opportunistic litigators not representing the critical mass.

Some would argue that this Judgment would be detrimental to home buyers/allottees of real
estate projects, the net effect of the Amendment Act would likely achieve its primary
objective of advancing the objects of the Code and enable speedy redressal. Alternative
remedies remaining available, the overall effect of the Judgment and the Amendment Act
seems sound.

5. Manoharan v. State of Tamil Nadu

In the case, the Supreme Court rejected the review petition of Manoharan who was convicted
for the brutal rape and murder of the 10-year-old girl and her brother in Coimbatore, Tamil
Nadu. 
Facts of the case

 In 2010, the accused Mohanakrishnan & Manoharan borrowed a car without

taking the consent of the owner and kidnapped a 10-year-old girl and her 7-year-
old brother while they were going to school. 

 Both the children were taken to a secluded remote area where rape was committed
on the girl.  

 Several attempts were made to kill the children.  One of them was giving the kids
milk mixed with poisonous cow dung powder. However, because the children only
took a small amount of milk, the attempt failed and the children did not die. To get
rid of the children the accused then threw away the children alive in the
Parambikulam-Aliyar Project canal.

 Both the accused were arrested by the police and one of them Mohankrishnan was
shot dead in the encounter. 

Judgment 

The trial court held the accused guilty of rape and murder and convicted him under Sections
120-B, 364-A, 376, 302, and  324 read with Sections 34 and 201 of the Indian Penal Code.
The trial court passed the judgment of death sentence that was approved by the High Court
on 23-03-2014. The Supreme Court rejected the appeal of the petitioner on 1st August 2019.
The Supreme Court also dismissed the review petition of the accused on 7th November 2019.

Justice Kant while rejecting the plea for review petition stated that in this case the two
accused misused social trust to kidnap two children going to school one of them was brutally
raped and sodomized and then the accused gave them poison to take their lives and lastly
dumped them to die. This was not a crime committed in the spur of the moment or a crime of
passion. He said the crime committed was so serious that it shocked the whole society and the
court. Sexually assaulting a 10-year-old girl so brutally and then murdering them is the most
heinous crime that a person could ever commit. The judgment said there was enough
evidence to convict him.
Mitigating factors acknowledged by the court in the review petition 

Lack of adequate opportunity 

In the report submitted by the jail superintendent and commissioned by the court during the
course of the appeal, the court stated that the conduct of the accused is merely satisfactory
and there are no signs of reformation. 

Backward socio-economic circumstance

There is no evidence that shows that the accused was helpless, illiterate, or belonged to a
backward class. The accused has the clear presence of mind to craft his own defence by
writing a full-fledged 11-page letter to retract his confession addressed to the Magistrate and
further receiving adequate legal representation.

Young age and aged parents

The mere young age and presence of aged parents cannot be grounds to reject the death
sentence. 

Remorse 

The advocate of the accused shows in the retraction letters that he tried to stop the co-accused
from committing rape and this entitles his commutation. The court said that this letter is the
defence used to shield the crime committed by the accused as the medical records show that
the rape was committed on the deceased girl.

Criminal record 

The Court refused to consider the lack of availability of criminal records because the crime
committed comprised multiple offences.

Delay in execution
Once the judgment of the death sentence has been passed there is hardly any way to get out of
it. Our legal system provides safeguard measures and options to the accused to save them
from the death penalty. The offenders sometimes use these measures to delay justice. Even
after the courts announce the death sentence, it still takes up to several years to execute an
accused. A convict can file up to four petitions. The first petition that a convict can file is in
the Supreme Court under Articles 132,  134, and 136 of the Indian Constitution after the High
Court approves the death sentence.

If the Supreme Court approves the death sentence, the convict can file a review petition
under Article 137 of the Indian Constitution. If a review petition is dismissed, a curative
petition can be filed to reconsider the decision. A mercy petition can be filed with the
President of India under Article 72 of the Indian Constitution or the Governor of the State
under Article 161 of the Indian Constitution. To carry out the punishment both of them must
reject the mercy petition.

In the Nirbhaya case (2012), the convicts exploited the measures to delay the punishment. In
this case, the Supreme Court passed the death sentence in the year 2017 but actual
punishment took place in the year 2020. The hanging, in this case, was delayed due to
convicts filing review, curative, and mercy petitions. The court said that there is a need of the
hour to frame new guidelines in the interest of victims. The center in the case
of Nirbhaya said that those who are convicted of heinous crimes like rape and murder should
not be allowed to play with the majesty of the law.

Conclusion

The death penalty should be used for the most severe crime that disturbs the peace of society.
Rape and murder of 10-year-old girl and boy is the news that melts the hearts of the whole
nation. Crimes like these are not committed in a moment but they are committed with all the
planning and preparation. The right to appeal is a necessary measure that should be given to
the convicts but the legislature must strike a balance between sentence and execution